馬斯科 (MAS) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter Conference Call. My name is Amy, 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 David Chaika, Vice President, Treasurer and Investor Relations. You may begin.

Thank you, Amy, and good morning. Welcome to Masco Corporation's 2017 Third Quarter Conference Call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer. Our third quarter earnings release and the presentation slides we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analysts' questions. (Operator Instructions) If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We 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. Our statements will also include non-GAAP financial measures. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We've reconciled these adjusted measurements to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.

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

Thank you, Dave, and good morning, everyone, and thank you for joining us today. You will have to excuse my voice. I'm suffering from a classic Midwestern head cold here where temperatures have been between 40 and 80 degrees depending on the day.

Please turn to Slide 4. In the third quarter, we continued to invest in our business, while driving profitable growth. Our top line increased 2%, excluding the favorable impact of currency, driven by solid growth in our Plumbing and Decorative Architectural segments. Excluding the divestiture of Arrow Fastener, our top line grew 4% or 3% in local currency. Our operating margin increased 60 basis points to 15.3%, largely driven by the quick turnaround in our North American window business. Earnings per share grew 22% to $0.50 per common share, demonstrating once again Masco's ability to convert solid sales growth into even better earnings per share growth through operating leverage, cost improvements and disciplined capital allocation. As you all know, there were significant natural disasters that impacted North America during the quarter, particularly in Houston, areas throughout the State of Florida and Puerto Rico. As a result, we were negatively impacted in the quarter as consumers, customers and builders alike focused on preparing for and cleaning up after these storms and not on building new homes or remodeling their existing homes. Our thoughts go out to all those impacted, and we expect there will be some ongoing challenges in these areas. But rebuilding efforts should be a net positive for our business in 2018. I would also like to thank our suppliers, particularly those who support our coatings business, for all their efforts to keep us supplied, which in turn enabled us to serve our customers during these difficult events. Despite these challenges, we achieved our 24th consecutive quarter of sales and operating profit growth. Let me give you some additional insights into the drivers behind each of our segments performance.

Beginning with Plumbing. In North America, our trade business continued to be strong as we gained share with our high-end showroom products and saw strong growth in e-commerce sales across both pure-play online retailers, and our omnichannel partners. I'm also proud to say that for the third year in a row Delta Faucet Company was awarded the U.S. EPA's Water Sense Sustained Excellence Award, the highest partner recognition for continued outstanding efforts to help advance the water sense program and water efficiency. Congratulations to the entire Delta team for its focus on developing innovative kitchen and bath solutions to help conserve water without sacrificing performance. Internationally, Hansgrohe grow significant growth in its focused market and saw a strength in its primary market of Germany as well as the rest of Central Europe and China. In our Decorative Architectural segment, our paint business continues to perform well. Our Pro Paint sales grew at a double-digit pace, and we believe we are positioned to outperform the DIY market, with our powerful Behr brand, its outstanding product quality and service ratings and our strong channel partner, The Home Depot. Additionally, we achieved strong sales growth in our Liberty Hardware business from our innovative shower door program and from our e-commerce business. In our Cabinetry segment, our KraftMaid brand drove double-digit growth across its retail and dealer channels, with its strong brand recognition and our continued focus on our growth initiatives. Our new KraftMaid product launch consisting of on-trend finishes and innovative products that enhance the functionality of consumers' kitchens and baths will continue this momentum. Offsetting the strong growth was weakness in our U.K. cabinet operation and softness with our U.S. builder customers, some of which was due to the impact of the hurricanes, which delayed deliveries and installations schedules. In our Windows segment, sales grew 9%, excluding the divestiture of Arrow Fastener. Profits increased $33 million, driven by the absence of last year's warranty adjustment as well as Milgard's strong brand, pricing power and other operational improvements. I'm very pleased with this rapid turnaround. And as I shared with you previously, I remain confident that we will achieve mid-single-digit operating margins for the full year in this segment, a substantial improvement over 2016. We also continued our share repurchase activity in the quarter by buying back 4 million shares and returning approximately $210 million in share buybacks and dividends to our shareholders.

Lastly, on our prior earnings call, we updated our 2017 target for earnings per share to be in the range of $1.93 to $2. Based on our results through the third quarter and the impact of the hurricanes on our business in the second half of the year and the good start we're seeing in October, we now expect our 2017 earnings per share to be in the range of $1.93 to $1.97.

Now I would like to turn the call over to John, who will go over our operational and financial performance in more detail. John?

Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other onetime items.

