馬斯科 (MAS) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Masco's Fourth Quarter and Full Year Results Conference Call. My name is Jack, 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'll now turn the call over to David Chaika, Treasurer and Vice President of Investor Relations. Mr. Chaika, you may begin.

Thank you, Jack, and good morning. Welcome to Masco Corporation's 2018 Fourth Quarter and Full Year Conference Call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer. Fourth quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations.

Following our remarks, we will open the call for analyst questions. (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 describe 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 reconcile these adjusted measurements to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.

With that, I'll now turn the call over to Keith.

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I'll begin with some brief comments on our fourth quarter before I turn to our full year results and conclude with the thoughts on 2019.

Turning to Slide 4. In the fourth quarter, our top line increased 11%, excluding the impact of currency, driven by strong growth in our North American Plumbing operations, the benefit of our Kichler acquisition and strong growth in paint. Excluding the impact of currency, acquisitions and divestitures, sales grew 5%. Operating profit grew $58 million or 23% due to increased volume, continued cost control and improved price realization. As a result, operating margins for the quarter expanded 150 basis points to 15.4%. Our earnings per share increased 56% due to improved operating earnings, a lower tax rate and lower share count. We repurchased 9.6 million shares for $300 million in the quarter, a significant increase in our repurchase activity compared to prior quarters. We were pleased with our fourth quarter performance.

Turning to Slide 5. For the full year of 2018, we overcame significant inflation and delivered strong sales, operating profit and EPS growth for the full year. This growth was driven by solid consumer demand, healthy end markets and our continued focus on executing our growth and capital allocation strategies to deliver shareholder value. Sales for 2018 increased 9%. Excluding the impact of currency, acquisitions and divestitures, sales grew 5%. This growth was driven by record sales years for 5 of our business units: Behr paint, Delta Faucet, Hansgrohe, Watkins Wellness and Liberty Hardware. Operating profit grew 6% despite significant inflationary headwinds, demonstrating our ability to manage our costs and successfully implement price to offset raw material and other inflation. Earnings per share increased 29% in 2018 due to a lower tax rate of 25%, increased operating earnings, lower share count and lower interest expense.

Turning to our segments. Plumbing continued its strong performance in 2018. Delta gained share with its Brizo brand in showrooms, its opening price point Peerless brand at retail, and we saw strength across all channels of distribution, including wholesale, retail and e-commerce. Notably, Delta achieved a record year and successfully implemented a company-wide ERP system. Hansgrohe's success was driven by growth in China and Germany offsetting softer conditions in certain other countries. Watkins, our leading spa business, had an outstanding year with strong performance in its core dealer network and retail channel and healthy sales of its aquatic fitness systems.

In our Decorative Architectural Products segment, the acquisition of Kichler Lighting early in the year significantly increased sales. We've integrated Kichler into our Masco enterprise, and we'll continue to drive value in 2019 by leveraging Kichler's product portfolio with existing and new customers, realizing further operational improvements and optimizing its brand and go-to-market capabilities. Our pro paint initiative grew high single digits for the full year, and we continued to invest in this large opportunity along with our partner, The Home Depot. Pro paint now represents about 25% of our coatings revenue, and we expect to continue to drive high single-digit growth in the pro paint market in 2019. In the DIY market, we are well positioned with a leading brand, the highest quality products and a great team of people and expect to continue to outgrow the DIY market in 2019.

Turning to Cabinetry. We returned to top line growth in 2018 with strong 7% growth, excluding the divestiture of Moores. Our repair and remodel cabinet business grew double digits in 2018, aided significantly by our new program win with Menards. This growth, together with our business shift over the past several years, has resulted in 70% of our sales in this segment, now driven by the repair and remodel market, up from approximately 60% 2 years ago.

In our Windows business, sales grew 1% for the full year, excluding currency and our divestiture of Arrow Fasteners. We achieved mid-single-digit growth in our U.S. business while our U.K. business was challenged with lower demand. We took action in the U.K. to restructure and rightsize our operations during the year to match the current level of demand.

From an overall Masco perspective, our strong growth generated over $800 million of free cash flow for a more than 100% free cash flow conversion rate. Strong cash flow is a hallmark of Masco, enabling us to drive shareholder value through reinvesting in the business, selectively pursuing acquisitions with the right fit and return and returning cash to shareholders through share repurchases and dividends. We deployed nearly $1.5 billion of capital during the year, consistent with our balanced capital allocation strategy. We returned $654 million to shareholders through share repurchases, we deployed $549 million for the acquisition of Kichler Lighting and we increased our dividend for the fifth consecutive year, all while reducing debt by $106 million. With this debt reduction and continued earnings growth, we finished 2018 with a very strong balance sheet. Our net debt-to-EBITDA at year-end was approximately 1.7x.

Before turning to 2019, I'd like to thank our more than 26,000 employees, both here in North America as well as across the globe, for all of their efforts to help make 2018 another successful year for Masco.

Now turning to 2019. I'd like to share with you our view of the markets for the year. Consistent with many industry forecasters, we expect the repair and remodel market to grow in the mid-single-digit range in 2019, though slower than the rate of growth in 2018. For new construction, we are assuming a low single-digit growth rate due mainly to labor constraints and affordability concerns, understanding that recent declines in mortgage rates could help alleviate some of the affordability pressure. And for our international markets, principally Europe, we're expecting a low single-digit growth environment.

