Earnings Call: Q2 2018

Jul 31, 2018

Good morning, ladies and gentlemen, and welcome to Masco Corporation's 2nd Quarter 2018 Conference Call. My name is Angela, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin. Thank you, Angela, and good morning. Welcome to Masco Corporation's 2018 Q2 conference call. With me today are Keith Ullman, President and CEO of Masco and John Snowys, Masco's Vice President and Chief Financial Officer. 2nd quarter 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. 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 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'll now turn the call over to Keith. Thank you, Dave. Good morning, everyone, and thank you for joining us today. Please turn to Slide 4. We continued our sales momentum in the Q2. Our top line increased 10%, excluding the impact of currency, driven by strong growth in our Plumbing, Decorative Architectural and Cabinetry segments. Our sales grew 6%, excluding the impact of currency, acquisitions and divestitures. Our teams executed well against our plans as we continue to make strategic investments into the business, integrate our Kichler acquisition and implement price across all segments, resulting in an operating profit increase of $8,000,000 in the quarter and a 16.5 percent operating margin. Our EPS increased 21% to $0.75 per share. Before I address our individual segments performance, let me address the topic of inflation and potential impact of the latest rounds of tariffs, as I know this is top of mind for many of you. As anticipated, we experienced commodity and other inflation across our segments in the Q2. And we continue to work to mitigate the effect of this inflation with disciplined cost control and pricing actions. We implemented price increases across all four segments in the first half of twenty eighteen. We believe these pricing actions will offset the commodity and other inflation that we have seen and we expect our price cost relationship to be approximately neutral in the second half of twenty eighteen. If we need to take further pricing actions, we will. As we discussed last quarter, we have not been materially impacted by the steel and aluminum tariffs that have been enacted. While many of the products and components that we source from China would be impacted by this latest round of proposed tariffs, We are confident in our ability to mitigate this potential cost increase if enacted with our flexible supply chain and price as needed. Additionally, we feel we are on equal or better footing compared to our competition across our product categories, considering our significant domestic manufacturing capabilities in Plumbing and Cabinetry. Now moving back to this quarter's performance. Let me give you some additional insight into the drivers behind each of our segments performance beginning with Plumbing. Our Plumbing segment continued its consistent top line performance by growing 9% or 6% in local currency. Watkins, Hansgrohe and Delta drove this growth by capitalizing on strong demand across channels and geographies. North American Plumbing grew 6% in local currency. Watkins achieved a record sales quarter due to new product introductions in its dealer channel and strong growth in its retail channel. Delta had another successful quarter with continued momentum in the showroom, retail and e commerce channels. I'm very pleased that this performance was achieved while also launching a new ERP system at Delta, our largest North American plumbing operation. The ERP launch on May 1 went well and I'd like to commend and thank the Delta team for their tremendous efforts to make this system launch a success. International Plumbing grew 5% in local currency, driven by Hansgrohe's strong growth in its home market of Germany and continued strength in China. In our Decorative Architectural segment, sales grew 22%. Excluding our acquisition of Kichler Lighting, sales grew 6% with mid single digit growth in both DIY and Pro. In our coatings business, we continue to execute our plan together with our channel partner, The Home Depot, to drive propaint sales growth by expanding our pro hub store concept and sales force. The integration of Kichler Lighting is progressing on plan in its first 100 plus days. As a reminder, Kichler is a leading developer of decorative residential and light commercial lighting products, ceiling fans and LED lighting systems across both consumer and professional distribution channels in the $6,000,000,000 residential lighting market. Decorative Lighting has a similar customer base as many of our building products, where the purchase decision is based on design, breadth of product offering, quality and reliability of service. We fully expect to leverage our operational capabilities and coordinate our design experience and expertise as we integrate Kichler and Damascus to further strengthen our position and profitably grow with our many shared customers. Moving on to Cabinetry. Our Cabinetry segment delivered 13% growth excluding the divestiture of Moores. We drove growth in our repair and remodel business across all channels, led by the ramp up of our Menards business as well as strong growth in our dealer channel. The rollout and initial months of the Menards program have gone extremely well and we are on plan to achieve an $80,000,000 annual sales run rate during the Q4. Turning to Windows, excluding the effect of the Arrow divestiture and foreign currency, sales matched last year. We experienced increased costs and inefficiencies in the segment, primarily due to the rightsizing of our U. K. Workforce and an adjustment to our warranty reserve largely due to cost inflation. A portion of these costs will likely continue into the Q3. Moving to capital allocation. We continued our share repurchase activity in the quarter by repurchasing 3,000,000 shares for $115,000,000 bringing our year to date share repurchase total to $265,000,000 Based on the strength of our forecasted cash flows and our