Irene Tasi - Director-Investor Relations Keith J. Allman - President, Chief Executive Officer & Director John G. Sznewajs - Chief Financial Officer, Treasurer & VP.

Samuel H. Eisner - Goldman Sachs & Co. Michael Jason Rehaut - JPMorgan Securities LLC Stephen S. Kim - Barclays Capital, Inc. Dennis Patrick McGill - Zelman Partners LLC Robert Wetenhall - RBC Capital Markets LLC Susan M. Maklari - UBS Securities LLC George Leon Staphos - Bank of America Merrill Lynch Michael G.

Dahl - Credit Suisse Securities (USA) LLC (Broker) Josh K. Chan - Robert W. Baird & Co., Inc. (Broker) Mike Wood - Macquarie Securities Keith Hughes - SunTrust Robinson Humphrey, Inc. Philip Ng - Jefferies LLC.

Good morning, ladies and gentlemen. Welcome to Masco Corporation's First Quarter 2016 Results Conference Call. My name is Stephanie and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes.

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

Thank you, Stephanie, and good morning to everyone. Welcome to Masco Corporation's 2016 First Quarter Earnings Conference Call. Joining me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President, Treasurer and Chief Financial Officer.

Our first quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion of our website. Following our prepared remarks, the call will open for analyst questions. As a reminder, we would appreciate it if you would limit yourself to one question with one follow up.

If we are unable to take your question during the call, please feel free to call me directly at 313-792-5500. I'd like to remind you that statements in today's presentation will include our views about Masco's future performance, which constitutes forward-looking statements.

These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We have described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission.

Today's presentation also includes non-GAAP financial measures.

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

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

Thank you, Irene, and good morning, everyone. Turning to slide four, we carried last year's momentum into 2016 and we're off to a strong start this year.

We experienced solid demand for our brands across the price continuum, including big ticket items such as spas, windows and cabinets, as well as smaller ticket items in our paint and plumbing categories. Our portfolios inherent operating leverage and our focus on cost control were key factors to our success.

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

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

Let's begin with Plumbing. Our portfolio of Plumbing businesses continued its strong performance and grew sales in North America by 5% when you exclude the impact of Canadian currency, and grew internationally by 3% in local currency.

Each of our Plumbing businesses contributed to this growth, including Hansgrohe, who yet again set a company record for quarterly sales and operating profit. The Delta and Brizo brands continue to resonate with the consumer and drive sales in both the retail and wholesale channels.

Our premier wellness business, Watkins, demonstrated the success of their brand, dealer network and bolt-on acquisition strategy by growing their top and bottom lines through the successful integration of Endless Pools.

Our Decorative Architectural segment delivered an outstanding quarter as the investments we have made to support the growth of this segment continue to take hold.

BEHR drove sales with its award winning core DIY products such as BEHR MARQUEE, its differentiated consumer experience in the aisle with a new color center and its launch of new products such as Granite Grip floor coatings.

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

Turning to Cabinets, the team delivered yet another strong quarter, maintaining their leadership position at retail and gaining share in the dealer channel with both Merillat and KraftMaid brands.

To further position this business for profitable growth, the team has continued to optimize their sales mix by exiting low margin direct-to-builder business in the Carolinas and exiting the kitchen countertop product category.

Given these actions and cabinetry's positive trajectory, we expect this segment to achieve operating profit margins between 8% and 9% in 2016. Our Windows and Other Specialty Products segment had another great quarter.

Milgard, the leading window brand in the Western United States, grew their top line by 9% as they consistently executed against a dynamic economic environment. Augmenting our solid operational performance across all segments was our execution against key capital allocation initiatives.

We strengthened our balance sheet by paying down $400 million in debt and refinancing two of our debt maturities. These actions will result in approximately $45 million of annual interest expense savings going forward. We also continued our share repurchase activity in the quarter, buying back approximately 3.2 million shares.

To date, we have repurchased over 25 million shares against our 50 million share repurchase authorization, returning over $600 million to shareholders and thus delivering on our commitment to drive shareholder value. Now, I'd like to turn the call over to John who will go over our operational and financial performance in detail.

John?.

Thank you, Keith, and good morning, everyone. Please turn to slide six. As Irene mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges. We continued our positive momentum coming out of 2015 with a solid start to 2016.