With regards to tariffs, our assumption is that the List 3 tariffs will increase to 25% on March 1. We previously shared with you with that the impact of these tariffs on Masco is less than the raw material and other inflation we effectively dealt with in 2018. As a reminder, the 25% tariffs represent approximately $150 million of annual inflation or approximately 2.7% of cost of goods sold. However, it remains to be seen what the impact these subsequent price increases will have on consumer demand.

Based on these assumptions, we expect sales growth in the range of 3% to 5%, excluding currency; margins to be similar to 2018 as we offset tariffs with supply chain initiatives, other internal productivity measures and price; and earnings per share to be in the range of $2.60 to $2.80. With our strong balance sheet, we will continue our balanced capital allocation strategy and intend to deploy approximately $600 million towards share repurchases in 2019.

Now I'll turn the call over to John to go over our fourth quarter and full year results in more detail. John?

Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization charges, inventory step-up related to purchase accounting for the Kichler acquisition and other onetime items.

Turning to Slide 7. We finished the year strong. Fourth quarter sales increased 10% or 11% in local currency. Excluding acquisitions and divestitures, sales increased 4% or 5% in local currency. Currency translation unfavorably impacted sales in the quarter by approximately $19 million.

In local currency, North American sales increased 14% in the quarter or 6% excluding acquisitions and divestitures. In local currency, international sales matched prior year in the quarter and increased 2%, excluding our divestiture of Moores in the fourth quarter of 2017.

SG&A as a percent of sales decreased 190 basis points to 16.9% in the fourth quarter due to leverage on volume, lower promotional spend and cost containment. We delivered solid bottom line performance as operating income increased 23% in the quarter and margins expanded 150 basis points to 15.4%.

For the fourth quarter, our EPS increased 56% to $0.64. I would like to note this performance was calculated based on a normalized tax rate of 25% versus the previously guided 26% tax rate. This change in our tax rate was driven by the issuance of recent IRS regulatory items regarding certain provisions of the new tax code. Due to this change, we have provided restated adjusted EPS numbers for each quarter of 2018 in the appendix on Slide 23. Fourth quarter EPS was favorably impacted more than expected by approximately $0.05, consisting of approximately $0.03 benefit from the pull-forward of sales in the Plumbing and Decorative segments, $0.01 due to the lower normalized tax rate of 25% and $0.01 due to the gain on an asset sale in the Decorative segment.

Turning to the full year 2018, sales increased 9%. Excluding the acquisitions and divestitures, full year sales increased 5%. Currency translation favorably impacted the full year results by $47 million.

In local currency, North American sales increased 11% for the full year or 6% excluding acquisitions and the Arrow divestiture. Our North American teams executed well, driving solid revenue growth as our strong brands, innovative products and broad products assortment continued to resonate with designers and consumers. In local currency, international sales declined 2% for the full year or increased 1% excluding the Moores divestiture. While we experienced some international market softness in 2018, mainly in the U.K., our international Hansgrohe plumbing business continued to drive growth.

Our SG&A as a percent of sales decreased 90 basis points to 17.7% for the full year as we continue to leverage our volume and control our costs. Full year operating income increased $67 million or 6% with operating margins at 15.1%. Lastly, our EPS increased 29% to $2.50 for the full year. Compared to our prior 2018 EPS guidance, the $2.50 in EPS includes the aggregate $0.04 EPS benefit of the sales pull-forward and a gain on the sale of the building in Q4 and a $0.03 full year EPS benefit from the normalized tax rate of 25%, down from our previously guided 26% tax rate. Our adjusted EPS calculation will continue to assume a 25% normalized tax rate for 2019.

Turning to Slide 8, our Plumbing segment had a strong finish to the year as sales in the quarter increased 6%, excluding the impact of currency. This was driven by strong growth in our faucet, shower and spa businesses. The fourth quarter benefited from approximately $10 million of pull-forward sales from Q1 of 2019 while currency negatively impacted sales by approximately $16 million in the quarter.

North American sales increased 8% in local currency as we experienced strong demand from our wholesale, retail, dealer and e-commerce customers. Additionally, our spa business continued to outperform by achieving a record fourth quarter with its innovative new products and industry-leading brands. Our international sales in the fourth quarter grew 3% in local currency, rebounding from a soft third quarter. Hansgrohe's focus on key markets drove this performance as they experienced strong growth in Germany and China. Operating profit in the quarter increased 11% due to incremental volume, lower spending and a neutral price/cost relationship.

Turning to the full year 2018, sales increased 6% in local currency. This strong growth was driven by record years at Delta, Hansgrohe and Watkins. North American sales grew 8% in local currency as we experienced strong growth across all channels and price points during the year. Our international plumbing sales increased 2% in local currency as Hansgrohe's performance continued to benefit from their investments in brand, design and innovation. Full year operating profit grew 3% due to volume growth, partially offset by the price/cost lag we experienced in the first 3 quarters of the year, mix and other expenses, such as ERP spending.