strong liquidity position, we intend to deploy approximately $200,000,000 towards share repurchases or acquisitions in the second half of twenty 18. Our Board of Directors also announced its intention to increase our annual dividend by $0.06 per share or 14% beginning in the Q4, reflecting their confidence in our long term prospects. This is the 5th consecutive year we have increased our dividend. In addition, we further strengthened our balance sheet in the quarter by retiring $114,000,000 in debt that came due in April. Lastly, we are updating our anticipating earnings per share for 2018 to be in the range of $2.48 to $2.55 This adjustment is largely due to the increased cost in our Windows segment that I just discussed. Demand across our product segments and geographies remains robust. I'm very pleased with our performance in the first half of the year and believe we are well positioned to capitalize on this robust demand to drive strong growth and margin expansion in the second half of twenty eighteen. Now I'd like to turn the call over to John, who will go over our operational and financial performance in 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 charges, the inventory step up related to purchase accounting for the Kichler acquisition and other one time items. Also, as a reminder, any reference to prior period comparisons have been adjusted to reflect the adoption of the new revenue recognition and pension accounting standards. Please refer to Page 19 of the earnings call presentation for the details we provided last quarter. Turning to Slide 6, we delivered solid double digit top line and earnings per share growth in the 2nd quarter. On a reported basis, sales increased 11% or 10% in local currency. Excluding divestitures and acquisitions, sales increased 7% or 6% in local currency. Foreign currency translation favorably impacted our 2nd quarter revenue by approximately $29,000,000 In local currency, North American sales increased 12% in the quarter or 6% excluding acquisitions and divestitures. We continue to experience strong consumer demand for our industry leading repair and remodeling products across all channels of distribution and across all price points. As a reminder, repair, remodel activity represents approximately 84% of our total sales. In local currency, international sales matched the Q2 of 2017. Excluding the divestiture of Moores, international sales increased 4% driven once again by Hansgrohe. Gross margins were 33.6%. As we look ahead to the second half of the year, we expect solid gross margin expansion year over year as the price cost relationship improves and the strategic investments diminish. Our SG and A as a percent of sales improved 100 basis points to 17.1 percent as we continue to leverage our SG and A while making strategic investments to drive profitable growth. We generated operating profit of $380,000,000 and operating margins of 16.5%. As we discussed on last quarter's call, operating margins were impacted in the 2nd quarter due to strategic growth investments, ERP costs and a lag in price cost. We also experienced incremental costs in our Windows segment. These items aggregated approximately $30,000,000 in the quarter. Our EPS was $0.75 an improvement of 21% compared to the Q2 of 2017. And as Keith mentioned, we are nearing our annual EPS estimate range to $2.48 to $2.55 per share. This lowers the midpoint of our EPS range by $0.04 The principal item that affects this change is the incremental cost in our window segment that Keith described. Turning to Slide 7, our Plumbing segment experienced another quarter of strong demand and solid growth as sales increased 9%. Excluding the impact of currency and acquisitions, sales increased 5%. This solid performance was driven by growth in our faucet, shower and spa businesses. Foreign currency translation favorably impacted this segment sales by approximately $25,000,000 in the quarter. Our North American sales grew 6% in local currency as we experienced strong consumer driven demand for our industry leading brands across all channels with growth in wholesale, retail, dealer and e commerce customers. As a reminder, the segment experienced approximately $10,000,000 of sales that were pulled forward into Q1 from Q2 due to the implementation of Delta's ERP system. Additionally, our spa business continued to outperform the competition as Watkins Wellness leveraged its strong dealer network, innovative new products and industry leading brands to drive growth. Our international plumbing sales increased 5% in local currency as Hansgrohe's focus on key markets continued to yield results with strong growth in both Germany and China. Turning to segment profitability, operating margins were impacted by a lag in price cost and strategic growth investments, which include displays. These items aggregate approximately $15,000,000 Mix also impacted margins largely due to our lower price point Peerless faucet win at retail. As we consider the second half of the year, despite the anticipated $5,000,000 of ERP spend at Delta in the 3rd quarter, we are confident that we will experience margin expansion as our pricing and cost containment actions are realized and our strategic growth investments begin to favorably comp year over year. As a reminder, we had $18,000,000 of display and other spending in the second half of twenty seventeen. For the full year, we expect operating margins for this segment to be down slightly compared to 2017. Turning to Slide 8, the Decorative Architectural Products segment grew 22%. Excluding the acquisition of Kichler, sales grew 6%. This performance was driven by beer's pro and DIY businesses each growing mid single digits. Liberty Hardware also contributed to the top line as it continues to achieve strong growth in both its retail and e commerce channels. Operating income in the 2nd quarter increased 11% driven by the Kichler acquisition and increased volume, partially offset by higher depreciation and amortization expense