馬斯科 (MAS) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to MASCO Corporation's first-quarter 2016 results conference call. My name is Stephanie, 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 Director of Investor Relations, Irene Tasi. Irene, you may begin.

Thank you, Stephanie and good morning to everyone. Welcome to MASCO Corporation's 2016 first-quarter 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 first-quarter 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 open for analyst questions.

As reminder, we would appreciate it if you would limit yourself to one question with one follow-up. If we are unable to take your question during the call, please feel free to call me directly at 313-792-5500. I would 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 have described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q, that we filed with the Securities and Exchange Commission.

Today's presentation also includes non-GAAP financial measures. Any references to operating profits, earnings per share, or cash flow on today's call will be as adjusted. Unless otherwise noted, with a 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'll now turn the call over to our President and Chief Executive Officer, Keith Allman.

Thank you, Irene. And good morning, everyone. Turning to slide 4. We carried last year's momentum into 2016, and we are off to a strong start this year. We experienced solid demand for our brands across the price continuum, including big-ticket items such as spas, windows and cabinets, as well as smaller ticket items in our paint and plumbing categories. Our portfolio's inherent operating leverage and our focus on cost control were key factors to our success.

Looking specifically at the quarter, our top line increased by 5% when you exclude the impact of currency. Which cost us $19 million in the quarter. Notably, our operating margin increased 350 basis points to 13.8%, reflecting our portfolio's strong operating leverage. This represents our best first-quarter performance in 12 years.

Importantly, our EPS grew 78%, to $0.32 per common share. These results reflect our ability to capitalize on improving end-market dynamics and our ability to generate solid consumer demand for our industry-leading brands. I would like to provide you with some additional insight into the drivers behind each of our segments' performance.

Let's begin with plumbing. Our portfolio of plumbing businesses continued its strong performance and grew sales in North America by 5%, when you exclude the impact of Canadian currency. And grew internationally by 3% in local currency. Each of our plumbing businesses contributed to this growth, including, Hansgrohe, who, yet again, set a company record for quarterly sales and operating profit. The Delta and Brizo brands continue to resonate with the consumer and drive sales in both the retail and wholesale channels. Our premier wellness business, Watkins, demonstrated the success of their brand, dealer network, and bolt-on acquisition strategy by growing their top and bottom lines through the successful integration of Endless Pools.

Our decorative architectural segment delivered an outstanding quarter as the investments we have made to support the growth of this segment continue to take hold. Behr drove sales with its award-winning core DIY products such as BEHR MARQUEE, its differentiated consumer experience in the aisle with the new color center, and its launch of new products, such as Granite Grip floor coatings.

Our pro-paint sales continue to outpace market growth, as a result of our mutual efforts with The Home Depot to capture share in this channel. We remain committed to investing behind this important growth initiative.

Turning to cabinets, the team delivered yet another strong quarter, maintaining their leadership position at retail, and gaining share in the dealer channel, with both Merillat and KraftMaid brands. To further position this business for profitable growth, the team has continued to optimize their sales mix by exiting low-margin, direct-to-builder business in the Carolinas, and exiting the kitchen countertop product category. Given these actions and cabinetry's positive trajectory, we expect this segment to achieve operating profit margins between 8% and 9% in 2016.

Our windows and other specialty products segment had another great quarter. Milgard, the leading window brand in the Western United States, grew their top line by 9% as they consistently executed against a dynamic economic environment.

Augmenting our solid operational performance across all segments was our execution against key capital allocation initiatives. We strengthened our balance sheet by paying down $400 million in debt, and refinancing two of our debt maturities. These actions will result in approximately $45 million of annual interest expense savings going forward.

We also continued our share repurchase activity in the quarter, buying back approximately 3.2 million shares. To date, we've repurchased over 25 million shares against our 50 million share repurchase authorization, returning over $600 million to shareholders, and thus, delivering on our commitment to drive shareholder value.

Now, I would 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. Please turn to slide 6. As Irene mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges. We continued our positive momentum coming out of 2015, with a solid start to 2016. The first quarter of 2016 was our 18th consecutive quarter of year-over-year sales and operating profit growth.

Excluding the impact of foreign currency, sales increased 5%. Foreign currency translation negatively impacted our sales in the first quarter by approximately $19 million, as the US dollar strengthened against the euro, the British pound, and the Canadian dollar.

North American sales were up 5% in the quarter. We are experiencing strong demand for our repair and remodeling products in all channels of distribution and across the price continuum as we see consumers trading up to our better and best product offerings. As a reminder, repair-remodel activity accounts for approximately 83% of our total sales.

International sales increased 2% in local currency in the quarter, driven by the continued strength in our international plumbing and window businesses. Gross margins expanded approximately 320 basis points compared to the first quarter of last year, to 33.1%. Our SG&A as a percent of sales improved as well, delivering a 20 basis point improvement over the prior year, driven by focused cost control throughout the organizations.