For 2019, we expect the Plumbing segment's sales growth to be in the 3% to 5% range, excluding currency, with margins similar to 2018 as we implement price to offset the impacts with the proposed tariffs. Also, given year-end currency exchange rates, we expect 2019 revenue will be unfavorably impacted by approximately $65 million, principally in the first and second quarters. This unfavorably -- unfavorable currency exchange results in negative EPS impact of approximately $0.01 per quarter in each of Q1 and Q2 2019. In addition, depreciation and amortization in this segment will approximate $20 million per quarter due to increased capital investments in 2018. We also anticipate additional $5 million of expense in Q1 as we will be exhibiting at ISH, the large biennial European plumbing trade show.

Turning to Slide 9. The Decorative Architectural Products segment grew 30% in the fourth quarter. Excluding the acquisition of Kichler, sales grew 8% as we experienced strong double-digit growth in our core DIY products and high single-digit growth in pro. Behr's strong DIY performance was aided by approximately $20 million of sales pulled forward from Q1 2019 due to increased year-end customer purchases to achieve incentives. Operating income increased 42% in the quarter, aided by the Kichler acquisition, increased volume and improvement in the price/cost relationship, cost control and a $4 million gain on the sale of a building.

Full year sales grew 20%. Excluding the acquisition of Kichler, sales grew 5%. The solid performance was driven by our Behr pro initiative as we achieved high single-digit growth and continued to grow share with the pro. While this pro growth is slightly lower than our previously guided double-digit growth expectation, we are pleased with this performance considering the slowdown in the overall coatings market. Together with The Home Depot, we will continue to invest in and capitalize on this significant growth opportunity. The solid sales growth in 2018 was also attributable to Liberty Hardware's continued share gains from successful new product introductions and program wins in the retail channel. Full year operating income increased 13%, principally due to the acquisition of Kichler, an improvement in the price/cost relationship and lower spending.

For Q1 2019, we expect segment operating margins to be down approximately 200 basis points. This margin erosion in Q1 is driven by the $20 million of sales pull-forward into Q4 2018, both sequential and year-over-year commodity inflation, additional investment in our pro paint initiative, the full quarter impact of Kichler and an increase in depreciation and amortization to approximately $12 million per quarter. For the full year 2019, we expect sales growth in this segment to be in the 4% to 6% range, including the benefit of approximately 2 months from the Kichler acquisition, and operating margins to be between 17% and 18%.

Turning to Slide 10. In the Cabinetry segment, excluding the Moores divestiture, sales increased 4% in the fourth quarter and 7% for the full year. This solid performance was driven by our industry-leading brands as we experienced double-digit growth in our repair/remodel business in 2018. The Cardell program at Menards is performing well, and we are pleased with its first year performance. In addition, our new home construction business matched 2017.

Segment profitability declined $1 million in the quarter and declined $8 million for the full year. The fourth quarter performance was driven by increased logistics costs and mix, as we discussed on our third quarter call. Full year profitability was also impacted by logistics cost and mix in addition to the ramp-up costs related to the Menards win. 2019, we expect flat to low single-digit sales growth due to lower demand in the cabinet market and expect segment margins will be similar to 2018.

Turning to Slide 11. In our Windows segment, sales decreased 1% in the fourth quarter and declined 2% for the full year. Excluding the sale of Arrow Fastener in the second quarter of 2017 and FX, sales increased 1% for the full year. This performance was driven by Milgard, our leading Western U.S. window business, which grew low single-digits in the quarter and mid-single digits for the full year. Milgard's growth was due to favorable pricing and a positive mix shift toward our premium window and door products, but this growth was partially offset by our U.K. Window operation, which continues to experience market softness.

Segment profitability in the fourth quarter increased $4 million but decreased $15 million for the full year. Fourth quarter profit due to favorable price costs and mix. Full year performance was primarily driven by restructuring actions taken in the U.K. and an increase in Milgard's warranty-related costs and inefficiencies in both the North American and U.K. operations.

In the first quarter of 2019, we'll be implementing the ERP system at Milgard's largest California facility. As a result, we expect a modest operating loss due to lower volumes and the incremental ERP costs in the first quarter. For full year, we expect low single-digit sales growth for this segment, excluding currency, with modest margin improvement.

Turning to Slide 12. Our year-end balance sheet was strong with approximately $600 million of balance sheet liquidity as well as full availability of our $750 million revolving credit facility. Working capital, as a percent of sales, finished the year at 14%. While slightly higher due to the acquisition of Kichler, this performance continues to be some of the best results in the industry.

During 2018, we repurchased 18.6 million shares for approximately $654 million, and we increased our quarterly dividend by 14% to $0.12 per share. We took further action in 2018 to strengthen our balance sheet by reducing debt by $106 million. In addition, we now hold an investment-grade credit rating at Standard & Poor's, Fitch and Moody's.

Going into 2019, our disciplined capital allocation strategy is unchanged. We continue to prioritize investments in our businesses to drive organic growth. We'll balance acquisitions with the right strategic fit and returns with share repurchases, and we will maintain an appropriate dividend. We expect to deploy another $600 million for share repurchases in 2019, subject to market conditions. We are assuming a 290 million average share count for 2019. We generated $830 million of free cash flow in 2018 and expect to sustain our better than 100% free cash flow conversion rate in 2019. Lastly, as Keith mentioned earlier, our 2019 EPS estimate is $2.60 to $2.80 per share.