from the Kichler acquisition and an unfavorable price cost relationship. As we look to the second half of twenty eighteen, we anticipate continued cost pressure on raw materials for paint and we will work to mitigate this inflation as needed. But for the full year, we expect margins in this segment will be in the upper end of our 16.5% to 18.5% range. Turning to Slide 9. In the Cabinetry segment, sales increased 13% in the quarter, excluding the impact of the Moores divestiture. This outstanding performance was driven by our industry leading brands as we experienced double digit growth in our repair and remodel business and low single digit growth in our new home construction business through increased volume and favorable price. The Cardell program at Menards continues to roll out on schedule and we are very pleased with this program's initial performance. Segment profitability increased in the quarter by $2,000,000 principally due to increased volume and favorable price cost partially offset by mix and ramp up costs related to the Menards win. For the full year, we expect 5% to 7% sales growth excluding the divestiture of Moores with operating margins at approximately 2017 levels. Turning to Slide 10, excluding the divestiture of Arrow Fastener, our window segment sales grew 2% and matched prior year in local currency. Foreign currency translation favorably impacted this segment sales by approximately $2,000,000 This performance was driven by single digit growth at Milgard due to increased volume, favorable pricing and a positive mix shift toward our premium window and door products. This was offset by a market softness in the U. K. As a reminder, this segment faces a tough comp in the 3rd quarter as segment sales grew 9% in the Q3 of 2017. Segment profitability in the quarter decreased $10,000,000 driven by actions we took in the UK to further right size our workforce and inefficiencies in an increased warranty reserve at Milgard. We anticipate approximately $5,000,000 of incremental costs in the Q3 as we address the inefficiencies and launch new products. For the full year, we expect this segment sales growth to be 3% to 5% excluding currency and divestitures with operating margins down approximately 100 basis points compared to 2017. And turning to Slide 11, we ended the quarter with approximately $400,000,000 of balance sheet liquidity as well as full availability on our $750,000,000 revolving credit facility. Working capital as a percent of sales increased 190 basis points versus prior year to 17.1% largely due to the impact of the Kichler acquisition. For the full year, we expect working capital as a percent of sales to be approximately 15%. We also took further action to strengthen our balance sheet by retiring $114,000,000 of debt in April. During the Q2, we continued our focus on shareholder value creation by repurchasing 3,000,000 shares valued at approximately $115,000,000 bringing our year to date total to $265,000,000 With our strong free cash flow, we expect to deploy approximately $200,000,000 in the second half of twenty eighteen in either acquisitions or share buybacks on top of the more than $800,000,000 deployed year to date. In addition, expressing confidence in our future, our Board announced its intention to raise our annual dividend to $0.48 per share, a 14% increase starting with our Q4 2018 dividend. Lastly, the outlook for the business remains strong. We're seeing solid growth in North America, Europe and China and we remain confident in our ability to generate more than $800,000,000 in free cash flow in 2018. And with that, I'll turn the call back over to Keith. Thank you, John. I'm pleased with our performance in the first half of twenty eighteen. We moved quickly to address the shifting market environment with effective pricing and cost actions. Our Plumbing and Decorative segments continue to drive growth with new products and programs and channel expansions. Our focused efforts in our Cabinetry business has led to strong growth and margin performance. And we have successfully executed on growth investments and a significant ERP launch at Delta. Furthermore, the long term fundamentals of our industry remain strong. Demographics should drive household formation and housing for years to come as the large millennial generation has begun to start forming households. Home price appreciation, which has a strong correlation with repair and remodel spending, remains strong at nearly 7% year over year. Existing home turnover remains at a healthy overall level of 5,300,000 units. Age of housing stock continues to increase as 65% of the U. S. Housing stock is now over 30 years old and older homes have more repair and remodel spending per home than newer homes. And importantly, consumer confidence remains at a 15 year high as consumers benefit from a healthy economy. With the actions we have taken and the investments we have made, we are well positioned to capitalize on the favorable industry fundamentals to drive strong growth and margin expansion in the second half of twenty eighteen as we expect to generate over $800,000,000 in free cash flow for the year. We will continue to deploy that cash flow with a disciplined and balanced approach to acquisitions with the right fit and return, share repurchases and dividends to create value for our shareholders. With that, I'll now open up the call for Q and A. In order to ensure that everyone has a chance to participate, we would like to request that you limit yourself to asking one question and one follow-up question during the Q and A session. Your first question is from the line of Stephen Kim with Evercore ISI. Thanks very much guys. Appreciate the time here. I guess if we could just start with your plumbing business. I think you broke out $15,000,000 in price cost and also I think ERP was in there perhaps. I just want to make sure that we got the components clearly. And in terms of what we could expect in 3Q and 4Q, if you're specifically looking for margins