Turning to Slide 6. Our performance resulted in solid growth in both our top and bottom line. The third quarter of 2017 was our 24th consecutive quarter of year-over-year sales and operating profit growth. On a reported basis, sales increased 3% or 2% in local currency and when accounting for the Arrow divestiture, sales increased 4% or 3% in local currency. Foreign currency translation favorably impacted our third quarter revenue by approximately $15 million as the euro strengthened against the U.S. dollar. North American sales increased 2% or 3% ex-Euro due to demand for our repair and remodeling products across all channels of distribution and across the price continuum as we continued to experience strong consumer demand for our better and best product offerings, particularly our KraftMaid, Milgard and Delta higher-end showroom products. As Keith mentioned, our Q3 results were adversely impacted by the devastating hurricanes in Texas, Florida and Puerto Rico. We estimate the revenue impact of these storms for the full year will be approximately $20 million. Approximately $15 million in the third quarter split nearly evenly between the Plumbing, Decorative Architectural and Cabinetry segments and $5 million in the fourth quarter we expect will largely impact the Cabinetry segment.

International sales increased 4% in local currency as each of our international Plumbing businesses continued to drive growth. Gross margins expanded approximately 70- basis points compared to the third quarter of last year to 33.6%, largely due to the improvement of our North American Windows business. Our SG&A as a percent of sales matched prior year at 18.3% as we continued to leverage our volume, while making strategic investments to drive profitable growth. We delivered solid bottom line performance as operating income increased 8% to $296 million with operating margins expanding 60- basis points to 15.3%. And our EPS was $0.50 in the quarter, an improvement of 22% compared to the third quarter of 2016.

Turning to Slide 7. Our Plumbing segment continues to deliver strong results. Segment sales increased 6% and excluding the impact of currency increased 4%. This solid performance was driven by growth in our faucets, showers and spa businesses. Foreign currency translation favorably impacted this segment sales by approximately $13 million in the quarter. Our North American sales grew 4% in the third quarter as we experienced strong consumer-driven demand from industry-leading brands with wholesale, large retail and dealer customers.

Our International Plumbing sales increased 6% in local currency. Hansgrohe continues to benefit from investments in brand, design and innovation. These investments, along with our focus on growing in key markets, is yielding results as they experience strong double-digit growth in both Germany and China. Operating profit for this segment decreased 2% in the quarter as the strong drop-through on incremental volume was more than offset by approximately $10 million of increased strategic growth investment and other variable expenses.

Turning to Slide 8. The Decorative Architectural Products segment grew 3%. This performance was driven by another quarter of strong double-digit growth of our Behr Pro initiative. We believe this segment will be the quickest to recover from the hurricanes as we're experiencing strong orders for our primers and interior paint in the affected areas. Liberty Hardware also contributed to top line performance as it continues to benefit from the expansion in growth of its innovative shower door program and in e-commerce channel. As we mentioned in our second quarter call, Liberty continues to win new retail programs and was awarded an expanded cabinet hardware program. This program was originally planned to set in the third quarter and now will be set in the fourth quarter. We anticipate spending approximately $8 million in reset costs in the fourth quarter on this program. In this segment operating income in the third quarter decreased $7 million, driven by an unfavorable pricing commodity relationship as we discussed last quarter. We believe that the third quarter experienced the greatest impact of increased input costs and we expect this relationship to improve as we go into the fourth quarter.

Turning to Slide 9. In the Cabinetry segment sales declined 4%. This is principally due to additional loss builder business in both the United States and in the U.K. Our repair and remodel business continued to perform well in the quarter. KraftMaid had solid performance in the home center and dealer channels, delivering double-digit growth through increased volume. Segment profitability declined in the third quarter by $1 million, driven by reduced volume in the incremental costs of approximately $6 million as we mentioned in our second quarter call, related to the antidumping duties and countervailing tariffs on imported Chinese plywood and the new KraftMaid product launches. We have mitigated the impact of these duties through supply chain and other initiatives, do not anticipate them to have a material impact going forward.

Turning to Slide 10. Our Windows segment sales matched the third quarter of 2016. Excluding the divestiture of Arrow Fasteners, sales grew 9%. This strong performance was driven by growth in Milgard, our leading western U.S. window business, which grew 12% in the quarter. Milgard's strong growth was due to favorable pricing, increased volume and a favorable mix-shift toward our premium window and door products. Segment profitability in the quarter increased $33 million over the prior year, driven by the lapping of last year's warranty expense, favorable pricing and cost-savings initiatives. We are extremely pleased with the rapid progress that the team has made on the Milgard's turnaround and the improved results delivered in 2017.

As a reminder, our fourth quarter sales and operating profit will be impacted by approximately $18 million and $5 million respectively due to our sale of Arrow Fastener. And as we mentioned on last quarter's earnings call, we expect to achieve top line growth in mid-single-digit margins in the segment for the full year despite the sale of Arrow.