I provided a lot of detail in our 2019 expected performance for each segment during my prepared remarks. Please see Slides 27 and 28 in the appendix of our earnings deck for a list of these assumptions.

With that, I'll turn the call back over to Keith.

Thank you, John. Looking at 2019, while we believe that growth may moderate in 2019, the fundamentals of our business and our core repair and remodel market are healthy. Consumer confidence and wages are growing. This increase is a consumer's willingness to invest in their home. Home prices continue to appreciate. This is highly correlated with repair and remodel spending. The age of the housing stock is increasing with 15 million owned homes greater than 30 years old. This drives increased remodeling spending. And household formations had steadily increased throughout 2018, driven by the millennial demographic. This trend is projected to continue, fueling housing demand for the next decade.

With our continued focus on executing our strategy, including investing in our leading brands, innovation leadership and operational excellence, coupled with our strong balance sheet and liquidity position, we will continue to create shareholder value.

With that, we'll now open of the line for Q&A.

(Operator Instructions) Your first question comes from the line of Ken Zener with KeyBanc.

The 8% growth we saw in North America Plumbing, I was wondering if you could maybe expand on that a little bit. I'm just thinking of your Analyst Day in the past where you looked at faucets and showerheads, non-decorative and other wellness. I just wanted to see how much dispersion there was between those different end markets. If you could do that for the quarter and for the year just so we can get a sense of how those different initiatives are working.

Ken, when you look at our North American plumbing market growth of 8%, we're very pleased with that. And we believe that, that growth is higher than the overall market, so we think we're taking share there. So we feel good about that. When you think about our international Plumbing business, that's an extremely diverse set of demands spread over 135 countries, and it's difficult to really nail down the market growth with that kind of aggregation. But when you look at how Hansgrohe is performing, particularly in Central Europe, we're happy with that. So when you look over -- look across the Plumbing group's overall performance and where that growth was driven, there were some good geographic dispersion which we're pleased with. And then when you look further as it relates to price point, we had some very good growth in the opening price point, driven the way we want it driven. Meaning, we launched new products to specifically address that price point. The Peerless brand, for example, we're seeing very good sales in our bathing and toilet categories, which tend to be more opening or entry price point. But we also saw strong growth in our high-end brands of Axor and Brizo for Delta and Hansgrohe, respectively. And we saw very good growth, as we talked in our prepared remarks, in our spa business and our hot tub business. So we're seeing strong dispersed growth across both geographies, price points and across our full continuum of the portfolio. So I feel good about the growth and feel good about 2019 in that segment.

Good. And then I was just looking at the -- the DIY paint seem to grow -- grew low double digits. Was that including the pull-forward? Because then I think there was some other commentary from some other producers about it being kind of challenging, and it seems like you didn't have the issue. If you could expand on that.

Yes. Ken, it's John. I -- first of all, the low double-digit growth rate does reflect or include the $20 million of sales that were pulled forward out of the first quarter into the fourth quarter. So yes, that does help aid that growth rate a little bit. That said, we do think that the overall coatings market in 2018 did slow a little bit. And so we do feel like we've probably picked up a little bit of share gain on the DIY side, not a ton. If you look at our overall growth rate for the full year, it was definitely low single digits, so a little bit of tailwind there in the fourth quarter. But for the full year, low-single-digit growth.

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

First question I had was looking out to 2019, your sales growth outlook of 3% to 5%. Obviously, by segment, you continue to execute a lot of market share gaining initiatives, such as pro paint, your expansion in plumbing, et cetera. I was curious, it look, though, that like the 3% to 5% was more of a -- in line with your market growth assumption. So if that is indeed correct, I was just curious about how you think about share gain opportunity in 2019 and if that's reflected at all in your outlook.

Yes, Mike. One of the things that did impact our guidance for the full year on the top line, the 3% to 5%, is the fact that we did have some of that pull-forward sales that impacted the fourth quarter. So that $30 million, we would have typically anticipate it hitting into 2019 pulled forward into 2018. But if you consider the markets that we are in, both the R&R market, which is growing kind of mid-single-digit 4% to 6% range and kind of low-single-digits for both new construction and international and if you consider the fact that, in particular, our Decorative Architectural segment we've got growing low single digits, if you put that all together, there is some share gain baked in there. So we do think we are going ahead of markets. But overall, the markets are slowing a little bit for 2019. So I hope that captures the essence of your question.

Mike, we're seeing some good share gain opportunities to continue on our propane segment, for sure. We have the real solid momentum in Plumbing and we can -- and expect that to continue. And our offering as it relates to in-aisle service, product and brand, et cetera, we feel good about that in the DIY space while that market is a little softer. We believe it'll be a little softer going into 2019. So there is share gain baked into our thinking.

Good to hear. I guess secondly, you mentioned that the List 3 25% tariffs are baked into your outlook for the year, your EPS guidance. Just wanted to clarify that it still represents $150 million of incremental headwind. And more broadly, if you could just remind us of the overall outlook for incremental raw material and tariff inflation in 2019 and how you expect to offset that between -- if it's possible to break it down, between price, productivity and whatever other offsets you have.

