馬斯科 (MAS) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Masco Corporation's fourth-quarter and full-year 2015 results conference call. My name is Jessa and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes.

(Operator Instructions)

I will now turn the call over to the Director of Investor Relations, Irene Tasi. Irene, you may begin.

Thank you, Jessa. And good morning to everyone. Welcome to Masco Corporation's 2015 fourth-quarter and full-year earnings conference call. Joining me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President, Treasurer and Chief Financial Officer.

Our fourth-quarter and full-year earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion of our website. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we would appreciate it if you would limit yourself to one question, with one follow up. If we are unable to take your questions during the call, please feel free to contact me directly at 313-792-5500.

I'd like to remind you that statements in today's presentation will include our views about Masco's 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've described these risks and uncertainties and our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we have filed with the Securities and Exchange Commission.

Today's presentation also includes non-GAAP financial measures. Any references to operating profit, earnings per share, or cash flow on today's call will be as adjusted unless otherwise noted, with the reconciliation of these adjusted measurements to GAAP in our quarterly press release and presentation slides, which can be found in the Investor Relations section of our website, www.masco.com.

With that, I will now turn the call over to our President and Chief Executive Officer, Keith Allman.

Thank you, Irene. And good morning, everyone, and thank you for joining us today. Please turn to slide 4.

2015 was a transformative year for Masco. This time last year, we outlined the three elements of our strategy for value creation -- number one, realizing the full potential of our core businesses; number two, leveraging opportunity across those businesses; and, number three, actively managing our portfolio.

Our focused execution enabled us to achieve the objectives we set out for ourselves in each of these areas. In 2015, we delivered solid full-year results. We created a stronger foundation for future profitable growth and we generated greater shareholder value.

On June 30, we successfully spun off our installation segment, transforming Masco into a global, branded building products company, where our distinct advantages, brand and innovation, are key success factors. These distinct advantages, as well as our operating discipline we've deployed in our businesses, drove both top- and bottom-line growth.

Our revenues for the year grew 6% excluding the impact of currency. Notably, despite a weakening global economy, our international revenues increased 4% in local currency. Our operating margin grew 190 basis points to 13%, our highest operating margin since 2006, demonstrating our strong operating leverage and operational execution.

All four of our segments contributed to this top- and bottom-line growth by continuing to capitalize on their leadership positions in the building products industry. Let me provide you with some key highlights.

Most impressive was the turnaround story of our cabinet business. By driving share gains at retail and dealer channels with KraftMaid, realizing significant benefits from cost savings initiatives, and improving pricing dynamics in the builder channel, we drove a remarkable 810 basis points improvement in operating margin, surpassing everyone's expectations. We're proud of this accomplishment and excited about the future outlook of this business.

Our plumbing segment had another outstanding year. By leveraging the strength of their brands and innovative products -- Delta, Hansgrohe and Watkins, our spa business -- each broke sales and profit records in 2015. Illustrating their industry leadership, Hansgrohe was recognized with numerous international design awards and Delta faucet received the 2015 WaterSense sustained excellence award, the highest recognition from the Environmental Protection Agency, for their exemplary effort to support water efficiency.

In our decorative architectural segment, Behr drove gallon growth with their innovative new product, Behr Marquee, their expansion into the pro segment, and their award-winning customer satisfaction levels. We remain committed to investing behind our growth initiatives, including launching four new pro paint supercenters in 2015, which further improve our fulfillment and service capabilities to the professional paint contractor.

Behr's leadership position in the architectural paint industry was affirmed with its number one ranking in the JD Powers 2015 paint satisfaction study in the interior paint category. From a quality perspective, Behr distinguished itself by simultaneously being awarded a number one ranking in interior paint, exterior paint, and exterior stain by a leading consumer testing organization.

In our other specialty products segment, Milgard Windows, the leading window brand in the western United States, successfully capitalized on new home construction growth and growing repair and remodel demand for higher-end offerings.

Capping off Masco's strong operational performance this year was our ability to generate nearly $0.5 billion in cash. Consistent with our balanced capital allocation strategy, we returned over $575 million to shareholders through stock repurchases and dividends in 2015.

I want to thank all of our employees for their hard work, dedication, and great performance in 2015. I will now turn the call over to John who will go over our operational and financial performance in detail.

Thanks, Keith. And good morning, everyone. As Irene mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges.

Our 2015 performance was characterized by strong sales growth driven by customer-focused innovation and solid operating margin expansion resulting from cost control and productivity improvement. The fourth quarter was our 17th consecutive quarter of year-over-year sales and profit growth.

We finished the year strong with both our fourth-quarter and full-year sales increasing 6% excluding the impact of foreign currency translation. All of our segments contributed to our strong sales growth in 2015.

Foreign currency translation negatively impacted our sales in the fourth quarter by approximately $45 million, and the full year by approximately $250 million, as the US dollar strengthened against most major currencies including the euro, pound and Canadian dollar. North American sales increased 6% excluding the impact of currency for both the fourth quarter and the full year, with strong demand for our repair and remodeling and new home construction products across all channels of distribution. As a reminder, repair and remodel activity represents approximately 83% of our total sales.