And turning to Slide 11. We ended the quarter with approximately $1.2 billion of balance sheet liquidity. Working capital, as a percent of sales, increased 140- basis points versus prior year to 14.3%, principally due to higher inventory to support our growth and new program wins. We believe we will have this inventory worked down to a more normalized level by the end of the year. And during the third quarter, we continued our focus on shareholder value creation by repurchasing approximately 4 million shares valued at approximately $178 million. And with that, I will now turn the call back over to Keith.

Thank you, John. I'm pleased with the third quarter results and with the progress we have made driving our growth initiatives that we outlined in May. We continue to invest in our Plumbing business and enjoy strong global growth as a result. In our architectural -- Decorative Architectural business, we continue to expand our DIY paint leadership and gain share in the Pro market while leveraging by Liberty Hardware business. In our Cabinet business, we're pleased with the progress of our KraftMaid dealer initiatives and our new product introductions, both of which will drive profitable growth.

And finally, our turnaround of the Windows business has been exceptional. The fundamentals driving our business are strong. Demographics, namely the large millennial group, are increasingly favorable and should drive household formation and housing for years to come. Home prices are appreciating, up over 5% year-over-year, boosting consumer's confidence to invest in their home. Housing turnover, a leading indicator for our business, is at a healthy annualized pace of 5.4 million units. And U.S. residential housing stock is aging, a key driver of repair and remodel spending with 70% of homes in U.S. now over 25 years old, an increase of more than 19 million units in the past 10 years. We remain committed to investing behind our brands for growth, developing innovative products to ensure we maintain our must-have position with our customers, 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 earns, share buybacks and dividends.

Our operational execution, coupled with our strong balance sheet and liquidity position, provides us with multiple levers to continue to drive shareholder value and outperform the industry. Nearly 3 years ago, we committed to doubling earnings per share from $0.88 in 2014 to $1.80 in 2017. I'm proud of our team and the fact that we will exceed this target.

Looking forward, we're committed to achieving our 2019 earnings per share target of $2.50 that we set at our Investor Day in May. With that, I will open up the call for Q&A.

(Operator Instructions) Your first question comes from the line of Susan Maklari with Crédit Suisse.

This is Chris Counihan on for Susan. I was just hoping if you could provide some additional color on some of the margin pressure you're seeing in that paint and plumbing segment. How much of that was input cost driven versus price mix?

Yes. So, Steven, we did see some commodity inflation, Chris, I should say, I'm sorry. We should see some commodity inflation -- we did see some commodity inflation in both those segments in the quarter. And to do, we foreshadowed that on our second quarter call. That said, there were also some incremental expenses that we incurred in our Plumbing segment, some strategic growth initiatives. One of the things that -- some of the things that are included in that: One, we had a little bit of a shop inefficiency, we had a new distribution center go-live in Germany for our Hansgrohe unit and that caused us a little bit of headwind in the quarter. We do expect that that should be short-lived and we're pretty much through that right now. At the same time, some of the strategic investments that we incurred, some of the incremental display and advertising cost as we are now nationally resetting displays in our dealer customers across the United States. And we probably -- what we decided to do is pull forward some of that expense. We're going at a fairly modest clip and given the strength that the Plumbing unit has been seeing, we thought we would accelerate some of that spend. So you will see some of that hit in the third quarter, and you will also see some of that hit in the fourth quarter. I would say probably $5 million of incremental spend related to that display set that -- those displays being set in the third quarter, maybe 5 to 10 in the fourth quarter as well. So as we accelerate some of that spend. On the paint side, we did see some raw material inflation. And as I indicated in my prepared remarks, we do think that we were mostly impacted by the price/commodity relationship in the third quarter and going forward that should ease a little bit going into the fourth quarter and beyond.

All right. And then my second question is on Cabinets, I know you said there would be additional spillover into 4Q. And you know it would be isolated to the Cabinet segments. I was wondering if you could provide some color on why that segment is experiencing that spillover and not the rest?

Yes, so there is a reason that the Cabinets segment is experiencing spillover from the hurricane impact. If you think about the way the projects work, Cabinets are one of the last things to get set when a home has been damaged and it gets rebuilt. They have to go through flooring, electrical, plumbing, drywall, paint and all that other before people set their cabinets. And so there's still going to be a little bit of a headwind in cabinetry going into Q4 but as we go into 2018, we do expect that we should see some tailwinds broadly across all of our product categories as a result of the rebuilding efforts in Texas and in Florida.

The next question comes from the line of Michael Wood from Nomura Instinet.