That $150 million impact, Mike, is the right number, and we've talked about that before. Of course, there's a significant amount of moving parts and potential variability there, does -- do the 10% -- does that stay, how much of the 25% goes in if everything, when it goes in. So I think it's best to think about that as a very dynamic situation. And as more certainty is revealed over time, we'll be sure to share that with you and reflect that in our updates. In terms of raws, the -- without a doubt, tariff is the biggest uncertainty for 2019. We're assuming in our forecast that, that does -- the tariffs do jump up to 25% in March. When we look at other significant commodities, like copper and zinc, for example, in Plumbing, that has started to moderate in the back half of 2018. And we think that the level we're at, we're assuming that the level we are at in copper and zinc will continue into '19. So there might be a modest benefit there as we move on through the year. In coatings, while TiO2 has moderated a bit, we are continuing to see significant pricing pressures in resins. And in Cabinets, plywood distribution and logistics, they remain elevated. But we think those are moderating. We think those will hold where they are currently. In terms of how we're addressing it, certainly, we're making significant moves and decisions and doing a lot of work on our supply chain. For example, we've reallocated, if you would, and moved over $30 million of plywood purchases in our Cabinet business to address countervailing duties and tariffs and the like. That's just one example. We're looking at value engineering and cost-out. We're looking at productivity. We're certainly looking at other opportunities to move to other low-cost countries, and then price. And I think we've demonstrated the ability to execute on all of those.

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

First question, just wanted to ask for some more color on the DIY gallon growth and if you have a point of sale trends that you could share with us in the fourth quarter. Looks like you -- as you mentioned, you outperformed the market. And if you could provide some more color in terms of what's driving some of that relative strength.

So Mike, in terms of -- we really can't get into POS. That's not ours. We can't give you too much of a readthrough. That said, gallon growth was kind of flat to low-single-digits in the fourth quarter. So that's where we stand there. We feel good about that overall, and that's a combination of both pro and DIY. So we continue to grow the pro side. The DIY has been a little bit sluggish, but that's been the case all of 2018. So that's not necessarily new news. So...

I think in terms of what's driving that DI (sic) [DIY] growth in the aisle, it's a number of things, there's no one silver bullet there. Certainly, a big driver of it is our strong partnership with The Home Depot and the work we're doing in the aisle to convert foot traffic to cash paying sales to the consumer. The brand of Behr is extremely strong in the DIY space and well known. Our service levels both in the store and in terms of delivery are extremely strong. So that combination of brand and service and a continued steady innovation pipeline is all part of our success in DIY.

Great. Then some other building product companies that have reported have seen some destocking in fourth quarter, notably Europe and U.S. retail. Did you see that in any of your segments?

There's always a fluctuation with inventories at our customers. We did see a little bit of destocking in Plumbing wholesale where we've had tremendous success, and that did slow down in that channel a little bit into Q4. So there was a little bit of destocking there. But then we also had significant pull-ahead volume, which would obviously equate to restocking. We talked about that $30 million impact over and across Paint and Plumbing. So really, we did not see what I would characterize as any material destocking in our channels.

Your next question comes from the line of Scott Schrier with Citi.

I'm wondering if you could talk a little bit about if there was any impact on margins this quarter that might have come from you pushing price to offset tariffs and then we had the tariff delays, so if there's any lag there that caused little bit of a margin tailwind there. And then understanding that it's pretty uncertain, if tariffs don't materialize or things turn out to be better than what we hoped for, can you speak to the elasticity of pricing that you might have for some of those price increases that you're putting through?

Sure, Scott. As it relates to the impact in the quarter due to pricing related to tariffs on margins, specifically to your question, you recall that what we're trying to do or what we're pursuing with price when we pursue price to offset the tariff impact is just to recover the dollar amount of the tariff. So there's not any incremental margin if -- on -- as a result of the tariff pricing that we're putting into place. And if anything, because we're only recovering the dollar value of the tariff, there actually is a slight potential for our margin to decline because of that, so really, no margin benefit there. I forget the second part of the question.

Elasticity. In terms of elasticity, Scott, it's -- that's really difficult to nail down when you look at the environment that we're in. Typically, the elastic studies that we do and information we have is based on -- in a constant environment, if a particular product line goes up or down. When this -- with this kind of broad-based inflation in our -- across our markets, it's difficult to really peg that down specifically. But we are expecting that there would be some pullback in terms of demand in the categories that are affected.

Got it. And then in the last couple of quarters, I believe that you've mentioned that you're seeing strong trends in terms of your ticket sizes. I'm curious if you anticipate that continuing or consistent with your comments about some moderation in '19, you would expect to see some -- even ticket sizes moderate in an environment where you have some uncertainty. And if so, is that built into your guidance?

Mix is a good story for us, Scott. We've -- we're seeing good high-end growth in our higher-priced bigger ticket items. I talked a little bit about it in terms of some very high-end shower systems that Hansgrohe continued to do well. Our spa business had a record year this year. So the high-end is very, very, very strong. It continues to be strong for us, and we expect that continuing into '19. We're also increasing our revenue on our growth rate in the opening price point or at the low-end, and that's by design, where we've launched specific products. I talked about Peerless. We've talked about bathing and some of our toilets and vitreous china products. So we're also seeing growth there. I think that's a good story. When you have that kind of bimodal dispersion in your growth, the market is strong, and new entries and new homeowners are forming households, driving some of that opening price point. And we have products to cover that. And then there's the move-up phenomenon. We have products on the high end. Now while our lower-end products tend to be a little bit lower margin, over time, we've done work to close that gap. But they are lower margin. And when you factor it all in, how we're looking at '19, we're really not anticipating mix being a material impact.