We delivered a very strong bottom-line performance as operating income increased 39% to $237 million, with operating margins expanding 350 basis points to 13.8%, our highest first-quarter margin since 2004. And our EPS was $0.32, an improvement of $0.14, or 78%, compared to the first quarter of 2015.

Turning to slide 7, our plumbing segment sales increased 4% in the quarter, excluding the impact of currency, driven by growth in our faucets, showers, spas, and our rough-plumbing products. Foreign currency translation negatively impacted this segment's sales by approximately $16 million in the quarter. Excluding the impact of foreign currency translation related to the Canadian dollar, our North American sales grew 5%, driven by strong demand for our innovative Delta and Brizo brands in the wholesale channel.

This performance was achieved despite, as we foreshadowed on our Q4 call, approximately $15 million of sales being pulled forward into Q4 of 2015 from Q1 of 2016 as several wholesale customers strived to hit higher rebates tiers in the final quarter of last year. North American plumbing sales increased 8%, if you exclude the impact of foreign currency and the sales pull forward.

Our international plumbing sales increased 3% in local currency. Hansgrohe continues to outperform, as it delivered its highest quarterly sales and operating profits in the Company's history. This achievement is a testament to Hansgrohe's successful investments in brand, design, and in innovation. Operating profit for this segment increased 17% in the quarter, driven by incremental volume, productivity improvements in North America, and a favorable price commodity relationship in Europe. Our first-quarter operating profit also benefited by approximately $5 million, due to the timing of sales and marketing expenses at Delta.

Turning to slide 8, in the decorative architectural segment, first-quarter sales grew 9%, fueled by strong demand for both Behr's core DIY products, including BEHR MARQUEE, KILZ primers, and our new floor coatings products at The Home Depot, as well as our BehrPro paint initiative. Favorable weather supplemented this strong demand for our industry-leading products as evidenced by our strong exterior paints and stain sales in the quarter. Liberty Hardware had another solid quarter, due to continued share gains from successful new product introductions, and program wins in the retail channel.

Operating income increased 27% in the first quarter, principally due to the operating leverage and the strong volumes at Behr. While we have had a great start to 2016 with our decorative architectural segment, I want to remind you that this segment is facing a difficult comp in Q2 as the second quarter of 2015 was an all-time record sales quarter for Behr.

Turning to slide 9, our cabinet street segment sales declined 5% in the quarter, due to the deliberate exit of certain lower margin business with builder channel in the United States and select low-margin accounts in our UK cabinet business. This decline was partially offset by high single-digit growth in the dealer channels. Both our Merillat offerings and our dealer-exclusive KraftMaid advantage programs continue to perform, and drive increased volume and a favorable mix.

As Keith mentioned earlier, we took additional actions in the first quarter to position this segment for a profitable growth, including exiting the Carolinas builder-direct business and our retail kitchen countertop product lines. These actions, when coupled with a previously announced pullback in our builder-direct business, will negatively impact this segment's top line by about $60 million for the full year, while improving its profitability. On a quarterly basis, the revenue impact will be approximately $15 million for each of the second, third, and fourth quarters.

Segment profitability in the first quarter improved $27 million over 2015. Our strong Q1 margin was driven by cost savings initiatives, and continued growth of our higher price point semi-custom KraftMaid offering. This segment's profitability in the quarter was also favorably impacted by approximately $4 million due to the timing of certain operational and marketing related expenses. As a result of the actions I mentioned earlier, and the recent performance of this business, we anticipate operating margins for this segment should be between 8% and 9% in 2016.

Turning to slide 10, our window segment sales increased 9%, driven by a low double-digit sales growth in Milgard, our leading Western US window business. Milgard is seeing strong demand in the Western US, resulting in increased volume and a continued benefit of a favorable shift toward our premium window and door product lines. Excluding the $2 million negative impact of a stronger US dollar, our European window sales increased 9% as this segment continues to benefit from share gains, the acquisition of Evolution Manufacturing, and growth in its Phoenix Door product lines. This segment's operating profit decline in the quarter is due to increased ERP expenses at Milgard of approximately $5 million, and incremental labor cost in preparation for the spring selling season of approximately $3 million.

And turning to slide 11, during the quarter we took further action to further strengthen our balance sheet. In March, we issued $400 million of 3.5% five-year notes and $500 million of 4 3/8% 10-year notes. Earlier this month, we used the proceeds from these debt issuances, together with cash on hand, to repay and early retire all of our $1 billion notes due in October 2016 and $300 million notes, which were due in March of 2017. To complete the retirement of these two debt maturities we will incur approximately $40 million, in a one-time interest payment in the second quarter of 2016.