International sales increased 4% in local currency in the quarter and 5% in local currency for the full year. Our international plumbing and window businesses continue to perform above expectations.

Demonstrating our ability to leverage SG&A as we drive growth, our SG&A as a percent of sales improved 50 basis points in the fourth quarter to 18.5%, and improved 20 basis points for the full year to 18.6% of sales. And we delivered solid bottom-line performance as operating income increased 31% in the quarter to $219 million, with operating margins expanding 280 basis points to 12.8%.

For the full year, operating income increased 19% to $927 million, with operating margins expanding 190 basis points to 13%. The effect of currency negatively impacted operating income by approximately $6 million in the fourth quarter and approximately $42 million for the full year. For the fourth quarter, our EPS increased to 61% to $0.29 and for the full year increased 35% to $1.19.

Please turn to slide 7. Our appliances segment continued its momentum on both the top and bottom line in the fourth quarter. Sales increased 10% excluding the impact of currency. This solid performance was driven by strong sales increases of faucets, showers, spas, and rough plumbing products.

We were also pleased with our European performance in the quarter as our international plumbing businesses grew 5% in local currency despite a tepid macroeconomic environment. Operating profit in the quarter increased 19% excluding the impact of currency driven by incremental volume and a favorable price commodity relationship, particularly in Europe.

Turning to the full-year 2015, this segment delivered another terrific performance as demonstrated by our Delta, Hansgrohe, and Watkins businesses all experiencing record sales and operating profit. Excluding the $218 million of foreign currency translation, sales increased 8% driven by growth in faucets, showers, spas, and new program wins in rough plumbing.

North American sales increased 10% excluding the $31 million impact of foreign currency related to the Canadian dollar as we continue to experience strong sales growth in both the trade and retail channels in 2015. More specifically, our luxury brand, Brizo, continues to drive consumer demand in trades and showrooms for our innovative new products such as the Artesso kitchen faucet. In addition, Delta gained share in faucets, showers, and bathing, with new product introductions at retail and trade.

Our European businesses continue to outperform, delivering 5% growth in local currency, as Hansgrohe grew its share in its core Central European markets with new faucets and shower offerings. Excluding the $30 million impact of foreign currency translation, and the unfavorable impact of our commodity hedge of $14 million, full-year operating income increased 9%.

Turning to slide 8, in the decorative architectural product segment, fourth-quarter sales decreased 4% driven by reduced paint and stain volumes in the DIY channel. This decline was driven in part from a difficult year-over-year comparison.

You may recall in the fourth quarter 2014, the timing of inventory replenishment orders favorably impacted our results as the segment sales increased 7% in the fourth quarter of 2014. Solid gains in the pro channel partially offset this decline. If you exclude the periods impacted by the timing of replenishment orders, we experienced mid single-digit gallon growth in the quarter.

Full-year sales grew 2% excluding the $11 million impact of currency through the introduction of Behr Marquee interior paint, strong Behr Pro growth, and Liberty's Hardware's continued share gains from successful new product introductions and program wins in the retail channel. Operating income increased 6% in the fourth quarter, and for the full year operating income grew 12% over the prior year.

Turning to slide 9, we are very pleased with the execution on the turnaround plan by the cabinet team in 2015. Segment sales increased 5% in the fourth quarter and 3% for the full year. We continued our momentum from the third quarter with strong KraftMaid sales in the retail channel.

Additionally, our dealer exclusive KraftMaid Vantage product line performing very well in the dealer channel and delivered both increased volume and favorable mix. Partially offsetting this growth was the deliberate exit of certain low-margin direct-to-builder business.

Segment profitability in the fourth quarter improved $26 million over the prior year and our operating margin was 7.5%, our best fourth quarter margin in this segment since 2007. For the full year, operating profit improved $82 million to $51 million, which was $10 million more than we anticipated at the end of the third quarter. This was due to continued growth of our higher price point semi-custom KraftMaid offering and the benefits associated with operational and other cost savings initiatives.

Turning to slide 10, Milgard capped off 2015 with a great fourth quarter as they continued to drive higher volume in a favorable mix shift through our premium window and door product lines. Milgard's growth, coupled with gains from the recent acquisition of Evolution Windows in the UK, resulted in Q4 segment sales increasing 9% excluding the impact of foreign currency translation. This segment's operating profit was flat excluding foreign currency translation, primarily due to increased volume and improved mix, offset by increased ERP spend and other costs.

For the full year, segment sales grew 10% excluding the impact of foreign currency translation, with strong window growth in the US with our dealers and custom builders as consumers upgraded their purchases to higher price point products. This strong volume growth and improved mix resulted in an operating profit improvement of 25% excluding the impact of foreign currency.

Turning to slide 11, our year-end balance sheet was strong, with approximately $1.7 billion of liquidity. This will enable us to execute on our balanced capital allocation strategy of investing in our businesses to grow our businesses, pursuing strategic M&A, returning capital to shareholders through share repurchases and dividends, and strengthening our financial flexibility by reducing our outstanding debt.