First just on the paint price cost. Paint traditionally very disciplined end-market, although demand there also tends to be relatively less cyclical because of the maintenance piece. Do you think there is any change and could there be any change of discipline in that industry just given the ongoing softness that you're seeing in the DIY gallon growth? And if you could provide that growth that would be helpful?

Good morning, Mike. It's John. Yes. So, in terms of what we saw in DIY gallon growth, it was down just modestly. As we indicated, our Pro business was up double digits. In terms of your first question around pricing discipline within the industry, we don't expect any change in that dynamic going forward. Everyone -- I can't speak for everyone else, but just given how we look at serving our major customer, we're very focused on supporting their strategy of both serving the DIY consumer with the best experience, the best quality of paint and the best service in the industry as well as really growing our share with the Pro. So we see no change in that dynamic whatsoever.

Okay, great. And thanks for the color on the Plumbing strategic spend. Can you also give us some details on the Decorative hardware setup. What delayed that from third quarter into fourth quarter?

Yes, we're going to set that program with one of the large retailers and as you are expecting we largely expect to set that in September and with the storms impacting a big part of the country, they just elected to delay that a couple of weeks. So nothing significant there.

Your next question comes from the line of Mike Dahl with Barclays.

John, just a follow-up on the detail around the Plumbing spend in particular on the display resets. Could you just give us a little more detail on how that was originally set to play out over what time period? And I guess, thinking forward into 2018 then should we expect incremental cost to continue? Or is this kind of pulling in $10 million or so into '17 that would have otherwise been in '18?

Yes, Mike, we did pull some expense. I think it will be a multi-quarter impact though, so we're pulling some expense out of '18 and into '17 for both Q3 and Q4. But we will continue to have some of these resets going into 2018 as well, but we do expect the impact to be a little bit more modest in 2018 than it was in the back half of 2017.

The reason we're accelerating this investment, Mike, is because it's working for us. I don't know if you had a chance to get out into the market and see some of our dealers and our showrooms, but fundamentally, these are the best displays that are out there. We're displaying our showering program more strongly. We've gained additional, I think it's 2 to 3 linear feet in these displays as we lay them out. And our customers, the showrooms, are seeing good return on those investments. So that's the reason why we're so bullish on this investment because the initial sets are performing so well.

Okay, great. That's helpful. My second question is going back to the paint side and the commentary around how 3Q should really be the peak of the pressures. I guess, just given the inflation that you're seeing in some of the raws there. Can you give us more detail on kind of what related to your pricing strategy or areas of cost reduction specifically are giving you the confidence that you will recoup some of these margin headwinds as we get through the next several months?

Mike, this is Keith. As you know, given the concentration with 1 customer, we don't go into specifics on price. We work in terms of cost avoidance. We work hand in glove with our suppliers. Those same suppliers that really helped us out during the hurricanes. We have great relationships with them. They help us win and we help them win. So together it's a good team. So we're constantly looking at value in the can, and we're -- by demonstrated performance -- have really walked a nice line there in keeping the quality in the can while trying to be as competitive as we can and giving the consumer what they need. In terms of price/commodity over time, the prices ebb and flow, and we tend to get commodities -- get price rather and give price commensurate with that flow. There's always some lag, particularly when the commodities accelerate really quickly, there will be more of a pronounced lag. But over time, we tend to remain flush with regards to price/commodity and that's what we expect going forward.

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

First question, back to the Decorative Architectural Products in the fourth quarter '16, you had a pretty heavy promotional spend, it was about $15 million. Will that reoccur in the fourth quarter '17?

At this point, Keith, no, we're expecting a little bit of promotional activity, but probably will not be as intense as it was in the fourth quarter of 2016.

Given that, will that allow margins to rise in that segment with -- as you talk about kind of the top with the price/cost pressure again?

Yes. So I think, Keith, these are a couple of things to keep in mind there, right. One is that seasonally we slowdown into the fourth quarter. And obviously....

year-over-year, I'm referring to (inaudible).

I'm sorry. So as I think about it, we will have a little bit of headwind only because of the $8 million of spend that we called out for the delivery reset. So make sure you factor that into your calculation. But in terms of the margins other than that, I think I'm just trying to think where were in the fourth quarter of 2016, margins will be slightly up, I think, from that point.

Keith, if it helps, in paint, we really haven't changed our outlook from last quarter where we talked about for the full year mid-single-digit growth and modest margin erosion.

And just one other quick one within the cabinet weakness you saw in the U.S. builder business. Is that entirely related to hurricane or are we still in the process of getting out of some builder business that's just really not where you want to be?