Including this one-time payment, we anticipate interest expense for the second quarter to be approximately $88 million. The results of these transactions will be an annual interest expense reduction of nearly $45 million. Starting with the third quarter of 2016, our quarterly interest expense will be approximately $44 million. With these debt transactions, we have delivered on our long-term commitment to strengthen our balance sheet. Due to our strong cash flow, and this recent debt retirement, we have greatly enhanced our financial flexibility as our net debt to EBITDA now stands at approximately 1.8 times on a pro forma basis.

From a working capital perspective, we delivered another strong quarter of performance with working capital as a percent of sales improving 50 basis points versus the prior year to 13.3%. Finally, as Keith mentioned, during the quarter we repurchased 3.2 million shares, valued at approximately $86 million.

With that, I will now turn the call back over to Keith.

Thank you, John. I am pleased with our team?s consistent execution. Our results reflect the strength of our powerful brands and our focus on operational excellence. We have strong positions and good industries, and our portfolio is aligned to improving macro trends. Existing home prices continue to appreciate, which is a driver for larger ticket items such as cabinets and windows. Housing turnover continues to accelerate, which is a leading indicator of repair and remodel spend. And affordability remains well above historic averages.

As a result of these trends, the consumer continues to gain confidence to reinvest in the home. And we are well positioned to benefit from that. The strategies that we laid out last year are working. And going forward, we remain committed to: one, investing behind our brands for growth; two, developing innovative products to ensure that we maintain our must-have position with our customers. Three, focusing on operational excellence through our continued deployment of the MASCO operating system. And finally, balancing our capital allocation between acquisitions, with the right strategic fit and return, share buybacks, and dividends.

Our operational execution, coupled with our strengthened balance sheet and strong liquidity position provides us with multiple levers to continue to drive shareholder value.

With that, I would like to open up the call for questions. Operator.

(Operator Instructions)

Your first question comes from the line of Samuel Eisner with Goldman Sachs.

Your line is open.

Good morning.

Good morning, Sam.

On the cabinets business, your guidance is for 8% to 9%. It seems as though expense timing already gets you to the high end of that range, based on your guidance. So I am curious, can you walk through what the puts and takes are for the remainder of the year, perhaps touching on some of the already announced cost savings, as well as underlying incrementals for the cabinets business going forward?

Sam, as we mentioned, there was a deferral of marketing spend of about $4 million. That has certainly benefited us in this quarter. And then we will have that expense in the following quarter.

We are focused on growing this business. We are making the pivot here. And we are investing behind that growth. So we will be seeing further investments as we drive growth.

You can expect to model this business going forward in that 30% to 35% level of contribution margin, dropdown, and incrementals.

And just a follow-up on paint. You have seen some of your other competitors talk about traction with TiO2 price increases in the market. Can you comment a bit about what you are seeing in the market? And also the implications that it might have on your 2017 goals? Thanks.

We are pretty confident that the material costs have bottomed. We are experiencing significant cost pressure from our major suppliers on TiO2 and resins as well. I think when you look at where we are driving growth, in particular with this business in the pro channel as we have talked before, we are doing a nice job there of driving that growth. And it is lower margin for us, while a great return. We are going to continue to invest behind that.

So there is some margin pressure that we are seeing, both in terms of the commodities, as well as our mix, as we drive that growth.

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

Your line is open.

Thanks.

Good morning, everyone, and nice quarter.

First question I had was taking a step back and looking at the progress here and thinking about the 2017 goals that you have laid out. It would appear, with all the progress and certainly the positive margin momentum, that you are on your way. I wanted to get a sense of -- I think last quarter you reiterated your outlook for your ability to hit that goal. Wanted to know if that was still the case. And talk through any of the puts and takes on that goal as we sit here today, relative to when you issued it about a year ago. Thanks.

Michael --

And also then I have a follow-up, sorry.

We are positive on the underlying fundamentals driving the business. When you look at our expectation, at R&R growth rate of about 5%, there may be some upside to that, but I think it is a little too early to call. I would like to see a little more time before we move off of that expectation in terms of the R&R growth.

We are seeing good new construction growth. Our estimate is 10% compared to 2015. And we are seeing that. And we are seeing a shift in that market mix in new construction to be more single-family laden versus commercial. And that helps us. We have higher content per unit in that and better mix in that. So the fundamentals are strong.

R&R is 80% of our business when prices are appreciating. As we talked about, demographics are improving. Affordability is still very favorable. And our capacity is in shape, as we have talked about in the past. We are ready for this uplift.

So we feel good. We are positive about the outlook; we are positive about 2017. And we are committed to, and we are on track for, the 2017 EPS target of $1.80 per share. We are not moving off of that.

Mike, it's John. A couple supplemental comments to Keith.

As you look at the various components of how we built that walk from 2015 to 2017, I think we're probably coming in a bit softer on the top line than we initially forecasted. But I think what is coming through a little bit stronger than we had initially anticipated, are some of the cost outs. And, obviously, you're seeing that reflected in the performance of the cabinet business.