We continue to produce some of the best working capital results in the industry as working capital as a percent of sales dropped to a record low 11.1% at year end. This is a result of great execution on our supply chain initiatives that helped us generate nearly $500 million in free cash flow in 2015. At the same time we delivered on our commitment to return capital to shareholders by repurchasing 17.2 million shares in 2015 and raising our dividend in the fourth quarter.

With that I will pass the call back over to Keith.

Thank you, John. We're proud of our track record of execution and as we enter 2016 we look forward to capitalizing on the momentum that we've built over this past year. Despite a level of global economic ambiguity, we remain encouraged with the opportunities before us.

The fundamentals driving our core US-based repair and remodel business, which I will remind you represents approximately 80% of our sales, are strong. Interest rates remain at historically low levels which support home affordability. Demographic trends are increasingly favorable which drive household formations.

Home prices are appreciating, boosting consumers' confidence to invest in their homes. US residential housing stock is aging with the average age of the US home 35 years and housing turnover, which is a leading indicator for our repair and remodel business, has accelerated. Our international businesses have demonstrated that they can perform even in periods of economic volatility as demonstrated by our international sales growth of 4% in local currency.

We will continue to drive it shareholder value by deploying the capital we generate from our strong free cash flows, including investing in our organic growth, investing in strategic M&A, continuing opportunistic share buybacks, and consistent dividends, and retiring debt. Given our industry-leading positions, robust innovation pipeline and the operational benefits from our Masco operating system, we remain on track to reach our 2017 EPS target of $1.80 that we set for ourselves back in 2015.

With that, I'll now open the call up for Q&A.

(Operator Instructions)

Your first question comes from the line of Mike Wood from Macquarie Securities.

Hi. Congratulations on a very strong year and quarter.

My first question, I would love your take on the overall health of the consumer. I'm looking at your results and if I exclude that inventory replenishment on paint, which looks like it had about a 2% impact, it looks like you're growing 8% organically. So just some color on the consumer and maybe how much of that is share gains.

Mike, it's John. Good morning. Thanks. Feel really good about the year. In terms of the consumer, we're seeing generally pretty good things. As we've seen the year develop, as we highlighted in our comments, we've seen very good growth in our plumbing business, as well as our window businesses, the last 5 or 6 quarters in terms of plumbing, and even better than that, probably the last 12 or so quarters, with our window business.

And now that Joe Gross and the team at Masco cabinetry have really had a chance to execute on the turnaround plan, we've seen very good growth with particularly our KraftMaid brand at both retail and the dealer channel. So, we feel really quite good about where the consumer stands right now, at least what we're experiencing in the last several quarters. So, all in all, the consumer seems like they're back and investing in their homes.

Mike, I think the home price appreciation is helping with that. That's getting that consumer to now be able to connect the dots in terms of investment into their home. And we're also seeing some nice mix upshift in the consumer, with our plumbing and window businesses in particular really benefiting from a mix shift upwards.

And then our KraftMaid business, lastly, with the mix shift there with their combination of new products and increased dealer sales is also helpful. So, all in all, we feel good about the consumer.

Thanks. And a follow-up -- your forecast for the $190 million CapEx in 2016, that's above where you've been tracking. Can you give some color on where those investments are?

Mike, there's a couple things that are driving that this year. And as you know, typically when we come on the first quarter of the year with our CapEx guidance, we will refined that as the year progresses. But there's a couple things that are driving it a little bit north of our traditional 2% of sales, a couple or three things.

One, ERP investment at Milgard. Two, we're in the process of expanding a distribution center for Hansgrohe over in Germany. And, three, at Delta faucet we're making some CapEx investments in a building there for their customer experience center. Those are the three things that really elevated above the typical 2% of sales.

Thank you.

Your next question comes from the line of Nishu Sood from Deutsche Bank.

Thank you. And, Keith, I just wanted to follow up -- you mentioned that you still feel comfortable with the targets that you laid out at the 2015 investor day, and I appreciate that update. If we look back to what has changed since then, on the revenue side, obviously the strong dollar, foreign exchange a bit of a headwind, maybe a little bit incremental softness through the retail channel but margin commodities obviously have been pretty strong.

In terms of how the path to get to that $1.80, have your views changed? The $8.3 billion in sales maybe, will that be a little more difficult to get -- but obviously stronger margin. What's changed in terms of the path to getting there? If you could give us an update on that, please.

Sure. First, I'd say that we're committed to the $1.80. That's not changed, and that's what we're focused on -- overall shareholder value creation for the entire portfolio, certainly as the year unfolded, and would expect changes and puts and takes to happen in the forward two years, as well. But when we look at it, really the underlying volume in paint was a little bit lighter than we expected.

But on the positive side, cabinets certainly had a more favorable year than we initially thought we had. Plumbing has also, with record years in both sales and profit from the two big horses in that segment with the Delta and Hansgrohe, that was a little bit more favorable than we had thought.

So, we're continuously monitoring our progress against the $1.80. There are some puts and takes but we feel very good and we remain committed to that $1.80.