The first quarter of 2016 was our 18th consecutive quarter of year-over-year sales and operating profit growth. Excluding the impact of foreign currency, sales increased 5%. Foreign currency translation negatively impacted our sales in the first quarter by approximately $19 million as the U.S.

dollar strengthened against the euro, the British pound and the Canadian dollar. North American sales were up 5% in the quarter. We're experiencing strong demand for our repair and remodeling products in all channels of distribution and across the price continuum, as we see consumers trading up to our better and best product offerings.

As a reminder, repair model activity accounts for approximately 83% of our total sales. International sales increased 2% in local currency in the quarter, driven by the continued strength in our international plumbing and window businesses. Gross margins expanded approximately 320 basis points compared to the first quarter of last year to 33.1%.

Our SG&A as a percent of sales improved as well, delivering a 20-basis-point improvement over the prior year, driven by focused cost control throughout the organization.

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

Turning to slide seven, our Plumbing segment sales increased 4% in the quarter excluding the impact of currency, driven by growth in our faucets, showers, spas and rough plumbing products. Foreign currency translation negatively impacted this segment's sales by approximately $16 million in the quarter.

Excluding the impact of foreign currency translation related to the Canadian dollar, our North American sales grew 5%, driven by strong demand for our innovative Delta and Brizo brands in the wholesale channel.

This performance was achieved despite, as we foreshadowed on our Q4 call, approximately $15 million of sales being pulled forward into Q4 of 2015 from Q1 of 2016 as several wholesale customers strived to hit higher rebate tiers in the final quarter of last year.

North American Plumbing sales increased 8% if you exclude the impact of foreign currency and the sales pull forward. Our international Plumbing sales increased 3% in local currency. Hansgrohe continues to outperform as it delivered its highest quarterly sales and operating profit in the company's history.

This achievement is a testament to Hansgrohe's successful investment in brand, design and innovation. Operating profit for the segment increased 17% in the quarter driven by incremental volume, productivity improvements in North America and a favorable price commodity relationship in Europe.

Our first quarter operating profit also benefited by approximately $5 million due to the timing of sales and marketing expenses at Delta.

Turning to slide eight, in the Decorative Architectural segment, first quarter sales grew 9% fuelled by strong demand for both BEHR's core DIY products including BEHR MARQUEE, KILZ primers and our new floor coatings products at The Home Depot as well as our BEHR Pro paint initiative.

Favorable weather supplemented the strong demand for our industry leading products as evidenced by our strong exterior paint and stain sales in the quarter. Liberty Hardware had another solid quarter due to continued share gains from successful new product introductions and program wins in the retail channel.

Operating income increased 27% in the first quarter principally due to the operating leverage and the strong volumes at BEHR.

While we've had a great start to 2016 with our Decorative Architectural segment, I want to remind you that this segment is facing a difficult comp in Q2 as the second quarter of 2015 was an all-time record sales quarter for BEHR.

Turning to slide nine, our Cabinetry segment sales declined 5% in the quarter due to the deliberate exit of certain lower margin business with builder channel in the United States at select low margin accounts in our UK cabinet business.

This decline was partially offset by high single digit growth in the dealer channel, both our Merillat offerings and our dealer exclusive KraftMaid Vantage program continued to perform and drive increased volume and favorable mix.

As Keith mentioned earlier, we took additional actions in the first quarter to position this segment for profitable growth, including exiting the Carolinas builder direct business and our retail kitchen countertop product lines.

These actions, when coupled with the previously announced pullback in our builder direct business, will negatively impact this segment's top line by about $60 million for the full year while improving its profitability.

On a quarterly basis, the revenue impact will be approximately $15 million for each of the second quarter, third quarter and fourth quarter. Segment profitability in the first quarter improved $27 million over 2015.

Our strong Q1 margin was driven by cost savings initiatives and continued growth of our higher price-point semi-custom KraftMaid offering. This segment's profitability in the quarter was also favorably impacted by approximately $4 million due to the timing of certain operational and marketing related expenses.

As a result of the actions I mentioned earlier, and the recent performance of this business, we anticipate operating margins for this segment should be between 8% and 9% in 2016. Turning to slide 10, our Windows segment sales increased 9%, driven by low double digit sales growth in Milgard, our leading Western U.S. window business.

Milgard is seeing strong demand in the Western U.S. resulting in increased volume and the continued benefit of a favorable shift toward our premium window and door product lines. Excluding the $2 million negative impact of a stronger U.S.

dollar, our European window sales increased 9% as this segment continues to benefit from share gains, the acquisition of Evolution Manufacturing and growth in Phoenix Door product line.

This segment's operating profit declined in the quarter due to increased ERP expenses at Milgard of approximately $5 million and incremental labor costs in preparation for the spring selling season of approximately $3 million. And turning to slide 11, during the quarter, we took further action to further strengthen our balance sheet.