to be up year over year in both of those quarters in addition to just the back half? Yes. Hey, Stephen, good morning. It's John. In terms of the components that I called out, yes, the $15,000,000 is the total breaks out we did call it the ERP spend of about $5,000,000 on our last quarter call. So the balance is roughly our price cost lag. As what you in terms of what you can expect for Q3 and Q4, if you recall, we have a fair amount of display investment in the 3rd Q4 of last year. So the second half of last year, we had about that aggregate about $18,000,000 in total, in this segment. So yes, to your second question, I would say that we would anticipate margin expansion both in the Q3 and the Q4 in that segment. Great. And then the second question I had was related to your comment about the M and A acquisition and or repurchases. I was curious if you could describe what the pipeline is looking like and if there are certain end markets that look particularly promising to you, if you could give us any kind of color as to geographically or in terms of verticals, which areas you're most focused on now given the pipeline? Stephen, our pipeline is healthy and it's diverse. We have opportunities that we're looking at that range from smallish in size and bolt on, if you will, to existing segments. And we have some larger ones both that would function within the segment as well as looking at some new segments. So we have a broad approach in terms of size. We're also looking both domestically and internationally, and we have the capital on the balance sheet to do these acquisitions. But I'd like to reiterate that we're going to be patient and make sure that we find acquisitions that have the right fit and return that fit with both our strategy and our culture. And obviously, we're focused on creating shareholder value for the long term. So we're going to remain disciplined and balanced in our approach and we're going to continue to value our acquisitions with a particular eye on return on invested capital where we can generate appropriate return for the shareholders. Would it be fair to say that when you're talking about both bolt ons as well as maybe ones that are a little bit larger that you'd be willing to go above that 200 $1,000,000 if the right opportunity came along? Or would you say that that $200,000,000 that we should think of as kind of a ceiling? No, I wouldn't think of it as a ceiling given the right opportunity. And again, based on our eye and our patients, it would have to be the right opportunity. But we have, as you know, the quality of our balance sheet to be able to go out over that $200,000,000 level if the right opportunity came. Thanks very much guys. Appreciate it. Your next question is from Susan Maklari with Credit Suisse. Good morning. I just wanted to talk a little bit about the paint segment. You mentioned some unfavorable price cost that's continuing to be a lag in that part of the business. Can you just kind of give us some sense of how those factors are coming together, your ability to get price there and maybe within that some of the expenditures related to the expansion of the hub stores? Yes. So good morning, Susan. In terms of the input cost of paying us is, I think our other public peers had disclosed, there are continuing headwinds in terms of price cost affecting both TiO2 and some of the engineered resins that go into paint. And so, as I mentioned in my prepared remarks, we're actively working to mitigate this through both pricing as well as working with our suppliers and working internally on our own efficiencies to try to mitigate those as best we can. In terms of our ongoing investment in expanding our Pro business, we're absolutely making further investment as we indicated earlier this year. That said, at this point, we're not disclosing the amount as our channel partner and we have decided to just say a little less about our investment in that area at this point. Okay. And then certainly in terms of cabinets, you had some really nice performance on the top line and the margin in there. It seems like you're getting some momentum with that dealer investments and some of the other things that you've been doing. I guess, can you just give us a little more color on that? Sure. Susan, this started call it 12 months to 18 months ago when we really went to work to reconfigure our supply chain and our factories to address the dynamic in the market. So we took our quality factories for example and focused them quality meaning the quality brand and focus them on the assembly of incoming purchase materials for the opening price point. So we have a factory that's reduced its complexity and focused on the lower price point part of the market. We then took the Quality brand and the Merillad brand and we count on the architecture. So again, driving simplification and cost reduction to go after, call it, the middle point of the market. And then we have the very efficient and effective Craftmade brand and supply chain that focuses more on that middle to higher semi custom. So a combination of reconfiguring our supply chain so that we have the right level of complexity and cost across the different bandwidths of the market and then continuing to drive good sales force execution. And I think when you look across, while it's taken some time for us to execute this, when you look at the Menards win that we're able to land, that was really an amplification of our strategy and shows that how we were able to be competitive with regards to low cost opening price point, if you will, stock cabinetry, value semi custom and semi custom. So it's starting to pay off we're going to continue to drive this segment. And obviously, with nice drop downs on the incremental growth, we're upbeat about its potential. Okay, great. Thank you. Your next question is from Michael Rehaut with JPMorgan. Thanks. Good morning, everyone. Good morning. Question I had was on actually a couple of the segments that Susan asked, maybe just in a