And a couple other areas of small opportunity. Obviously the debt refinancing that we put in probably adds $0.02 to that $1.80 that we outlined last year as we refinanced sooner and at a lower rate than we had assumed in the forecast we provided last year. Maybe a little bit of upside to that $1.80. Not a ton at this time. I think we are reaffirming that $1.80 right now. And we're pleased with how we're getting there.

That's helpful. Thanks, John.

Secondly, you mentioned the timing of expenses both in cabinets and Delta in the plumbing business. I think you said that you expect the cabinet, that timing of expenses to impact 2Q. Is the same for Delta? And is there any other type of timing issues that we should anticipate for the second quarter?

No other timing issues, Mike. I would tell you that the $4 million, while not a huge number, will probably be spread across a couple of quarters. There are some products that will be coming to market. And those are really launch costs related to those new products. So depending on when those come to market, we'll incur those.

The Delta $5 million, I think will largely be deferred into the second quarter of the year. But beyond those two, nothing else on the timing issue.

Great. Thanks.

Next question comes from the line of Stephen Kim with Barclays.

Your line is open.

Thanks very much. Good strong quarter. I wanted to follow up on those timing charges.

I think you itemized $9 million or $5 million in Delta and another $4 million in cabinets. If we back that out, the impact on the overall gross margin does not seem like it would be that significant. Only about 50 basis points or so, which still leaves your gross margin this first quarter at a very high level. Historically, it seems that the first quarter of gross margin is generally the lowest of the year.

I was curious as to whether or not you felt that was also likely to be the case this year. Or if there was something else that was likely to drive that gross margin down later in the year.

I think, Stephen, when you take a look at several things that impact our gross margin. I think the one thing that probably most dramatically impacted the favorable gross margin in the first quarter of this year was the commodity environment that we find ourselves in. As you probably realize, most of the commodities bottomed in January of this year.

The year got off to a pretty choppy start with the overall stock market and economic environment. And since that time, we've seen a pretty consistent rise in both base metals, some of the hardwoods. And, as Keith referenced a couple minutes ago, we are seeing it also in TiO2 that goes into our paint business.

I think with raw materials slowly inflating -- they are not dramatically inflating, but starting to inflate. I think that will add some pressure on our gross margin going forward. With that said, to your point, the first quarter is typically our slowest quarter of the year. And as we enjoy the seasonal volumes that come with the second and third quarters, I think there is potential to have stronger gross margins as the year continues to unfold.

I would add to that, Stephen, that while we are seeing some upward pressure on the raws, our mix is holding quite well. And that is also a driver of some of that favorable gross margin. When you look at our windows business -- which is obviously a big ticket -- our wellness business and spas, I think that is a good indicator of the stability of our mix. There are a couple things going in the opposite direction there. We think we're going to hold our mix; we don't anticipate that slipping. But we are experiencing pressure in raw materials.

That sounds like all things combined, you will still wind up on the positive side of the ledger.

My next question relates to your comment about the cabinet incremental investments and your guidance for 8% to 9% this year in margins, which seems a little low relative to what you did in the first quarter. Was curious if you could talk a little bit more about what you meant by pivoting to growth. And is that something that has changed in your view or just sort of the next step in your strategy for cabinets? And if your thinking has evolved at all about whether the segment is core in your opinion or not?

As we've talked about for some time now, our focus and the team's focus in cabinets is to improve our profitability in the quality of the earnings. And get that business in shape to compete. We've worked hard on our processes underlying how we work. We have worked hard on our product assortment. And we certainly have made significant improvements in our leadership team there.

As is often the case, I think, in situations like this, to get in shape that sometimes means you need to get better before you get bigger. And we have done a pretty good job of doing that. The change in focus on growth is really more of a next step in an evolution of our thinking, based on how we have gotten ourselves fit and ready for the ring. And ready to get in there and compete for growth. And that is how I would characterize it. More as a next step as we have earned the right to grow.

Thanks. Looking forward to it.

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

Your line is open.

Thank you.

To carry on that last comment you made there -- just to clarify the $60 million that you detailed, John, on the walk away business in cabinets. Does that include the actions that you took in the third quarter? Or is that just related to the actions from this quarter?

That includes, Dennis, the actions we took last year. As we laid out on the fourth quarter call, we thought we would have about $20 million of incremental loss business. Think about it as an incremental $40 million to that $20 million, so a total of $60 million.

Okay. In conjunction with going on an offense, if you back that out then in this quarter, it still looks like the organic growth in the segment was low single digits, probably trailing the overall market by a fair amount?

So do you look at these actions that you have taken so far as being the last of the culling of the revenue? And from this point forward, once we have lapped that, you would envision to be trending at least back towards market growth? That is the offensive component? Or could there be more pruning as you continue to fix up the business?

I think this is really the final pruning of the sales portfolio within this business. We are doing a similar exercise at our UK cabinet business as well. So there might be a little bit of a headwind with that later in the year.