Great. Thank you. And in terms of share repurchases, John, last year the third quarter was your heaviest share repurchase quarter. That was, of course, during a period when there was also market turmoil so you were opportunistic and took advantage of that.

With this renewed market turmoil have you been more active in share repurchases so far in the first quarter? You guided to a similar dollar figure this year so would you be willing to increase that based on if the opportunity presents itself? And are there any seasonal cash flow restrictions that might influence how you conduct those share repurchases, as well?

Yes, Nishu, you're right, we were a little bit more active in the third quarter of last year. As a matter of fact, the fourth quarter of last year we pulled back a little bit. We purchased about 1.7 million shares in the fourth quarter of last year.

In the first quarter I think we would continue to be optimistic. And you're right, we did guide to approximately the same dollar value of share repurchases in 2016 as we had in 2015. In the initial part of the year we had done some share repurchases so we were a little bit constrained in the blackout period as to what we could buy but we were active in the market, as you saw the share price decline a little bit here in the first part of the year.

I continue to expect us to be opportunistic as we look at when and how we buy our shares back. And to part of your question about seasonal constraints, just given the $1.7 billion of liquidity we have on the balance sheet, the seasonal aspect of our business really does not impact the pace or the rate at which we could buy our shares back.

Okay. Great. Thanks.

Your next question comes from the line of George Staphos from Bank of America Merrill Lynch.

Hi, It's actually Alex Long sitting in for George. Thanks for taking the question and congratulations on the year.

If we just look at margins for a second, plumbing and paint showed really nice margin expansion in the quarter. Are there any one-time items that benefited that? And how should we think about it on a go-forward basis?

Is that John, a lot of it was cost control and productivity? But if you can provide a little more granularity there.

Yes. Alex, you're right. Good margins across the board, across all the segments in the fourth quarter except for the other specialty, and I'll talk about that in a minute. If you look across each of the segments, cabinetry, obviously a little bit of volume growth, better mix, as well as productivity improvements because of the ERP implementation last year really drove us to a great 7.5% operating margin in the fourth quarter.

In our plumbing business, really it's more productivity improvement there and some of the mix shift that we saw as Delta saw some favorable mix. We did experience a little bit of negative mix at Hansgrohe during the quarter, and it's our BrassCraft unit as well, our rough plumbing business.

And I would also highlight the fact that in plumbing, we saw some very good volume. We do estimate that we probably saw $15 million to $20 million of pull forward from Q1 into Q4 as a couple of our customers strive to hit higher rebates here in the quarter. In decorative architectural products, the team at Behr and at Liberty did a great job in both productivity improvement as they continue to work on the kinds of engine we were trying to establish in our businesses, and also some nice volume increases, particularly at Liberty.

Thanks for that. And just as a follow up -- I appreciate the color on the mid single-digit gallon growth in paints when adjusting for the inventory replenishment timing -- but would it be possible to provide some granularity around Pro in terms of the growth rate maybe in the quarter or 2015 just to help us frame what the growth rate was like for that? And what's your outlook for 2016 on Pro?

Pro is going very well for us and we would continue to expect in 2016 a similar trajectory as we saw in 2015, which is high double-digit growth rate in that segment. We're really happy with that. And that comes as a combination of investment both in terms of product as well as customer experience. And we're very tightly linked with our channel partner and I think that shows the power of having that outstanding channel partner and working together specifically on this initiative.

Pro is growing very well for us and we continue to expect that to continue. We highlighted a little bit on the call about the investment that we're making in pro supercenters, which basically gives us the capability to do high-speed tenting and jobsite deliveries to large Pro customers, and we're seeing a very powerful impact with that.

Thank you.

Your next question comes from the line of Dennis McGill from Zelman & Associates.

Good morning, Keith and John. My first question is for Keith. You mentioned the global ambiguity that's out there. That's probably the biggest question on all of our minds, at least. But a bigger debate is whether that is also on the minds of the consumer.

Can you maybe just elaborate a bit more on what you've seen so far this year, and just big picture how you think about the health of the consumer today? I know you walked through the housing positives, which we would concur with, but at what point is that backward looking? And do you start to worry about the filter-through effect at all?

I'm not really -- that's not one of the things that keeps me up at night in terms of the health of the consumer. We're seeing really strong traffic in our showrooms in particular. And, as I mentioned, Dennis, in plumbing, for example, the mix trade up in the success of our showroom brands and our Brizo brand and our Hansgrohe brand, which all tends to be on the higher end of our continuum with regards to price, is very solid.

So that combination of traffic and willingness to spend, we are continuing to see that. It gives me confidence in the health of the consumer -- as well as the overall macroeconomic indicators that we look at around jobs and home price appreciation, some of those other things that we talked about.

In terms of the international ambiguity and some of the risk there, we have a very strong business in Hansgrohe. We sell to some 135 countries. And I think with their 2015 4% growth demonstration of their capabilities, that tells me that we figured out how to maneuver through this ambiguity.

So, all in all, clearly there's some international issues that we are faced with. Hansgrohe is well-positioned to address them. In terms of how that affects the customer in our core repair and remodeling business, which is 80% of our demand drivers, I feel good about it.