different light. First on paint, with DIY and Pro both up mid single digit, I was more interested in Pro for the moment. DIY, kind of consistently kind of consistently pointed to a low double digit or a 10% or better type of growth rate. So with the mid single digit growth this quarter, I was just curious if you kind of view that as the beginning of an inflection point where perhaps given the size that it's achieved over the last few years, we should be thinking more about a mid single digit type contribution rather than low double digit or is this more of a 1 quarter type of pause because we've also kind of thought about this as a still a good area of expansion potential over the next 2 or 3 years? We're committed to this to driving double digit growth for the next couple of years in this Pro segment, keeping in mind, of course, that it is over $400,000,000 So it's a sizable chunk to drive in terms of double digit growth. But we've seen that our investments in this Pro Hub concept and expanding our Pro sales force works. We're pleased with the growth. I'm sure there's going to be some quarters that are more accelerated than others, but we remain committed to the double digit growth and we're happy with our DIY growth as well. Together with the Home Depot, I think we're doing an outstanding job of converting shoppers to buyers in the aisle. We're generating good traffic with our brand and our advertising scheme and of course the quality in the can speaks for itself. So overall when we look across coatings both against ourselves and the competition we think we're doing pretty good. That's great. Understandable. Secondly, on the cabinet segment, great growth there and impressive turnaround continues to be a great turnaround story over the last couple of years. I was curious in terms of the Menards rollout, if that was a contributor to the obviously very strong top line growth this quarter. I know you said that you continue to expect 4Q to recognize that $80,000,000 annualized run rate, but I don't know if there's any I mean, cabinets is more of an inventory business, not sell in. I don't know if there's any sell in in advance of that, but if the Menards rollout contributed to the top line, But even outside of that, if you could just talk about the dealer channel with this double digit growth there, repair model and what are the key drivers that allowed the strong results? Of course, the Menards win, it was a big win for us. And as I mentioned, being able to showcase the work that we've done over the past year, year and a half in terms of cost competitiveness, assortment expansion and good sales work. So that is definitely a contributor. But as you mentioned, we had strong growth in our dealer channel as well. And then when you look across demand drivers, we had strong growth in both repair and remodeling and new construction. So it's beginning to come together and it's as you might imagine no one action that we took. We've built this and executed this turnaround over a series of actions that included, obviously cost outs. We've driven significant assortment enhancements in terms of launches at both CraftMaid and Merrell at. And then the reconfiguring of the supply chain that we did, call it 18 months ago with regards to focus cost reduction around the various price points along the continuum. So all those things have come together and we're excited about the potential in the business. Any further granularity in terms of maybe over the next couple of quarters, should we be expecting at least like core mid single digit growth and obviously Menards could potentially add to that? We're looking for the full year in that 5% to 7% growth range. Great. Thank you. Your next question comes from Nishu Sood with Deutsche Bank. Thank you. So, Keith, appreciate the commentary about the input costs on the tariffs at the beginning. Looking at the guidance reduction, the kind of $0.04 at the midpoint, I imagine a lot of puts and takes going into that, but you highlighted or you called out the incremental decorative architectural. Can you talk about just some of the other puts and takes as well relative to where your expectations were previously? It sounds like in decorative architectural, the price cost trends are going a little better than expected perhaps at the with the high end of your margin guidance range there. And plumbing, it sounds like perhaps the opposite. So maybe some of the other kind of major puts and takes that went into kind of reconsidering the guidance for this quarter? Yes, Nishu, when we compare what we thought about at the beginning of the year versus what we're seeing unfold here, there's 2 primary drivers. 1 is foreign exchange and 2 is the Windows headwinds that we experienced. In terms of the Windows headwinds, that impact was about $10,000,000 in Q2 and that was a combination of a significant reduction in workforce that we did in our business in the UK and some warranty expense that we accrued in our Milgard business here in the United States. So and we think there'll be about $5,000,000 of impact in those areas in Q3. So when you aggregate that, that comes to about $0.04 And then in terms of FX, we're experiencing about $70,000,000 in revenue less favorability than we originally thought we would and that affects operating profit. So that accrues to about $0.03 So there's $0.07 right there. But that's the principal difference in terms of what we thought at the beginning of the year and the way we're seeing the year unfold. Got it. And then on price cost, does that tell us that price cost has gone as expected as you kind of anticipated it earlier this year? Yes. I'd say it's about as expected. We always said from the very beginning, there would be a back half kind of a story for this year on price cost and that's how it's playing out in Nishu. So I think both Keith and I mentioned in our prepared remarks, we expect to be price cost neutral in the second half of the year. Got it. And then on Decorative Architectural, the mid