In March, we issued $400 million of 3.5% five-year notes and $500 million of 4.375% ten-year notes. Earlier this month, we used the proceeds from these debt issuances together with cash on hand to repay and early retire all of our $1 billion notes due in October 2016 and $300 million which were due in March of 2017.

To complete the retirement of these two debt maturities, we will incur approximately $40 million in a one-time interest payment in the second quarter of 2016. Including this one-time payment, we anticipate interest expense for the second quarter to be approximately $88 million.

The result of these transactions will be an annual interest expense reduction of nearly $45 million. Starting with our third quarter of 2016, our quarterly interest expense will be approximately $44 million. With these debt transactions, we have delivered on our long-term commitment to strengthen our balance sheet.

Due to our strong cash flow and this recent debt retirement, we have greatly enhanced our financial flexibility as our net debt to EBITDA now stands at approximately 1.8 times on a pro forma basis.

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

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

one, investing behind our brands for growth; two, developing innovative products to ensure that we maintain our must-have position with our customers; three, focusing on operational excellence through our continued deployment of the Masco Operating System; and, finally, balancing our capital allocation between acquisitions with the right strategic fit and return, share buybacks and dividends.

Our operational execution coupled with our strengthened balance sheet and strong liquidity position provides us with multiple levers to continue to drive shareholder value. With that, I'd like to open up the call for questions.

Operator?.

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

Yeah, good morning everyone..

Good morning, Sam..

So, on the Cabinets business, your guidance is for 8% to 9%. It seems as though expense timing already gets you toward that high end of that range based on your guidance.

And so I'm just curious, can you walk through what the puts and takes are for the remainder of the year perhaps touching on some of the already announced cost savings as well as underlying incrementals for the Cabinets business going forward?.

Sam, as we mentioned, there was a deferral of marketing spend of about $4 million. So, that's certainly benefited us in this quarter and then we will have that expense in the following quarter. We are focused on growing this business. We're making a pivot here, and we're investing behind that growth.

So, we will be seeing further investments as we drive growth. And you can expect to model this business going forward in that 30% to 35% level of contribution margin dropdown in incrementals..

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

Yeah, we're pretty confident that the material costs have bottomed, and we are experiencing significant cost pressure from our major suppliers on TiO2 and resins as well.

I think when you look at where we're driving growth in particular with this business and the Pro channel as we have talked before, we are doing a nice job there of driving that growth. And it is lower margin for us while a great return. So, we're going to continue to invest behind that.

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

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

Thanks. Good morning, everyone, and nice quarter. First question I had was just kind of taking a step back and looking at the progress here and thinking about the 2017 goals that you've laid out.

It would appear that with all the progress and certainly the positive margin momentum that you're on your way, I just wanted to get a sense of – I think last quarter you reiterated your outlook for your ability to hit that goal.

I wanted to know if that was still the case and just kind of talk through any of the puts and takes on that goal as we sit here today relative to when you issued it about a year ago. Thanks. And also then I have a follow up. Sorry..

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

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

R&R is 80% of our businesses. Home prices are appreciating as we talked about. Demographics are improving. Affordability is still very favorable. And our capacity is in shape as we talked about in the past. We're ready for this uplift. So, we feel good. We're positive about the outlook. We're positive about 2017.

And we're committed to – and we're on track for the 2017 EPS target of $1.80 per share. We're not moving off of that..

Hey, Mike, it's John. Just maybe a couple supplemental comments to Keith.

If you look at the various components of how we built that walk from 2015 to 2017, I think we're probably coming a little bit softer in the top-line than we initially forecasted, but I think what's coming through a little bit stronger than we had initially anticipated are some of the cost-outs.

And obviously you're seeing that reflected in the performance of the Cabinet business.

There's couple other areas of small opportunity, obviously the debt refinancing that we put in probably adds a couple pennies to that $1.80 that we outlined last year as we refinanced sooner and at a lower rate than we had assumed in the forecast we provided last year. So maybe a little bit of upside to that $1.80. Not a ton at this time however.

I think we're reaffirming that $1.80 right now, and we're pleased with how we're getting here..

Nice. That's helpful. Thanks, John. I guess just secondly, you mentioned the timing of expenses both in Cabinets and Delta, and the Plumbing business. I think you said that you expect the Cabinet – that timing of expenses to impact 2Q.

Is that the same for Delta and is there any other type of timing issues that we should anticipate for the second quarter?.

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

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

Great. Thanks..