Your next question comes from the line of Justin Speer with Zelman & Associates.

A couple -- I had a couple of questions, one, just the broader corporate level SG&A. The management in the quarter was excellent, and I just wanted to understand how much of that is temporal in nature and how to think about SG&A as a percentage of revenues on a go-forward basis embedded in your guiding.

A portion of that favorability in SG&A this year is what we talked about in terms of gain on sale in the DAP segment, so that was about $4 million. And we did lap some investments in Q4 of '17 tied to some pretty significant resets and program wins at -- in Decorative hardware with Liberty and the shower door program. So there was a bit of an easy cap, if you would. We also had good cost control throughout the year, and we did push certain investments into '19 to mitigate inflationary pressures, for example. In '19, we expect total SG&A for the company to be up slightly from '18, as a percent of sales, as we pick up some of those investments that were pushed out to '19. We're going to continue to invest strategically for growth, such as marketing spend in Plumbing and additional headcounts in Deco to support our pro initiative.

Okay. And then the next question is a two-part question, particularly as it pertains to the Plumbing business. Looking for flat margins there. You included a 25% tariff. First question is, do you already have the price in hand for that 25% tariff? And the second question is how do margins for that business flex around a more sanguine R&R market backdrop? Let's say, low single or flat as opposed to your 5% view? And how do they look under a 10% or no-tariff scenario?

I think in terms of do we have price in hand for the 25%, no, we do not. We obviously had significant conversations and pricing actions for the 10%. We feel we're -- with the combination of the price and the cost outset we've driven, that we're in good shape on the 10%. But more conversations would be required, for sure, should we see this go to 25%. Justin, could you repeat that second part of your question?

On margin flex in a low-growth environment versus a no-tariff scenario. So Justin, as I think about that, assuming that commodities are constant, so let's put that -- and assume we don't have any commodity impact, I would say that we should see some modest margin expansion, just given our leverage on incremental volume, right? And so that should help us out. And to the extent that the tariffs don't go into effect and that has a good impact or a favorable impact on consumer demand, we would typically see incremental margins off of volume in this segment kind of in that high 20% to 30% range. So we should see some -- again, some modest margin expansion in that scenario as well.

But in a flat world, assuming a 25% tariff does go into fruition, that would potentially risk your guidance since you're looking for modest growth there.

Yes, it could have a little bit of an impact. Only because with 25% tariffs, we are going to be -- again, the same answer I gave a couple of minutes ago. We won't be getting the dollar impact of that recovery on all those tariffs. So that -- if anything, it could present a little bit of a headwind to margins in that scenario, Justin.

I think I may have heard you say something along the lines of the 25% tariff risking our guidance, just to be clear, we have incorporated into our guidance the expectation of 25% on March 1.

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

I wanted to ask first about the assumed moderation in demand that you're baking into your '19 forecast. So on the housing side, we clearly have some indicators that housing has slowed down, and I imagine you would expect that to begin to impact some of your businesses in the next quarter or 2. On the R&R side, the assumed slowdown, is that something you've seen already in 4Q? Or are you just assuming that it happens, given the slowdown on the new side?

We did see a little bit of a slowdown in Q4. I think in our coatings business, we saw it a little bit. I talked a little bit about our Plumbing business in the trade and wholesale. So there's a little bit of slowness there.

And Nishu, I would also say that we saw a little bit of slowdown in our Cabinets and, to a degree, our Windows business. We grew low-single-digits for the fourth quarter in Windows, grew mid-single-digits for the full year there.

Got it. And in terms -- just shifting gears to Cabinets and Other Specialty. In terms of the kind of margin turnaround there, kind of getting us back to a double-digit, low-single-digit revenue growth there seems pretty good, given their greater exposure to new construction. On the margin side though, we're expecting flat for the year. They have less, I would imagine, tariff impact, based on your tables there, and less commodities as well. So why only flat? Are -- when can we expect further improvement in the margins on those 2 businesses?

When you look at Cabinets, we had a full year margin north of 9%. And when you compare that to the competition, we think we're doing pretty good there. We've got, certainly, some good drop-down that can come from that. We also experienced some inflation in plywood that we've dealt with. There's still a little bit more of that, that could be a drag on margins. In terms of our Windows business, we've got ERP spend that we're going to continue to make into the quarter, which our experience shows us will have an impact on both the top line as well as the actual expense of that ERP system. So when you combine those things together, that's what's really led to our guidance as it relates to margin.

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

Wanted to follow up on the Cabinet conversation a little bit. In Menards, I think you had indicated that it was going to be running at a run rate of about $80 million or so by -- on an annualized basis by the end of this year or the end of last year. I'm guessing that maybe you recognized about half of that in 2018. And if that were to be the case, that would suggest that Menards alone would add about 400 basis points to your sales next year. But you've guided 0 to 3. And so I'm kind of wondering if you could talk about what you're seeing in the market environment that underlies that guidance. Or was there any -- is there anything that you're seeing in terms of the sales environment that is depressing things that is worth calling out, whether it be regionally or price point-wise or anything like that?