single digits growth in DIY kind of tells us that you're still seeing positive volume growth there, would be would seem to be better than the category growth. So obviously, a good performance there. You've had that trend in place now for some time. What are the underlying drivers of that? How long can you continue to outperform the DIY category kind of looking ahead? Well, we're certainly expecting that mid single digit growth through the year. And we're very pleased with the traction we're getting. And it is certainly a partnership with the Home Depot as I mentioned to convert traffic in the store to customers. In terms what's driving that, we have, let's call it, 2,000 points of distribution that's just outstanding and very well managed with the Home Depot. We've got great levels of service. We have a truck going to a distribution center for Home Depot every week. And we this is the concept of focus and eightytwenty on steroids here where we are completely focused on the Home Depot and their customers. So that efficiency and that level of focus be it in service levels, in the quality and of course in the brand, leading DIY brand and that is a significant generator of foot traffic and sales. So it's a combination of service, product, quality, brand, outstanding distribution and an understanding of what the consumer wants and how to make that conversion and taking care of them. So it's definitely a partnership with the Home Depot and Behr and we expect continued growth. Your next question is from Mike Dahl with RBC Capital Markets. Good morning. Thanks for taking my questions. My first question on decorative, just breaking down the margin performance both in the quarter and then thinking about the guide in some of those comments around price cost, it actually it looks to me as if ex Kichler, the legacy business was probably roughly flat in the quarter. And just given the guide toward the upper end of that 16.5 to 18.5 range would suggest that potentially flat to even up for the full year on the legacy business. Am I thinking about that the right way? Or is there something in the Kichler margins that has gone better than expected? Just a little more color on just the difference between those two margin components there would be great. Yes, Mike. I think you had some good insights there. 1, the Kichl's annual margins as we disclosed when we bought the company are in that low double digit range and lower obviously than we've been experiencing the high teens we've been experiencing in that segment. That said, I would say that Kish was probably doing a little bit better from a margin perspective than we originally had anticipated, but not materially different. So that helps the margin in the segment just to touch. And with the inflation that we've experienced in paint and raw materials and some of the actions we've taken, don't forget that the way that it works for us, particularly with paint, is we recover price with paint, we recover the commodity cost inflation on that paint. So actually, what that does is tends to contract margins a little bit. So that has a piece of it. So we do expect kind of modest margin contraction for the full year. Okay, got it. That's helpful. My second question just around plumbing. You're in the midst of the ERP. Could you just give us an update? It seems like guidance items didn't really change as far as the cost top line look decent. So it doesn't seem to be that disruptive, but just give us an update on kind of the ERP conversion there and whether there have been any puts and takes around that? Yes. Mike, I would characterize it as being a little bit further along than, as you said, in the midst of it. We went live in May. We've obviously been through a couple of closes. We have manufacturing turned on. This was a significant order to cash type of system launch. So it was a very significant system that we implemented that involved hundreds of people in that organization and a multitude of change management initiatives and training, etcetera, as we not only implemented the ERP system, but it was a new ERP system. It wasn't a new version of an existing system. So it was a significant endeavor. And I think, Mike you're pointing to a good point that we while it was costly and it was a significant investment, it was very well executed and we're happy with that. We certainly have some efficiencies that we need to continue to drive and we have some business intelligence tools that we have yet to turn on. But when you look at the magnitude of this and the success of it, it's been a real big plus. And we also had an upgrade, significant upgrade to our SAP system in Hodge Grove that we executed in the quarter as well and that went very well. So this is something we put a focus on and doing a better job at and I'm pleased with our performance, particularly at Delta. Great. Thanks, Keith. Your next question is from John Lovallo with Bank of America. Hey, guys. Thank you for getting me in here. First question is, I just want to make sure I understand this. The comment about being price being flushed with raw mats in the second half, Is that the case in the Q3 as well? Or is it just more catch up in the Q4 that's kind of leveling it off for the second half? John, it's roughly similar quarter to quarter. So not a lot of difference between Q3 and Q4. Okay, that's helpful. And then, I think last quarter you had mentioned that freight and logistics costs had not really increased that much given your use of standard distribution runs. Did you see any uptick in that in the second quarter? Yes. John, we actually have seen a little bit of uptick in that particularly for our more customized products like our Windows products as well as our Cabinetry products, where we don't have as standard of runs, let's say, as we may have with our with BERPA Paints or with Delta faucets going to some of our common customers. So yes, indeed, we have seen a little bit of inflation, but we think we're in a position to work to offset some