Let me just add to that a little bit. When we exited 2014 and interest rates started to pick up, we saw a little bit of a pull back in refinancing activity in consumers. Now that the 10-year treasury has dropped and mortgage interest rates are now at three- or four-year lows, we expect increasing levels of refinancing activity, which generally has been a leading indicator for repair and remodel activity, which again drives north of 80% of our volume.

Got it. And so if you sit here today and you set aside the pressure in the shares and the stock market overall, it doesn't sound like you feel any differently or less confident about any of your businesses than you would have, let's say, two or three months ago.

That's a true statement. When we think about 2016, we really view 2016 versus 2015 very similar to how we saw 2015 versus 2014. So, a continuation of that trend, with R&R right at about 5%.

We think we'll see new construction come in right at about 10% growth, a slowing down of the growth rate in multifamily and a little bit of an acceleration of the growth rate in the single-family. And, as we talked about on the R&R side, with home price appreciation, good housing turnover. And demographics -- that millennial group is aging and the average age from 25 through 29 is when they're clearly going to start having children and that bodes well for new household formations, which at 1.7 million is a strong number. We feel good about the year going forward.

We agree with you. Thank you, guys. Good luck.

Your next question comes from the line of Stephen East from Evercore ISI.

Thank you and congratulations, Keith and John. A quick question on cabinets. Keith, if you wouldn't mind delving in a bit more about how the quarter shaped up and what drove the [beep] from a dealer perspective and a retail perspective? And then your performance -- you're already, with this quarter, at 7.5% op margin. Your long-term target was 7% to 10%.

Is it time to reset the bar for that? How are you looking at that? And if it is time to reset the bar, what do you think is achievable by the time we get to the end of 2017?

I think I'll talk in generalities at first here a little bit and then maybe get into a little specifics about what we're thinking about in terms of carryover, particularly on the cost side. In terms of generalities, the KraftMaid business, particularly in the dealer market, has got some very nice traction. We're growing nicely in the dealers. The value of the Vantage product offering that were launched is significant. And that volume is a mix help for us.

So, we're seeing some favorable mix in cabinets. Clearly, we've done a good job of cost takeouts. We had, as you recall, some significant issues around an ERP implementation in 2014. We've put that behind us and the team is really locked and loaded in on a pipeline of further cost reductions. So, we're continuing to drive it.

But, admittedly, the year-over-year cost takeouts will not be as strong as they were when we look at 2016 verses 2015 as they were 2015 versus 2014. The better you get the harder it is to get better. We took a lot of that cost issues out of the ERP systems but we're going to continue to work on it.

Going forward, more specifically, you can think about approximately a $15 million carryover of cost improvements that we would have in that business. And then if you layer in the kind of growth rates that we talked about, with R&R at about 5%, new construction at about 10%, you know the mix of our business and those two demand drivers, think about around a 30% to 35% drop done in that incremental volume. And I think that gets you right into where we're thinking about that segment for 2016.

Okay. That's great. And how you look at long-term maybe more generally on that 7% to 10% type of range?

That's certainly not the ceiling for us and we're going to continue to drive that higher. We're continuing to focus on cost outs because obviously we never believe we're all the way there. We're going to continue to drive that continuous improvement culture and mindset. But it's really about growth and we're driving growth, and profitable growth, with good mix in that dealer channel, specifically.

Some of the new construction momentum that we talked about at the 10%, in general, some of that will be abated as we continue to prune and focus on builder-direct business where we can really bring a value-add and where can get paid for it. So, that growth will be a little bit muted on the cap side.

All right, I got you. And then the second question, just quickly, I didn't hear anything in the paint side about raw material benefits, what you're seeing there.

And then as you look at cash usage, you laid out pretty good for next year. How do you think about that longer term, John? Where does the allocation go, call it, over the next two to three years?

Sure, Stephen. In terms of price climb we did have a little bit of a benefit there in 2015. We probably experienced low to mid single-digit deflation in the year, 2015. That said, as you probably have heard, there have been a number of suppliers that have recently announced price increases later in 2016. It's not really clear whether those will stick or not but those are hanging out there over our head right now.

In terms of the second part of your question on capital allocation, you're right, we feel pretty good about where we're going to go here in 2016. Longer term and beyond that, obviously we're looking at opportunistic acquisitions. You can never really predict the timing of those but with Amit onboard and clearly trying to fill up the acquisition funnel, we've got a fair amount of activity generated toward that. But at the same time, looking at our share repurchases and making sure that we're doing the right thing for our shareholders by returning capital to them.

And then obviously we're going to take down some debt later this year with that maturity in October. So, we feel like we have a good path forward of how we're going to allocate our capital. It's all really going to be dependent upon the timing of some of these acquisitions that we're looking at.

All right. Thank you.

Your next question comes from the line of Eric Bosshard from Cleveland Research.

Good morning. In the cabinet business, it was helpful to see your guidance on how the profit growth might perform from here. In terms of the market share growth, you talked about the progress you're making with KraftMaid and the progress with market share in total. Can you just talk about or frame your expectations of how the cabinet business might grow relative to the cabinet market in 2016?