So Stephen, with respect to the Menards business, while we won't break out specific customer sales, we'll probably do a little bit better than that $40 million run rate that you suggested. So the impact for 2019 is greater, as you laid out there. That said, as we go into 2019 and we consider a little bit of the deceleration we saw in 2018 and the impact of the tariffs and the pricing, particularly on a big-ticket item like cabinetry, we do expect to see a little bit more of a market slowdown in Cabinetry going into 2019. And so that definitely weighs on our forecast for 2019. That said, even though that we did see some of this deceleration, we do expect just some modest growth in this because we've seen nice growth on the R&R side of our business, and we've gotten back to flat sales for our new construction business. So not wild growth, but we do see a little bit of deceleration in that area for 2019.

Okay, that's helpful. But just when -- just to clarify, you're expecting some modest growth excluding or in addition to the Menards win?

We -- given the fact that we've baked in some headwinds, given the tariffs and the overall market demand, I'd say it'd be kind of flat to very low single-digit growth x Menards.

X Menards, okay, got it. And then you talked about the outlook for housing starts, I think, being kind of low single-digit growth for the year. At this point, that seems like it's reasonably conservative, but also there's a lot that's still up in the air in terms of what the housing market is going to do as we just entered the spring selling season this week. And so I was curious if you see upside to this housing starts figure that you laid out of low single-digit growth. Is there anything about your strategy that would change? And are there any particular segments that we should be expecting you would be able to generate outsized sales or profit growth as a result of housing starts specifically?

If there's -- if rates start to go down a little bit, then obviously, that could be an upside for us. In terms, Stephen, of your direct question if we see upside in our guidance, I would say no. I think we put our guidance right where we think it would be and where we expect to come out based on what we know now. With regards to our specific strategy and would we change anything in our strategy, should there be an increase in housing demand, no, not really. We've got our capacities in a good spot where we need to fulfill the demand. We've purposefully moved our portfolio to a less cyclical, higher-margin, more stable state because we think that's the right thing to do for shareholder value. We talked a little bit about doing that in our Cabinet business, how we shifted it now to some -- close to 70% of our business coming from repair and remodeling rather than new construction. Obviously, going back, we spun off our services businesses. And we're continuing to drive our Paint and Plumbing business and our Lighting business, particularly into the R&R space. So that's our strategy. We think that strategy is solid and it's working. So I would not say that we would have any material strategic change should we see housing pick up in '19.

And Steve, I just remind you that housing, as a percent of our total revenue, is now down to about 15%. So it's really -- it's a key point. Because of the strategic repositioning that we've done over the years, it's really a very minor impact to where the overall part of our sales or our business.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

I wanted to just go back to some of the commentary around sales and thinking about the cadence of things. You guys have called out a couple of things that are idiosyncratic about the pull-forward in the paint and Plumbing segments with respect to the impact on 1Q. You pointed out some margin headwinds in 1Q. But I guess at a higher level, when we think about that 3% to 5% organic sales growth, how should we think about that playing out kind of 1Q, 2Q versus the second half?

Well, we've talked about some of the pressure that we're seeing in 1Q as it relates to margin and also on top line with the pull-forward that we experienced in paint and plumbing. So that would be a factor on the first quarter. When we look at that from first half to second half, it was -- we certainly will see a pickup in the second quarter, as those first quarter headwinds don't exist with regards to the pull-forward, and then the second half to be somewhat similar to the first half. So we're maybe a little bit stronger in the back half, but really pulling out the effect of the pull-forward out of Q1 into Q4 of '18, really, not a significant change beyond that.

Okay, got it. And then my follow-up question, just looking at the Decorative segment in particular with respect to the 2019 guidance. I was hoping to drill down on Kichler a bit more, because clearly, that's a business that has, potentially, outsized exposure from a tariff standpoint. You've expressed some conservatism, broadly speaking, around what potential demand impacts could be should the 25% go into effect. So I guess on Kichler specifically, what are you guys embedding from a growth and margin standpoint to the extent you can give us a little more detail there?

Yes. I won't break it down into specific details for Kichler. But in speaking more in general terms, you may recall we had 10 months of Kichler in 2018, starting basically in March. So we'll have the full quarter in Q1 of Kichler. And just on face value, Kichler, that would be a margin drag as Kichler's margins are lower than the average in the segment. But particularly in Q1, that's seasonally a weaker quarter for Kichler. So that will put some drag on the segment as we look at the performance in Q1, and that's part of our guidance, some of our prepared remarks with regards to margin, in that segment. Very happy, we continue to build out the team down in Kichler, have an outstanding leader that's demonstrated performance across a number of our businesses and a number of functions. As I interact with the dealerships and get more exposure to our customers, I'm really seeing a strong brand. And I'm also seeing an opportunity for us to bring some of our [impress] and operational skills and some of our purchasing power to that area. We have an outstanding ability and opportunity to bring e-business capabilities to that business. So we're very happy with the Kichler acquisition, and we're going to continue to drive performance throughout the year. Understanding that given the full year -- or full quarter ownership of Kichler and the fact that Q1 is a seasonally weaker quarter, that will be a little bit of a margin drag on the segment.