That said, I want to remind you that our dealer sales were up high single digits in the quarter. And our retail business was up low single digits in the quarter. So we did have pretty good growth in both aspects of our non-direct-to-builder business in the first quarter of the year.

Okay. Great.

And then on the paint side, can you maybe detail -- split out the volumes that you are seeing both on the DIY side and any variance you might be seeing between point-of-sale and inventory management there? And then on the pro side?

Honestly, Dennis, the first quarter is a little bit of an unusual one, just given the ramp-up towards the end of the quarter to go into the spring selling season. We did see very good sell through, as well as sell-in to the quarter. As I mentioned in my prepared remarks, very strong exterior paint and exterior stain sales in the quarter, driven by the favorable weather that we saw in the first quarter.

We also saw -- as Keith mentioned, we launched some new products in the quarter. Very good sell-through in that product category as well. So as we go into the second quarter, inventory levels are right where we want them to be. Very consistent with where we saw them at this point last year as we go into the spring selling season.

Great. Thanks and good luck.

Next question comes in the line of Bob Wetenhall with RBC.

Your line is open.

Good morning and fantastic quarter, Keith and John. You have made some tremendous headway in a relatively short amount of time.

Wanted to ask you on the paint business, it seems like there is a bunch of things going on top line. Like you had some pull forward into 4Q. Yet you still had really good growth, up 9%. And it sounds like the exterior business is strong.

How should we think about organic volume growth during the quarter? And how do we think about top line moving forward, given the fact that you have a really tough comp?

It's an important point you brought up, Bob, in terms of the comps that we are facing. Q2 of last year was a record quarter for us, up 6% last year. So that is a tough comp for us to lap.

In the quarter that just completed, it is hard for us to estimate with extreme accuracy the effect of weather. But clearly, that quarter that we just finished was one of the lightest winters we have seen nationally in a long time. There were probably a couple points of benefit there. As we try to figure out what that is, we look at the exterior sales. And they were extremely high when you look at the quarter-over-quarter comps.

So there is a component of that. But we expect to continue to take share, particularly in our core business as well as we have done consistently in our pro business. And having said that, we do face a tough comp coming up.

Bob, I would remind you, though, I don't think there is a ton of pull forward into the first quarter of the year. If you recall, the fourth quarter was a relatively flat quarter for us last year. And that had to do with some timing issues due to preceding year, 2014. So I think overall, the fourth quarter from an organic space is a pretty solid quarter.

Okay, and taking off that, if you are hitting a tough comp volume-wise year over year, you're not going to get a lot of incremental volume growth on a gallon basis. And you cited some mixed headwinds and some cost pressures on TiO2. How should we think about your operating margin moving forward?

I think from here, operating margins -- because of what Keith cited as a result of some of the pressures we are facing on the commodity input side -- I think you'll see that our margins come under some pressure over the course of the next several quarters as we deal with those cost pressures.

That said, hopefully as we get into the spring selling season, our Marquee volume has been very strong, which is a nice favorable mix for us. And if we see a better paint selling season than we saw in 2015, that kind of volume could help us negate some of those. But, generally speaking, I would think about margin pressure in the near term and the longer term in this segment.

Bob, more in line with what John said in terms of the pressure that we are seeing combated somewhat by the Marquee mix benefit that we have, we are seeing more gradual pressure than we are any kind of cliff or falloff of the margin.

That's helpful.

John, you've taken net leverage down to 1.8 times. And I think in your prepared remarks on capital allocation, you guys mentioned acquisitions. And I was hoping either yourself or Keith could touch on what the pipeline looks like, the size of a deal you would do, and your appetite versus buybacks and reinvesting in the business. Thanks and good luck.

I would characterize it, as we have consistently, our capital allocation strategy, Bob, is balanced. We have a good generation of cash flow. And we expect M&A to play a part of our value creation as we go forward. We are focused, and continue to be focused, on bolt-on acquisitions, with our pipeline targeted towards plumbing and paint. Although we would look at others, if it would help drive our organic strategies.

In terms of how we toggle back between buybacks and acquisitions, we have the flexibility. If we saw a good deal, and if that deal was bigger, we could certainly do it. But I?d tell you that we are being conservative in how we evaluate them. They need to be on strategy for our portfolio. And they need to be strong returns.

And we certainly evaluate those returns against what we think we can get with our own buybacks. So I would say that we haven't changed our focus to acquisition. We're working hard in developing the pipelines and contacting potential acquisitions. And we are working the process. But we remain committed to a balanced flexibility, and our focus is on bolt-ons.

Your next question comes from the line of Susan McClary.

Your line is now open.

Thank you. Good morning.

Good morning.

One thing that you mentioned over this call is that you are definitely seeing an improved mix where you're getting consumers that are trading up to some of your better or best options there. Can you talk about those trends that you are seeing? And maybe how is that contributing to the margins that we should be thinking about, especially with cabinets?