of that either through price or some of our own internal efficiencies. Okay. Thanks, guys. Your next question is from Phil Ng with Jefferies. Hey guys. I'm curious to get your thoughts on the commercial integration of Kichler and how that's ramping up as you leverage some of your distribution? It's going very well. We're on plan. It's been over 100 days. We've executed integration along a number of fronts in terms of treasury risk management, legal. We're working with the team at Kichler to implement the Masco operating system. We're going in and grabbing efficiencies as quickly as we can, particularly in areas of logistics and freight consolidation in China with our existing China infrastructure. And we've got work to do yet. We have common customers that we think are going to be able to be leveraged to add further value. So in summary, I'd say that we're on plan. For sure, we're on plan with our investment thesis. The cultures are meshing very well. We're getting early wins and we're planning for more longer term wins. Got it. And then, Keith, you kind of touched upon it in your prepared remarks on the tariffs, potential tariffs, I guess, in China. Curious what type of impact do you kind of envision in your supply chain and how you're going to manage it respectively? And particularly interested on the Kitchener side of things, just since it's a newer business and you do buy a lot of components from Asia? Thanks. I'll state the obvious, but there's a lot of moving parts here. And it remains to be seen where it all shakes out, if at all and to what degree and how it's enacted and the timing and everything else. But it varies as you might expect across our segments. So in paint, which is a large segment for us that would have really no impact. Windows has a little bit of impact with some imported hardware, have some impact in cabinetry with regards to imported plywood and then plumbing and our decorative hardware and lighting would have the largest impact. In terms of how we handle that, we look at a couple of things. Number 1, what can we do effectively and quickly with regards to the supply chain to mitigate some of these costs? And then number 2, we look at our competitive position. And by and large, we believe that we are on equal or better footing when you look at our competition across our product categories considering what we do in terms of domestic manufacturing in plumbing and cabinetry. And then in Lighting really that is an industry wide value chain as it relates to procuring from China. So in that regard, price is obviously something when you look at our channel service and the strength of our brands that we would initiate it if needed. But I would reiterate there's a lot of moving parts and we're going to watch and see where this all shakes out. But we feel comfortable in both our competitive position and our ability to stay whole as it relates to cost outs and price. Your next question is from Keith Hughes with SunTrust. Thank you. Questions or a quick question back in Plumbing, specifically U. S. Plumbing. You kind of called out and generally it sounds like all the channels were good in this period. Just diving the details a little bit more, I know in the past wholesale has been it went for you and I think the sector as a whole. Did that trend kind of continue in the Q2 with that being the leader of growth? Yes, it did. Very strong in wholesale and that's been strong for quite a while. Yes. And you call Keane. So go ahead. I'll just say, just reminding you that even though we posted pretty good numbers and that was impacted by the ERP, so that $10,000,000 that was pulled out of Q2 into Q1, don't forget that as well. And is that affect the wholesale numbers or is that a retail? Where does sound? I think that is fairly broad based across all of our customers. Okay. And final question on this, why has wholesale been so good over these periods you discussed, Keith? I think a lot of it speaks to the work we did on the assortment. So we've went in and worked on the opening price point with some targeted launches. We've done a significant amount of work in the showroom aspect of wholesale. So we've had some nice work that we've done on what we call the back end of the counter business and we've also done more on the assisted sale in the front end. And then a lot of our work goes to influencer outreach and marketing programs where you may recall, we spent a year or so back some significant capital to build an extension and create a customer experience center, where by design we bring in our showroom customers to show them the Brizo and the Delta and the product offerings that we have and to work on that customer outreach. And that really creates advocacy. And then you overlay that with our investment that we've made in displays across the showroom continuum, where we've not only juiced up the displays in terms of LED lighting and showcasing the product more effectively, we also gained 3 incremental feet. So it's a combination of all those things around that area of what I would call commercial excellence that is driving the good growth for us. Thank you. Your next question is from Stephen East with Wells Fargo. Thank you and good morning guys. Congratulations in a pretty tough environment that we're seeing. Keith, in early May, you talked about being flushed with price cost by the end of the second quarter and you all still feel that way. Could you talk about a few things? One, could you the assumptions that you have for your various major raw materials as you look through the back half of the year? And it sounds like in paint, you might not be flush in the second half offset it with being better than flush in some of your other businesses. Is that the right way to think about that? And then finally on the raw materials, sort of the lag time from when you get a cost announcement to when that actually is typically flowing through your income statement? Probably the best way to break your question down, Stephen, is to