Yes. Mike, maybe just to add on to Keith's comment just a bit. If you think about how we look at the lighting business and what we talked about when we acquired the business, we really don't see the fundamental market for lighting shifting dramatically from when we initially talked about it. It should grow kind of at the same rate as the overall R&R market kind of in that mid-single-digit 4% to 6% range as you might call it. That said, you raised the point about the tariffs and the tariff impacts. Could that have a little bit of a headwind on that? Yes, that could, without a doubt, so something we need to look at and see how the tariffs actually roll out and see how that plays.

Your next question comes from the line of Matthew Bouley with Barclays.

I just wanted to follow up on the discussion earlier around how you would kind of flex margins, depending on different market assumptions because you gave a point estimate for both Plumbing and Cabinets margins in 2019 in light of, obviously, a lot of moving pieces around tariffs and commodities. So I guess just what gives you confidence in such precise estimates? And then would you be able to kind of give, I guess, a more specific range or bracket around those margin estimates?

I think the specificity comes from being able to identify the pull-forward, for example. I think that's a significant bit of it. We wanted to get some more detail in those segments because there were so many moving parts. I think the -- historically, we understand how those businesses operate and the effect of Kichler as it relates to a seasonally slower point on time and the fact that we own it 3 out of 3 months instead of 1 out of 3 months there. So that was straight math, and we wanted to make sure that we talked about that so we could be more precise in that specific quarter. With regards to more detail, I think we've laid out the detail that we're prepared to lay out with regards to our margin performance for the year. And with respect to the impact of tariff, which is obviously the big moving piece here that we're talking about, that would have -- if those were to go away, that would move us up towards the higher part of our range. And we'll leave it at that, and we'll provide more detail as we get more certainty around the number, the dates, et cetera.

Okay, I appreciate that detail. And then just the margin guidance specifically for Decorative. Understanding the larger impacts in the first quarter, it still suggests that you're expecting a lower margin year-over-year, from the second quarter to the fourth quarter. So is there any additional color on why that may be. In light of oil prices obviously moving lower, I guess how much of that would be the Kichler headwind from tariffs? Is mix of pro a meaningful part of that? Just any additional color on why the conservatism on margins there.

Sure. Look, Kichler is a big mover there with the -- that we've already talked about. We do expect some price/commodity headwind in the first half of '19. We are going to continue to invest in hub stores and pro reps and recall that we don't anniversary our 2018 pro rep additions until the third quarter. So when you look at Kichler, you look at what we expect to be commodity headwinds particularly in the resin area, that we'll be facing early in the year. We look at our growth investments and hub stores and pro reps and the fact that we don't anniversary some of those additions we made in '18 until late in the year. Those all combined to put our guidance in that 17% to 18% range.

The one other thing I would add to that list of items that Keith just called out is our depreciation and amortization in the segment. I called that out in my prepared remarks. We'll be up compared to what we've experienced historically, Matthew. So that's another margin headwind a little bit. But from an EBITDA perspective, we're probably EBITDA -- no impact on EBITDA whatsoever.

Your final question comes from the line of Susan Maklari with Crédit Suisse.

My first question is just around -- you've done a fair amount of work on the working capital side over the last year or so. How much more do you think you can do there? And how should we think about that potentially adding to some of the cash generation that you expect?

Certainly. So you're right, Susan. Thank you for noticing the fact that we've been working on working capital. Indeed, the business has been working hard at it. It has actually elevated a little bit from where we've been historically. A large part of that has to do with the Kichler acquisition as they carry higher working capital than most of our business -- our businesses -- core businesses typically have done. That said, we are working with the Kichler team. We know -- they know that they see opportunity to reduce the working capital in their business, so that could be a little bit of a tailwind for us going forward. And as you may all know, we have all of our businesses focused on working capital. So we're -- while we were happy with what we've posted so far, we always strive to get better than where we've been. So I think there's an opportunity to grind out a little bit better working capital as we go into 2019. That said, the one thing that will be a bit of a headwind for us in working capital is the tariffs because, the tariffs, you have to pay the government in very short period of time. I believe it's 7 days. And so that will impact our working capital a little bit as we go into 2019.

Okay. And then my next question is just -- now that Kichler is integrated, how are you thinking about M&A going forward? Can you give us any color on what you've been seeing in terms of the pipeline there?

We have not changed our strategy in M&A. Our pipeline remains solid. We're focused on identifying spaces, if you will, that we think have good fundamental growth and tailwinds and good pricing power and then we identify specific targets and then start our cultivation activity and we have a pipeline process. And I'm pleased with the level of the pipeline. We really are not changing our strategy. We are -- we have a strong balance sheet that affords us the ability to do the kind of deals that we want to do as well as allocate capital on a balanced approach towards share repurchases, dividends. And of course, we're going to continue to fund our brand and innovation and our existing core business. So we like what we're seeing, and we're going to continue to drive it. And when we are ready to do -- to announce a deal, we'll do that.

This concludes the Q&A session and the Masco Fourth Quarter and Full Year Results Conference Call. We thank you for your participation. You may now disconnect.