I will talk about some of the trends.

And then, John, you can touch on some of the impacts on margin.

Susan, it's broad-based. We are seeing consistent move-up in some of our lower price premium products. If you look at faucets, we are seeing a move up in the showroom to more expensive, more featured products, both in terms of finish as well as functionality. Be it our touch technology or our MagnaTite docking or our intuition showers -- all those higher-margin, higher contented products at that price point. We are seeing them move up, as we have talked about with BEHR MARQUEE. So in the lower price point range, we are seeing a mix-up.

In the bigger ticket items, we're also seeing it. Our KraftMaid Vantage program is doing very well. And it's helping the consumer move up in terms of wood species, finish level, content in terms of drawer guides, et cetera. I would characterize it clearly as broad-based across the continuum.

From a channel perspective, we're also seeing it. We have a favorable mix in retail. Clearly, in our plumbing wholesales we are seeing a favorable mix. We talked about our dealer network in wellness. And we've got a couple new spas that are out, and people are willing to pay for that value.

So I would characterize the mix move up across really all of our segments, and across all of our channels and price points.

Susan, to further supplement Keith's comments, as you think about this trend, it's been going on for a number quarters now. And as you've seen, the margin progression that we have experienced from the end of 2014 through 2015 and now into the first quarter 2016, I think a lot of what you have seen is really twofold.

One is there's a commodity benefit that we have been enjoying. But at the same time, the mix benefit. And it?s reflecting itself clearly in our cabinet business. That is probably the one where it is most evident. As you've seen the progression we have made in the cabinet business over the course of the last four quarters, as we launched Vantage about this time last year. You can see the impact that business has had on the cabinet business.

And you can also see it in our plumbing segment. We've had pretty consistent margins from 2014 to 2015. And now in the first part of 2016, we are seeing continued margin expansion. And I think that is really attributable primarily to the mix shift and some of the volumes that we are enjoying as a result of that favorable mix.

Okay. And then in terms of Milgard, you've noted that you are gaining some share there. How sustainable do you think that is? And who do think you're actually taking that business from?

Milgard's got a fantastic position in the Western US, Susan, as I think you're very well aware. And as we grow that business in the Western US, I think we are taking share from a number of competitors. Clearly, it is a highly fragmented business; and we are taking share from some of the smaller competitors.

But at the same time, just given our growth, I feel like we are probably taking share from some of our more mainline competitors as well. The Milgard team has done a great job of refocusing the business away from the production builders, and really more toward remodelers and the custom builders. So we've really enjoyed very nice growth with both of those customer segments in the last year to year-and-a-half.

Okay. Thank you.

Your next question comes from George Staphos with Bank of America.

Your line is open.

Hello, everyone, good morning. Thanks for all the details, and congratulations on the progress so far. Two questions for you.

First for you, John. We always talk about the SG&A leverage that the Company has been exerting over the last number of years. And once again, you had SG&A as a percentage of sales down.

Does there come a point where you have to start investing in corporate and SG&A in general to keep up with the revenue growth? And the related point, how much did FX serve to trim, in dollar terms, the SG&A level that you had in the first quarter?

Second question, in decorative arc, and in particular in paint, you mentioned you have to invest in the business. You have some initiatives to invest within the second quarter. Is there any way to size what level of investment you are considering there or what the focal points are for that in 2Q and 3Q? Thank you.

Yes George, you're right. We are really proud of how the entire team is responding to our SG&A initiatives. And we have done a nice job of controlling cost as we've grown the business.

What I am most proud of, particularly in the first quarter, is the fact that we did a nice job of holding SG&A as a percent of sales or having it decline, despite the fact that we are investing in some of the programs that impact SG&A. For instance, I think we are now up to about 150 pro sales reps in the Behr organization to call in the pro (inaudible) to contractors. So in incremental costs, yes, the fact that we're able to bring the SG&A as a percent down, really gives a sense of how the organization is responding to our desire to hold costs constant as best we can.

As we grow the business, will we have to invest some in SG&A? Yes, I think we will. But I really think the mantra that both myself, and particularly Keith, are trying to get across to the organization, is that this is the way that we can really help create shareholder values. And if we grow the business and hold our costs down, good things happen to the bottom line and to profits. And so the entire team has responded particularly well to that.

In terms of your question on FX, really we didn't have much of, if any at all, FX benefit on the SG&A line this first quarter. So we feel really good about how that performed here in Q1.

In terms of paint investment, George, we completed our rollout of the color centers in 2015. So that is done. And we like what we are seeing from that. The in-store customer consumer experience is getting very favorable feedback. That investment is done.

In terms of the promotional environment, we are seeing a bit of a tick up in the promotional levels as our competitors support recent launches. We certainly had good success in our promotions that we did last year in July 4 and in Labor Day. And I think that you can think about our investment in advertising going forward this year to be similar to what we had last year.