think in terms of some of our different segments. So if you look at Plumbing, big driver there is copper and zinc. And if you look at, say, June as a point of view from June 2018 to June 2017, you've seen about a 12% increase from about $2.70 up to $3 for copper. Now while that has dipped down a little bit more of late, that's been a significant cost driver. And then zinc, again over the last year has gone from about $1.25 to $1.35 So that's about a 7% increase. And again, we've seen that dip a little bit in the last month, but those are still healthy increases. So that's the driver in the Plumbing segment. When you look at our coatings business, it's really about resin and TiO2 and we've seen TiO2 go up kind of the same as copper, about 12% if you look at it from June of 2018 to June of 2017. And then in resins, we're seeing we've seen it go up to almost $0.85 a pound now. So that's a significant increase. And what we're seeing is probably going to be a little bit more pressure in resins as we look to the back half. So that's the primary driver in coatings. And then we use hardwood, obviously, hardwood lumber and plywood. And again, that's gone up coincidentally right about in that 12% range. So pretty broad based commodities pressure that we've experienced and that's the way we've attacked it with both cost and price, as we mentioned getting price across all four segments. Got you. All right. And then as you look at your lag time, how long from when you get that announcement that it flows through? And then the other question I'd just add is your capital allocation, you've already bumped it up through 2019 to $1,700,000,000 I'm wondering how far into it you are with that and any thoughts or indications whether you bump that any further? In terms of the lead time on the price in general, let me take the capital allocation question. It really varies by segment and a lot of it depends on the inventory. So you can't you could imagine I'm sure with a China supply chain where we may be FOB the ship at the port that we would have a longer time before we could actually get price into our P and L. And in some cases, it's more cyclical as it relates to price books and when the price books come out. And then in more direct business that's off sheet, we could get that right away. So it's a variable. It varies. It could be 1 to 2 quarters depending on the commodity and the supply chain that we're talking about. John, you want to touch on capital? Yes, sure, Stephen. In terms of capital allocation, you're right, as we outlined on our Investor Day last year, we had a pretty healthy $1,700,000,000 that we updated after tax reform. And I think one of the things that we've gotten more comfortable with over the course of the last couple of quarters is perhaps operating with lower levels of cash on the balance sheet. And so could there be more capital than the 1.7 $1,000,000,000 that we indicated in May of last year deployed through that 3 year window? Yes, I think there is a possibility that does exist. How much more? It's tough to say. I mean, we would have to see what plays out for us both in terms of where does the share price go as well as where do acquisition candidates emerge. And so that's something still out in the future a little bit. And our last question comes from Justin Speer with Zelman and Associates. Good morning. Thank you, guys. Good morning, Justin. I'd like to ask a quick question on the windows business. Just some color on the size of those pieces that you mentioned. What's one time? What's ongoing? And particularly as you look to 2019 or maybe the intermediate term, what the right margin is for this business? We had about $10,000,000 headwind in this quarter. We think it will be about $5,000,000 next quarter as we work through some of those inefficiencies we talked about over in the U. K. In particular. In terms of long term, for the year, we're looking at 3% to 5% growth in the top line. Well, I'm thinking more like on those pieces that you mentioned warranty piece and you mentioned U. K. Workforce. I was just curious which how those pieces go as we think to next year in particular, what repeats and what doesn't and what the right with these restructuring moves, what the right margin structure is for that piece of the business? Yes, sure, Justin. So like you might expect, the UK piece is kind of one time in nature as we work through some of that restructuring activities and that should not be recurring. In terms of the warranty piece, that's one of those things that we evaluate our warranty from time to time and you have to make adjustments to all your judgment based accounts, whether it's warranty or whether it's accounts receivable or whether it's inventory or whatever. And so from time to time, we do it. The principal reason that drove this quarter's adjustment was some of the inflation that we were experiencing with respect to some of the warranty costs that were coming in. Longer term, I guess, to the nature, the heart of your question in terms of where do we expect margins to be, at this point, it really doesn't change our view that long term and again, long term is not quarter or the Q1 of next year, but long term the margins for this quarter should be in that low double digit to low teens in that 10% to 13% range that we called out at our Investor Day in May of last year. And then lastly for me, just follow-up questions on cabinets. How much benefit from innards in the quarter? And then did you provide a back half organic growth figure for the Plumbing business in your guidance? No, I don't think we provided a back half. I think all we said is for a full year of 5% to 7% excluding the divestiture of Moores. Okay. And then on the cabinets piece, just thinking about the Menards contribution in the quarter, obviously that helped, but we don't know how much. Do you have any context there for us? We haven't closed that to this point. We don't intend to disclose it at this time. And this does conclude today's conference.