Well, clearly, the hurricane was a big piece of it. When you look at our builder direct concentration of branches, where we have them, we have them in Denver, Texas and Florida. So 2/3 of our footprint was pretty well devastated. So that was a significant piece of it, but it wasn't all of it. We're continuing to drive price into that builder channel. We want to have this builder and we will have this segment profitable for us. And when we do that, we don't always win those rebids when we go back with price and there was a little bit of that. We had a little bit of builder consolidation that created some headwind for us and will create a little bit of headwind going forward for the next couple of quarters. But fundamentally, it was a combination of the pricing actions that we've taken, a little bit of hit from the builder consolidation and the hurricane.

Your next question comes from the line of John Lovallo with Bank of America.

The first question, I guess, is that your largest partner has initiated an advertising campaign supporting a competitors Pro coatings product. Can you maybe just give us an update on your thoughts on that and how you see that going forward?

I will tell you, John, we haven't really lost any shelf space with our Behr products. Our relationship with Depot is very strong, and we joined at the proverbial hip with both DIY and the Pro market share initiatives that we have. It's a great position to be in, when we have the best brand in terms of Behr, the best quality as verified by third-party folks, the best service verified the same way. And the most compelling proposition on the shelf in terms of how we commercialize it. And we have all these great stores that are out there. So we've had -- obviously, Depot offers many brands across its product categories. They want consumers to have the choice, and we're confident in our product offering and we expect to continue to win.

And also to say, John, they're equally advertising our product as well in the marketplace. It's not just solely. So there is a great partnership on the advertising side with Home Depot on that front as well.

Okay. And then it seems like some of the industry data for Cabinets has been a little bit softer than we expected, at least. Is there any reason in your view why it's sort of underperforming the overall RNR business?

Yes, John, I think there are a couple of things that we can point to on that. You're right, the data has been a little bit choppy and a little bit soft. What we're seeing, I think, are 2 things. One, we're seeing not that we participate in this part of the category, but the very high end, the custom part of the market we're definitely seeing softness or at least the data suggests that there was softness in the very high end of the market. So I think that's one component of it. I think the second component of it may just be installation labor. While we're seeing good demand across our dealer customers and in the retail channel for our craft-made products, we're hearing pockets of the country where demand is strong enough where your project is simply delayed because you can't get the installation labor to install the products.

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

Going back to the hurricane impact. A lot of investors are looking past the kind of the current weakness and anticipating the positive tailwind you might get from rebuilding that you mentioned. Houston seems to be pretty well along in the kind of rebounding, the recovering from the immediate impact. On the ground, how is that showing up for you folks? Are there any early indications that you're seeing, what kind of impact or the tailwind you might see from the rebuilding efforts there?

You're right, Nishu. We're seeing the same effect. We do see Houston recovering a little bit faster than the Florida market at this point. We principally think that due to the nature of the weather where it's localized flooding versus kind of widespread in both rain and wind damage in the State of Florida. So early indications, what are we seeing? Right. So we're starting to see, in particular, strong orders for our paint and primer products, which is what we would expect following the storm. We've seen that after other natural disasters as people look to repaint their home, they need to prime it with our Kilz primers. So that's the first line, and so this is going just as expected as we've experienced following other hurricane activity. Following that should be orders for faucets and cabinets should be the last to be impacted. And as I mentioned earlier that really we don’t think will be felt until 2018.

Got it. Got it. Okay. I guess that's reflected in how you laid out the expected sales break down for 4Q as well. Second question, I wanted to go back to the price/commodity in paint. Obviously, you're not talking specifically price responses, but thinking about the inflection in the price commodity with the disruption to the petrochem sector, input cost -- the max kind of input cost impact for paints is probably going to be in 4Q. So how should we think about that? I mean, I would've expected that that would have delayed the inflection in price commodities, but it sounds like you're saying even in spite of any potential hurricane-related increase in input cost you're still going to be able to see the inflection in 4Q. How do I reconcile that?

Yes, I think quite simply -- we do think that the hurricane impact and there are some very, very minor disruption with transportation and things and the like that we will flow through that impact very quickly.

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

Keith, I guess just big picture on the organic growth side. I think it was 3% in the quarter, would have been 4% I guess aside from the hurricane impact. That's kind of where the revenue growth has been in the last year and a half or so. How do you think about that trend into the fourth quarter, especially with what you talked about with October off to a good start. Can you start to see that reaccelerate? And then thoughts on the ability to outpunch that 3% or 4% range as you get into the early part of next year?