Thank you, Keith. Good luck in the quarter.

Thank you.

Your next question comes from Mike Dahl with Credit Suisse.

Your line is open.

Thanks for taking my questions and nice job on the quarter.

I wanted to go back to cabinets and maybe frame the margin discussion around some of the long-term objectives. You had outlined 7% to 10%, I think, last quarter. You've stressed that wasn't necessarily a ceiling. And clearly, the 8% to 9% today, and people previously pointing out that may even sound conservative.

It doesn't take that many years of 30% to 35% dropdown to get back to a mid-teens margin in this business. So how are you thinking about the next couple of years and the opportunity especially with some of the improved mix? And what's realistic as far as the path for that business?

I think working this business over the next couple of years to mid teens is realistic. And we are driving in that direction. Importantly, as I mentioned earlier, I really like the team there. They are doing a great job.

And the nature of the improvements that we are seeing are broad-based. It's SG&A, and certainly it's manufacturing conversion costs. We are working a lot on our wood yields and our finishing yields. We've invested into a better quality system, and our quality costs are coming down. And Joe and the team are doing it with a process orientation. As I look at how we're doing it, as far as what has been done, I'm confident that it is sustainable.

And now, as we start to work harder on our growth initiatives and we are seeing the results of that, KraftMaid is the number one brand in repair and remodeling. And Merillat is the number one brand in new construction. As we get ourselves back and get that momentum back, I think it is sustainable. I do believe that those margin targets that we talked about in a couple years are doable.

That's great, thanks.

As a follow-up, those growth investments. Can you elaborate a little bit more on now that you say you have earned the right to compete for growth? You clearly have been focused on pruning some parts of the portfolio in cabinets. But what are some of the specific areas that you are looking to invest more heavily in, in terms of growth initiatives?

A couple of key ones are product assortment initiatives. So going after and understanding the trends that are out there and launching new products to address those trends, both in terms of form and function, look and aesthetics, as well as price points. So going after the broad spectrum in terms of taste as well as price.

And then with that, as you saw these launches into the channel, you have some launch expenses. Certainly, there is a component of advertising that's in there. But primarily, it is more on the launch side.

Outside of assortment, looking at the channel as we grow, we have significant headroom, we believe, in share overall of our existing dealer base. And to help drive that and to motivate that, there is some expense that you incur in terms of incentives. And we also believe that there are spots, as we look at our national coverage, where we can either get more dealers or get higher-quality dealers. And to start up new dealers, that takes some money. So primarily the investments are around product assortment enhancements and channel enhancements.

Thank you.

Your next question comes from Josh Chan with Baird.

Your line is open.

Good morning and congrats on a great quarter.

We talked a little bit about weather in the decorative business. I was wondering about what are your thoughts on how much weather might have helped in Q1? And what trends you are seeing in April in that trajectory there?

Josh, it is John.

Beyond paint, it's really tough to get an assessment of how much weather benefited us in the first quarter in our other segments. As you would expect, most of our plumbing business is focused on the remodeling channel and repair. And so when your faucet breaks, you repair it on a timely basis as opposed to weather.

We may have had a little bit of benefit on the new construction side as I think the builders were able to button up a few more homes in Q1 than they normally would. But beyond that, it?s hard to get a true assessment, just given the nature of the products that we have.

Any color on whether the trajectory has continued into April?

I'm sorry, the weather or -- ?

On the demand trajectory.

The demand trajectory? I'd say demand has been pretty consistent.

I think, Josh, you are talking about weather here. I think we are out of it here in April -- pretty clean.

Great. And then my other question is, you talked briefly about raw material inflation through the rest of the year. How would you characterize pricing ability and the ability to offset that over time?

It depends on the product category. Generally speaking, if you're thinking about the long-term trend, we are able to get price over the long term. Probably the place where it's most critical in the near term is in our window business. As I think you may be aware, there were some glass plants that went down in the Western US, and so glass was on allocation in the Western US. We had been passing through pricing here in the first quarter with our Milgard business in the Western US.

And the other product category is on a case-by-case basis. We did get pricing in Europe in Q1 as well in our plumbing business.

Great. Thank you for your time.

Your next question comes from the line of Mike Wood with Macquarie Capital.

Your line is open.

Good morning.

A follow-up to the trade up question you answered earlier. Can you compare the product mix you are selling now compared to where you were when housing was more normal historically? Thus, I'm asking are you still cyclically depressed in terms of product mix?

Just so I'm clear, you're asking maybe compared to 10, 11 years ago and what we are seeing today versus what we were seeing then?

Yes, basically, how much more room is there in terms of product mix to get to a more normalized mix within portfolios like plumbing and cabinets?

I think we're pretty close to normal right here. Clearly, when we went through the crash, there was a reduction in content per unit -- cabinets per house, bathrooms per house, houses got smaller, et cetera. There was a mix down.