We are really thinking about it consistent with the market growth. We've had some nice retail growth this past year. We believe we are growing and taking share in the dealer growth, as well. That gets to be a little bit more difficult to peg the market size in the dealer market because of the fragmentation but I would think about our growth rate being fairly consistent with the pace of the overall market.

And the cabinet market you're assuming grows in line with the R&R and new construction market? Is that what the assumption is at this point?

Yes. That's right. About 5% on the R&R side and about 10% on the new construction side.

And then, secondly, in the paint business, better growth, better underlying growth, it sounds like, in the fourth quarter, and quite favorable raw materials into 2016. Can you talk about the volume and margin expectations in that business from a bigger picture perspective, what we should be thinking about?

Yes. We really haven't changed our outlook on the longer term margin in this segment of right there at about 18%. That's what we talked about at our investor day and that's where we continue to think about it.

We're committed to investing for growth in this, not only in terms of products and customer experience in retail but of course to continue to invest in our pro business. So, I think long term, thinking about this segment at 18% is a good way to think about it.

Okay. Thank you.

Your next question comes from the line of Robert Wetenhall from RBC Capital Markets.

Good morning, everyone. Nice way to finish the year on a high note. I wanted to ask, if 2015 was about getting cabinets back to profitability and spinning off installation, both pretty impressive things to accomplish., what's 2016 going to look like?

Really, we're focused on implementing our Masco operating system and driving growth to outperform our markets across all of our segments, and then to carefully use our capital to drive shareholder value. We've earmarked in the range of $500 million for acquisitions. Our plan is to be very careful with that and to look for bolt-ons, particularly in our plumbing and coatings businesses.

We are committed to paying down debt. We are certainly committed to continuing returning cash to shareholders and dividends and our share buybacks. So, when I'm thinking about 2016, it's about deploying our Masco operating system and outgrowing the market and being good stewards of our capital to drive value.

Cool. So, it's like more of the same with improved profitability.

And maybe a question for John. How should we be thinking about free cash flow growth in 2016? It's pretty clear that you are going to grow in line with the R&R market, or slightly better, hopefully, and you're raising your CapEx. Is free cash flow going to grow this year in light of the bigger CapEx or will EBITDA growth outpace it? Any guidance there would be helpful.

Yes, Bob, just given the strength of our contribution margins that runs generally around on 30% incremental volume, and some of the improved mix we're seeing across our business, I would expect that cash flow or operating profit growth would run ahead of the increased CapEx that we're forecasting at this stage of the year. I would overall expect free cash flow growth as we go from 2015 to 2016.

The end markets are looking good and we're feeling good about the productivity improvements and the efficiencies in our businesses. So, we feel good about that right now.

If I could just sneak one more in -- what are the competitive dynamics? You guys have been very focused on expanding volume gallon growth in paint. What are you just seeing from competitive response in the marketplace? You obviously dominate Home Depot with Behr. What are you seeing out of Lowe's? What are you seeing across other competitors that have retail? How's that shaping up as we head into 2016? Thanks very much.

I'd say probably the most meaningful competitive dynamic in paint was an increase in advertising that we saw in our competition last year as they launched some of their new product lines. We did not have any significant Q4 promotions. We did in July and Labor Day, we had some very productive promotions for us.

But, by and large, we stayed to our plan with our channel partner. But we did see some increased promotions in the competition. Outside of that, it's a tough category, it's a tough market, but I would say the competitive dynamics are fairly stable.

Got it. Good luck. Thanks.

Your next question comes from the line of Keith Hughes from SunTrust.

Thanks. Building on Bob's question, do you anticipate, particularly with some of the raw material declines, that paint could become more competitive on a price basis as we go through 2016? And this is not specifically big box but looking at the other channels where consumers can buy paint.

Keith, it really, I think, depends on where some of the price increases, the input cost increases that have been announced end up. I think what we're seeing in the marketplace now, we're seeing good sell-through on our product line, our paint products, in the retail channel. We're seeing very good growth obviously in the pro business coming off of an admittedly low base. So, we feel really good.

Will the industry get more competitive? No. I think we're up against some large tough competitors but I think where we're at, with four or five main competitors in the industry, I don't think the competitive dynamics change all that dramatically.

Okay. Thank you.

Your next question comes from the line of Michael Rehaut from JPMorgan.

Thanks, it's Mike Rehaut. Good morning and congrats on the quarter. First question, I wanted to go back to the $1.80 goal on 2017 EPS. Clearly there's a path there. That path would really require some good acceleration on the top line. And, of course, this year it's been negatively impacted by FX, but still, even without that, I think across most of your segments, it does require a good, at least, mid single-digit type of growth rate, if not stronger.

I just wanted to get your sense of, segment by segment, how you're seeing things progress in terms of executing some of those growth strategies. Obviously at the analyst day you laid out multiple paths, detailed type of a goal segment by segment. So maybe if it's possible just to give some highlights in terms of perhaps how some of those opportunities are progressing segment by segment. Any additional detail there would be great.