I think in terms of the full year, Dennis, maybe it makes sense to go kind of line-by-line by our commodities in paint segments -- rather, in paint, as we've talked about mid-single-digit growth for the full year, we're still expecting to see that. In cabs, which was hit harder by the hurricanes as we described and will probably continue to get a little bit of top-line hit there in the fourth quarter. We're looking at our top-line maybe to be flat to down slightly in Cabinets for the full year. In terms of Plumbing, again, mid-single-digit growth for the full year. And in Windows, we're having strong growth. Our capacity is in good place. We do see some seasonal fourth quarter typically slow down for us and we're anticipating that. So for Windows, we've seen mid-single-digit growth as our expectation and we're confident in that. In terms of 2018, I would really see this as an extension of '17. We still believe in the fundamentals. We're seeing good POS at the cash register for our products, particularly in paint, we're seeing good semi-custom Cabinet sales. And as I said, the resets in our dealer and showrooms in Plumbing is very productive for us. So we're right on our Investor Day plan for 2019, and we would expect 2018 to be a continuation of the good growth that we've seen.

And, Dennis, maybe one just point of clarification specifically on the third quarter. The way we probably look at it as if you take the hurricanes out and the impact of Arrow out, we're closer to 5% top-line growth.

Yes.

Just the way we see it.

Okay. Not a huge net.

Not a huge inflection.

Understood. And then, John, just on the earnings guidance, the implied guidance in the fourth quarter, relatively wide range, but hoping you can maybe just detail. What are the puts and takes that would get you to the higher end of that range versus the lower end where the more sensitive items?

Yes, I think there's really 2 things, Dennis, that we see. Principally one is just simply volume and how the fourth quarter shapes up there, that's the key driver. Other than that, it would be how we decide to control our expenses or pull forward some expenses into the fourth quarter if we choose to do so out of 2018.

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

This is actually Trey, on for Steve. First, could you talk a little bit about how you expect your market share in terms of at Home Depot/ Behr Pro. Do you expect that to eventually mirror that to what you have in terms of a DIY product at Home Depot?

The way we think about our pro initiative is really to go after about half of the Pro market here in the United States, which is a significant market. It's those painters that are involved with home -- resi repaint with maintenance and repair, apartment maintenance, those sorts of things. The folks that are already in the Home Depot. That's really where our value proposition rings. So we continue with the kind of double-digit growth that we've seen and to attack that specific segment.

Got you. And then could you turn back to Cabinets. Is there any additional abandonment that happened in 3Q from builder business you just walked away from excluding that consolidation that happened? Also was there any incremental promotional activity going on in Cabinets?

The promotional activity in Cabinets was pretty consistent and we haven't really seen much of a change from where it has been the last couple of quarters. In terms of the builder business, there was a concentration on a couple of those builders that were affected with consolidation. A little bit from the price increases that we put into the market and then, of course, the hurricanes.

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

This is Neal BasuMullick, on for Mike. I guess first I want to ask you a bit on the turnaround in Windows. How much do you see as your efforts as sort of ahead of schedule with the ERP rollout and Milgard share gains recently. I guess, where are you in the turnaround given the solid performance? And are there any bottlenecks -- you pointed out labor -- otherwise that you're seeing kind of coming up?

I would tell you and, I did mention it on a prior call that I expected this turnaround to be relatively quick, and the reason for that is because our value proposition is really clear to us and it's clear to our customers in terms of lead times, delivery and fill rates. And we had a line of sight with regards to the improvements that we had planned to get those lead times down into industry-leading levels, and we've done that and the demand bounced back quite quickly. By and large, this is a business that our dealers bid on a sheet by sheet basis, meaning they get a job and they bid it and then they win or lose and oftentimes the delivery as you might expect, the delivery time is a key driver to doing that. So we expected it to be a relatively quick turnaround. But having said that, I would tell you it's been faster than I expected. So I'm pleased with that. Neal, what was your follow-up question?

On capacity.

I apologize, on capacity. You know, we've talked about the labor market in the Northwest and the California as being tight. It continues to be tight. I will tell you, however, that the operational improvements that we've made have really helped out in this regard. We've talked about -- what was it John -- 12% growth in the Milgard -- Milgard in the quarter, and we have close to record lead times and fill rates during that significant period of growth. I like where we're at in capacity, but it's always something you have to work on, both in terms of getting folks in the door and then also turnover in those less than 90 days. But the improvements we've made go a long way to helping with that.

Your next question comes from the line of Megan McGrath with MKM Partners.

Maybe a couple of more bigger picture questions or higher-level questions. In terms of Cabinets, looks like ex the hurricanes sales down around 2% it's your 7th quarter of declining sales year-over-year. And I understand that you're being very focused on price and profitability. Given what you saw in the quarter regarding that and your negotiations, like, when would you expect this segment to start seeing some flattening out, at least in the revenue base, as we go forward?