I think we have come back from that. And I would say we are at about normal levels. Not to put a very finite metric on that, but it feels like we are back to the normal levels.

Okay, and what are you doing now or what stage are you in pro paint initiatives? Anything that you are working on right now to keep growing that?

I would say we are in early stages of it because we see a lot of headroom. In terms of what are we doing to continue to grow that, in a nutshell, we're leveraging one of the best partners in the space in The Home Depot and one of the best supply chains in the space, which is Behr supply chain. And one of best products. So we are continuing to do that on all fronts.

We are putting in more resources in terms of focused pros in the stores. We are putting in focused hub stores and high speed tinting capabilities in our distribution centers so that we can deliver large quantities to the job site when required. We are working on the experience of the pro and the store together with Home Depot. So we are continuing to move a ton of levers to drive this demand. And it's working.

Remember, Mike, our ultimate goal with Home Depot -- whether it's on the DIY side or the pro side -- is grow paint gallons. That's their objective; that's our objective; and we're aligning very closely with them to meet that goal.

Okay. Thank you.

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

Your line is open.

Thank you. Just one final question about the pivots of growth in cabinets. Do you think your success will come more from the big box channel, the dealers? What area are you really focusing on first looking for growth?

Dealers our focus, Keith. That being said, we have the leading share position in both retailers. And we are not resting on that. We are continuing to try to add more value so we're the best choice for more consumers through that channel and the best choice for those customers. So we're working on it.

As you know, the dealer segment is fragmented. It tends to be a higher mix. And it tends to be a better channel for us. We think we have and we know how to grow in that channel. Now that we have got our assortment and our performance and the quality of the earnings back. So our focus is on the dealer, Keith; but, of course, we are not sleeping on big box.

So looking at the dealers, you referred in another answer on assortments. Do you not need to improve the assortment, particularly towards the upper end of the range? You got out of countertops, which is a little bit of a different business. But is there going to be investment that's going need to become there in order to hit that market harder?

A big part of our upper-end assortment with KraftMaid Vantage has been addressed. And we have had that in the market for a good year now or a little better. And that helped us in a number of ways.

Number one, it gave our dealers the ability to differentiate from other channels. Because of the offering was directed towards them and was an exclusive offering to them. Where you can get, while not infinite, practically infinite heights and widths and depths. So it's a good point of sale for the dealers.

And then we also bundled with that a pricing scheme that made it easier to sell and upgrade. That is really what has been driving the benefit for us, is that combination of the exclusivity and ability to more easily get a consumer to step up in terms of price, to go for that higher content.

I think with that being said, we're not going to stop being on trend on some of the higher-end finishes and continue to work in that area. I think we are okay with KraftMaid in the upper end. We are working on the lower end, and we are working to continue to improve our Merillat assortment. The Merillat dealers are back and growing with us now, which I?m really happy about.

The performance issues that we had are behind us, and then the long memories are starting to get behind us as well. I don't know so much that it is targeted on the upper end as it is more broadly across the whole spectrum.

Thank you.

Our final question comes from the line from Phil Ng from Jefferies.

Your line is open.

With two of your competitors in paint merging, what type of impact do you see in your business? I'm not expecting much, but I'm just curious to get your thoughts on that front.

And would you be interested in any of the assets if there were any that were divested?

I will meet your expectation, Phil, and not give you much. This deal hasn't gone through yet. It's very early in the transaction.

We are pleased with our paint brand. We think we are a tough competitor. And not a lot of comment on that.

But I will tell you that, as we said before, our M&A pipeline is focused on bolt-ons where we can add value to organic strategy and bring synergies. And that, specifically, is focused -- while we look at other segments, we are focused on paint and plumbing. Should there be something available here, we could very possibly be interested.

Got you.

I would add to Keith's comments and say we think we've got a very good recipe for success within our paint organization. While we pay attention to the industry broadly, we are very focused on executing our strategy of growing our paint business with our channel partner, The Home Depot. So while we're not blind to competition, we're focusing harder on DIY products. But we're also focusing very hard on our paint initiative. Because we think we've got great opportunities to continue to grow our paint franchise for the years to come.

Okay. That's helpful.

And you mentioned Home Depot, a big partner of yours. I believe they acquired Interline Brands last year, which is a big pro channel guy. Is that an opportunity down the road having a larger avenue to sell your business on the pro-channel side? And would you be open to targeting a new channel outside of pro as well as DIY down the road? Thanks.

I think DIY is a great opportunity for Behr. When you look at our supply chain and our product assortment in the pro, we think that we are tailor made to add value to that. And we are working with The Home Depot to figure out how to do that. I think that would be a great leverage for our product assortment and our supply chain.

That concludes our call for today. Thank you, everyone.

This concludes Masco Corporation's first-quarter 2016 results conference call. You may now disconnect.