Sure, Mike. In paint I've talked a little bit about it already on the call. The overall market was a little bit softer in DIY than we had planned, but we believe we're outgrowing that market and driving gallon growth. At the analyst day we had our growth rate back-end loaded as we anticipated the ramping up of our Pro initiative to take some time. We're actually doing better in Pro than we thought. So, we anticipate a continued ramp up and feel good about how the last couple years toward that goal in 2017 are going to roll in paint.

In terms of cabinets, we've talked about that, as well. That has exceeded our expectations. The team not only did a great job last year of ripping the cost out that we put in to protect the customers due to that ERP issue, but we're also now getting more productive. And we put in a new finishing system so our quality there is what I would consider best in class when you look at the quality coming out of that flat finishing line.

We have new products that we're launching. The products that we have already launched are taking off. So, cabinets are a real positive story and we're looking forward to profitably growing that business, particularly in the dealer channel.

In plumbing, again, very good story. We're seeing nice mix shift. We also have very strong performance out of Delta with a record year. And that's saying something for a company that's been as successful as Delta has been. Hansgrohe also had a record year, another very successful company, with an outstanding leadership team in place there.

So, we're clearly ahead of where we thought we would be. So, that's on the plus side as we think about moving out and going into 2017.

From a windows is perspective, we're continuing to grow and outpace the market and gain share. We have our Texas plant that's coming up nicely. The new ERP system so far is going very well.

We've already implemented several components of that without a hiccup, so we feel good about that. And that's an outstanding value proposition with that Milgard value proposition out there. That has driven their share performance. So, from a plumbing, cabinets, paint perspective, while we talked about some puts and takes in terms of some stuff that's running hotter than we thought, and stuff that's a little cooler than we thought, on balance we feel good and remain committed to the $1.80.

That's a great review, Keith, I appreciate that. Very helpful.

And for my second question, it goes back to maybe pushing you a little bit on plumbing. You've reiterated an idea around the 18% long-term margin target and you ended 2015 at 20%. Is there anything specific that would, let's say, drive the results back from 20% to 18% in 2016 in terms of incremental investment or higher advertising?

Because, if you recall, I think some of that was what impacted the group in 2014 or into 2015, if I remember right. Or, is there negative mix or is the incrementals a little bit worse than we're thinking? I appreciate the 18% long-term guidance but is there anything specific that's going to drive a 200 basis point reversal in 2016?

Mike, it's John. A couple things that we talked about earlier. One, there are some price increases hanging out over the industry in terms of some of the input costs. The other thing, as we've talked about in the past, is the Pro business that we are growing, and growing quite rapidly, is a negative mix impact on the overall segment. That does not come at the same margin that our core DIY business comes at. So, that would be a little bit of it.

And the third thing, you mentioned it in your remarks, is we continue to invest and grow this business. This is something that we want to do. Our goal in conjunction with our channel partners at Home Depot is to drive gallon growth. That's what we're committed to with them, that's what we're focused on with them, and that's where we're putting our investments in this segment. We're looking forward to having future good years but it's all about getting the top line moving on this segment.

Great. I appreciate it. Thanks, guys.

Your next question comes from the line of Mike Dahl from Credit Suisse.

Hi, thanks. Keith, I wanted to go back to a response you had to, I think, Stevie's earlier question around cabinets, $15 million carry-over from cost improvements plus just the general leverage in the business. I wanted to push on that a little because our understanding was a lot of the progress this year was somewhat organic in terms of mix improvement and some leverage, and then some of the initiatives that may have been underway prior to the analyst day when Joe had outlined the $50 million in cost take-outs. I understand wanting to play it a little slow since it's still early on in the turnaround, but if the team's work isn't done, shouldn't you see more improvement in 2016 than just the carryover effect from the 2015 initiatives?

We are continuing to drive cost takeouts and revenue gains in this business. If you look at 2015 and the pace of the cost-outs that we did, that was the thing that really was a positive versus our expectations -- was the speed that team was able to take these costs out. So when you look at where they came out, the lion's share of these cost-outs came out early in the year as we were making these improvements.

Certainly we're going to drive to try to get everything we can in terms of the cost takeouts. But we're also investing in this business and balancing it with growth investments around new products, around some pricing and some advertising and programs that we're running. So, thinking about the $15 million carryover, plus the 30% to 35% drop-down in incremental volume, I think about that volume increment pretty consistent with the market. I think that's a good place to be.

Got it. Okay. And then, John, I think you made a comment on the plumbing that there was $15 million to $20 million pull forward in sales in the fourth quarter. So, just curious if you could give us a sense of how to think about that from a profit standpoint as it will impact the first quarter of this year. Since it was coming against a higher rebate level should we think about that as maybe less of a hit to the 1Q profits than normal? Or any color you can give there.

Yes, Mike, I'm on about a 25% drop through on those that pull forward sales.

Okay. Thank you.

Your next question comes from the line of Stephen Kim from Barclays.