We've talked about our long-term view on Cabinets to be in that 5% to 7% growth range and the 13% to 15% margin. Certainly, we're going to start to get a move in that direction in 2018. We're focused on the margin improvements particularly in the builder segment. And then in the repair and remodeling, our new product introductions on both KraftMaid and Merillat are performing well. So we expect to continue to march towards that 5% to 7% growth and 13% to 15% margin that we called out on our Investor Day.

Okay. And then in paint, you gave your sort of estimate for gallon growth in the quarter, which is down a little bit. And at the beginning you talked about the positives we're seeing in terms of repair and remodel and house prices and things like that. Just generally speaking, we've seen kind of lackluster gallon growth for the industry for quite some time now. What do you think is driving that given the positives we're seeing in terms of the macro fundamentals?

Well, I think there are a number of things and there's a lot of people who have talked about this. The demographics, I think, plays a piece in it where millennials tend to be more of a do-it-for-me rather than do-it-yourself. There has been a significant uptick in few years in terms of renters as a percent of household formations versus owners. And renters tend to paint less. And then the products are getting better, one coat coverage on a lot more of our colors, which requires fewer gallons if you go way back to paint and primer in one, that's a piece of it. I will tell you that our belief is that as these millennials start to get into forming families that I think that discretionary money tends to make a bigger difference. If you're going to look at the cost to have someone paint your house versus you painting yourself on a weekend, I think that's going to start to [tip the] scales as we see more formations from the millennials. So fundamentally, when we look at the numbers that we look at to peg the market for DIY paint, we think it's going to start to come back.

Yes, Megan, and as you look at our sales, gallons on a combined basis, DIY and Pro, I'd tell you, we're above low-single digits in the quarter on a gallon basis. So, overall feel pretty good about how we're performing.

Your next question comes from the line of Alex Rygiel with FBR Capital Markets.

As it relates to some of the guidance that you put out at the Investor Day, the Kilz and Liberty lines I think you're looking for $50 million to $80 million revenue opportunity over time and then the Pro business $150 million to $180 million. Where do you stand generally on those targets tracking ahead, tracking behind and any other comments?

Alex, acknowledging that we're only kind of a quarter and a half into a 3-year guidance on those. I'd say we're definitely on track and clearly one of the things that will help the Kilz and Liberty piece was the expanded cabinet hardware program that we're resetting now. That's definitely a big component to helping us achieve, if not exceed -- get to the higher-end of that range there. And then on the Pro side, we continue to do -- we're very pleased with how we're performing on the Pro. I think we're right on track to achieve the Pro growth that we forecasted.

And secondly on the Windows turnaround, are there any actions left to take?

Well, we're only a couple of quarters or so into it. So we're continuing to work. We've gotten a lot of the productivity improvements behind us and we've certainly improved in our on-time complete and our fill rates. We've got an ERP system that we're continuing to roll out. The last couple of plants that we put that in have performed very well, and we're prepared for that. So there's always more work, particularly in continuous improvement to drive this business to keep working.

Your next question comes from the line of Philip Ng with Jefferies.

You provided some color on price costing better in paint into fourth quarter but, John, I may have missed it. Can you give some color how we should think about price/cost in Plumbing in fourth quarter and going into 2018?

Yes, again, Phil, as we look at it, we expect that relationship should slowly improve over time. As we talked about on the second quarter call, we may have got a little price ahead of commodity cost, and that's why we saw the expanded margins in Q2. And so we're feeling a little bit more of that in Q3. But as we go into Q4 into 2018, we'll have to look at putting further price into the marketplace.

That's helpful. And margins for your Windows business, that was pretty impressive. I know historically, 2Q and 3Q are your highest margin quarters, and you see some seasonal decline in 1Q and 4Q. Is that a good way to think about building out your margin profile for 2018, which should see a nice step up from that mid-single digit target that you've guided for this year?

Yes, I think that's a good way to look at, Phil. You nailed the seasonality perfectly. That's exactly how the business develops over the course of the year. And given the strength that we're seeing, as long as the volumes continue to hold out and the strong orders that we're seeing continue to hold out, we would expect that kind of development in 2018.

Your next question comes from the line of Adam Baumgarten with Macquarie.

Can you just clarify on the Plumbing input cost in terms of the metals, we've seen copper and zinc up kind of dramatically. What's the lag in terms of when those go up and when you see them in your results?

Adam, this is John. You're right, there's generally a lag that we see to hit our P&L. Generally, it's about 2 quarters, roughly speaking, because of the length of our Asian supply lines. And so if you track copper and zinc, and it's not a direct one-for-one, but it's pretty close, you can see how that will play out over the course of time.

Okay. Great. And then just lastly, any update on acquisitions or where you're targeting. If there's anything in the pipeline that's kind of close?

Adam, obviously, we can't get into specifics. We will let you know when we do a deal, but in terms of our focus on it and the pipeline status, really there hasn't been a change from the last update I gave last quarter, and that is that we're continuing to work it. We're moving attractive targets, both in and out of the pipeline for various reasons. We've actually got good volumes. We've got, what I believe to be, a good spread in terms of value across -- if you look at the distribution -- the type of companies we're looking at. We're looking globally and we're looking here in North America. So good activity. And we're continuing to stay focused, but at the same time, patient. We need to find targets with the right fit and the right returns before we act on them. And we're continuing to work at it.

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

Nice quarter, given a hurricane. I wanted to ask you, your windows business is crushing it. I never knew that could be such a profitable business. What's the ceiling on this 2 to 3 years out. Where can you drive margins to given the turnaround still underway?

Yes, as you know, Bob, we talk about 10% to 13% margins on the Investor Day. So that would imply, the top end of 13%, but we're going to keep driving out there. We've got a great leadership team in place, a great brand, good delivery, good fill rates and fundamentally a strong underlying market. So that 13% is probably not the limit.

Got it. And I just wanted to think about, you got a $1.2 billion of cash on the balance sheet. It sounds like you're being very disciplined around your approach to M&A opportunities. Is -- barring any large scale M&A that consumes cash, we just expect more buybacks, more raise the dividend activity from a capital allocation standpoint?

Yes, Bob. It's John. I think that's the way to think about, right. The way we prioritize our capital allocation is, as you know, always first and foremost invest in the business to continue the growth of our existing businesses. And CapEx, as you've been watching, it runs pretty like 2% to 2.5% of sales. And then after that, we're balancing the M&A activities that Keith just talked about versus share repurchase activity and we're out in the marketplace pretty aggressively in third quarter buying back 4 million shares. And then you're right, we have raised the dividend 4 times over the course of the last 4 years. And while we cannot commit the company, we'll continue to look at that type of activity going into 2018.

Got it. And just a cleanup question. I was just trying to understand some of your commentary around Plumbing and the margin compression and you're obviously investing in some strategic growth initiatives. What's kind of dollar spend in 4Q and when do you finish investing in that business, when you get back to -- the dollar spend you put in, when does that come out and should we expect it to go into 4Q and to the 2018?

Thanks, Bob. We do expect to go in the fourth quarter. We do expect the spend somewhere to be in that $5 million to $10 million range in Q4. And will there be similar activity in 2018, in the Plumbing segment, yes, there will. We'll give you better clarity and guidance on our February call when we have our plans all set for 2018. But, yes, count on some spend in 2018 for those displays.

Your last question comes from the line of Truman Patterson with Wells Fargo.

I wanted to dig a little bit deeper into the Cabinet segment, some of the declining revenues there. Could you guys just give us an update on your capacity utilization levels. Previously you've stated you can still hit about 1.5 million starts. And as we're looking into 2018 in the fourth quarter, just how do you really think about kind of the trade-off between your capacity utilization level and maybe some of the decremental operating margins that you see from that?

Yes, we think our capacity is in a great place. We have plenty of headroom to get up to that 1.5 million start level and commensurate RNR growth. We really look at capacity as a cost issue more than anything. And when you look at the type of capacity that we have with regards to say operating on 2 shifts instead of 3 shifts, that's not a whole lot of extra cost for us. So in terms of the decremental, if you will, margin -- that excess capacity -- it would present, it's really not a big deal for us because we're talking about extending hours of operation across an existing asset, asset that we need to meet our demand for our current demands. Our capacity is in good shape. It's right where we want it. And we're excited about pivoting into growth and getting our KraftMaid new product introductions working and getting our Merillat and quality brands humming and fundamentally as we talked about at the Investor Day, this is a good business for us and we look forward to getting it back up to those performance levels.

Okay. Okay. So also if you guys are looking as you move into 2018, you're looking to move towards that 13% to 15% operating margin. Is it safe to assume that the promotional environment going forward is going to be fairly steady or maybe even decline a little bit? And then also those product launch costs that we're kind of anniversarying as we enter '18. Are those going to repeat or we're going to see further headwinds from those?

Again, it's -- we don't set the promotional schedule. That's set by our customers and some of those, we support others, they go it alone, if you will. In terms of my expectations, I would say that I wouldn't expect a whole lot of change in terms of the promotional environment. It's been fairly consistent. I have no reason to believe that it won't be something of that ilk going forward. I think it's going to be pretty steady. Do you have a follow-on question Truman?

I'd like to thank everyone for their interest in Masco Corporation, and this concludes today's call.

This concludes today's conference call. You may now disconnect.