Thanks very much, guys. Congratulations on a good quarter. First question was about your comments on mix shift. I think that I heard you specifically call out the faucets but I was curious as to whether you could expand a little bit on what you're seeing with respect to mix shift, particularly along a few vectors. One is, across segments, was it more broad-based than just the faucets?

Two, was it primarily driven by new product introductions? Is that primarily where you saw it or were you actually seeing something more organic across all your products, whether they weren't newly introduced or not? And then, thirdly, whether it's just a comment that you're seeing shifting toward higher end, or if across this price spectrum you're seeing people willing to invest a little bit more for something a little better.

Yes. Stephen, it's John. I'll give you a couple comments on some and then I'll turn it over to Keith for some comments, as well. In terms of, let's say, the window business, for instance, we've seen a nice mix shift in our window business the last probably seven or eight quarters, as consumers have moved up the price continuum to either a high-end vinyl or our fiberglass window product at Milgard. It's been a continued focus of the teams but the consumers are driving that.

And that's why you're seeing nearly double-digit growth in that segment for the last 12 quarters or so. So, really strong growth, partially impacted by mix. And we launched that Essence product about three years ago, so that's driving that.

And then I'd say if you look at our paint segment, as well, we launched Behr Marquee interior paint this year. And while that's a $45 a gallon or so price point for us at retail, our highest retail price point, we have seen some nice mix shift up. That is a new product introduction that is driving some of that mix benefit that were seeing. And I'll let Keith talk about both plumbing and cabinetry.

Steve, I would say that the mix shift we're seeing is more broad-based. It certainly not just constrained to one segment. Our spa business, for example, that is an extremely discretionary, high dollar ticket item and we continue to do very well in that business with a record year. So, that's significant. In our Windows business, with the Essence product line, we're seeing that shift to that higher end products very clearly.

On the plumbing side, some of our most successful product lines are those that we sell in the showrooms in the high end. We've talked about Brizo, Hansgrohe, and then our showroom-based products in Delta. And you look at -- just an anecdotal view, as I was out at the builders show and the kitchen and bath show in Vegas, the most exciting part of the booths where we got the most traffic were in those higher-end items. So, it's broad-based. Marquee in paint.

I see it as a general trend in terms of driving the upgrades. Clearly, a part of that we're enjoying is due to new product introductions. The KraftMaid Vantage line has got quite impressive penetration in our dealer segments.

It's very helpful as we present it to dealers that we sign up. So, between driving share of wallet in our existing dealer base to helping us have a solid value proposition to new dealers, it's very helpful.

So product plays a fundamental component. As does channel focus -- getting deeper and deeper relationships on our existing dealers, both in the plumbing segment as well as in cabinets, it's very helpful. Understanding how our channel makes money in this higher end and helping to drive them in that direction. We're seeing that in our plumbing wholesalers, in particular.

So, it's broad-based. It certainly is driven by new product introductions but it also has a fundamental component around channel focus and relationships.

Perfect. That's very helpful. Switching gears, I wanted to just ask a general question about the exit from the cabinet, the builder-direct business. My understanding is that this was something that you're still actively servicing the smaller builders in the market, which still represent the majority of the industry, but my understanding is it was the larger builders you chose to exit from. My question here is, what's changed versus, let's say, 10 or 15 years ago? Because obviously you're very effective at serving large customers, so that's really nothing new for Masco.

So, I'm curious as to what do you think has changed in the industry and your relationship with the larger builders such that this is business that really just doesn't make sense for a large producer like Masco? Are these larger builders de-specking their product, so just the value proposition isn't there in cabinets? Or have they become noticeably more aggressive negotiators over the years?

It's more on the take per unit issue that's driving this to be a very difficult channel to make money in. You mentioned 15 years ago. I don't if it was that long ago but if you go back to where the average home had, say, 18 boxes in it, and they were 42-inch uppers, so big cabinets with a solid wood, glazed, a ton of content in them, and quite a significant amount of boxes. And then now you move forward to in some of the market -- not all but some of the market -- you're down to in the 13 to 14 boxes per unit, flat panel oak, very decontented finishing levels and decontented hardware, that sort of thing.

So, your take per unit is significantly clipped in some of these customers but you still have the costs of that last mile of delivery, you still have to manage the installation and manage the punch out and all the other issues that go with keeping customers happy in this segment. I would say the main driver on it really was the change in the type of product that was being delivered and our ability to make money, given the, by and large, fixed-cost nature of that last mile install and punch out.

And it's not just the large builders, it's not strictly large builders. What we're really looking for is builders that value our brand builders that value our excellent service, and then partnering up with them. And what we're finding is that there's good business out there for us to have, but there's some business that's not productive for us to have, and that's our approach

Great. Think you very much

Your last question comes from the line of Alex Rygiel from FBR.

Thank you, John. Nice quarter. Keith, nice quarter. Just one quick verification. Does the $1.80 view in 2017 include any incremental future share repurchases?

Yes, Alex, good question. There's a couple of assumptions underlying the $1.80. One was constant currency as of the date of the analyst day in May of 2015. And the other was the assumption that we completed the 50 million share authorization that was announced on September 30 in 2014 by the end of 2017.

Perfect. Thank you. Nice quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.