Yes..

Your next question comes from the line of Stephen Kim with Barclays. Your Iine is open..

Yes, thanks very much, guys. Good strong quarter. I wanted to ask a little bit if I could just follow up on those timing charges. I think you itemized I think $9 million or whatever, $5 million in Delta and another $4 million in Cabinets.

I was curious if we sort of back that out, the impact on the overall margin, gross margin, doesn't seem like it would be that significant, only about 50 basis points or so, which still leaves your gross margin this first quarter at a very high level.

Historically it seems that the first quarter gross margin is generally the lowest of the year, and so I was curious as to whether or not you felt that was also likely to be the case this year, or if there was something else that was likely to drive that gross margin down later in the year..

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

As you probably realized, most of the commodities bottomed in January of this year as the year got off to a pretty choppy start with the overall stock market and economic environment.

And since that time, we've seen a pretty consistent rise in both base metals, some of the hardwood, and as Keith reference add couple minutes ago, we're seeing it also in TiO2 that goes into our paint business.

So, I think, with raw materials slowly inflating, they're not dramatically inflating but starting to inflate, I think, that will add some pressure on our gross margin going forward.

That said, to your point, the first quarter is seasonally typically our slowest quarter of the year, and as we enjoy the seasonal volumes that come with the second and third quarters, I think, there's potential to have stronger gross margins as the year continues to unfold..

I would add to that, Stephen, that while we are seeing some upward pressure on the raws, our mix is holding quite well, and that's also a driver of some of that favorable gross margin. When you look at our Windows business, which is obviously a big ticket, our wellness business and spas, I think that's a good indicator of the stability of our mix.

So, there's a couple things going in opposite direction there. We think we're going to hold our mix. We don't anticipate that slipping, but we are experiencing pressure in raw materials..

Okay. Well, that sounds like it's, all things combined, going to be a pretty positive. You'll still wind up on the positive side of the ledger.

I guess my next question relates to your comment about the Cabinet incremental investments and your guidance for 8% to 9% this year in margins, which seems a little low relative to what you did in the first quarter.

I was curious if you could talk a little bit more about what you meant by pivoting to growth and if you could talk about, is that something that has changed in your view or just sort of the next step in your strategy for Cabinets and if your thinking has evolved at all about whether or not the segment is core in your opinion or not?.

As we've talked about for some time now, our focus and the team's focus in Cabinets is to improve our profitability and the quality of the earnings and get that business in shape to compete.

We've worked hard on our processes underlying how we work, we've worked hard on our product assortment, and we certainly have made significant improvements in our leadership team there. And as is often the case, I think, in situations like this, to get in shape that sometimes means you need to get better before you get bigger.

And we've done, I think, a pretty good job of doing that. So the change in focus on growth is really more of a next step and an evolution of our thinking based on how we've gotten ourselves fit and ready for the ring and ready to get in there and compete for growth.

And that's how I'd characterize it, more as a next step as we've earned the right to grow..

Okay, great. Well, thanks very much, guys. Looking forward to it.

Thanks, Stephen..

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

Hi. Good morning. Thank you.

I guess, Keith, just carrying on that last comment you made there, just to clarify, the $60 million that you detailed, John, on the walkaway business in Cabinets, does that include the actions that you took in the third quarter or is that just related to the actions from this quarter?.

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

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

So do you look at these actions that you've taken so far as being the last of the culling of the revenue? And from this point forward, once we lap that, you'd envision to be trending at least back towards market growth? That's the offensive component, or could there be more pruning as you continue to fix up the business?.

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

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

Okay, great.

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

Obviously, Dennis, the first quarter is a little bit of an unusual one just given the ramp-up towards the end of the quarter to go into the spring selling season. And so we did see very good sell-through as well as sell-in into the quarter.

As I mentioned in my prepared remarks, very strong exterior paint and exterior stain sales in the quarter driven by the favorable weather that we saw in the first quarter. And we also saw, as Keith mentioned, some – we launched some new products in the quarter; very good sell-through in that product category as well.

So as we go into sort of the second quarter, inventory levels are right where we want them to be, very consistent with where we saw them at this point last year as we go into the spring selling season..

Okay, great. Thanks. Good luck, guys..

Thanks..

Your next question comes from the line of Bob Wetenhall with RBC. Your line is open..

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

Thank you..

Wanted to ask you on the paint business, you had a lot of – it seems like there's a bunch of things going on top line, like, you had some pull-forward into 4Q, yet you still had really good growth up 9%, and it sounds like the exterior business is strong.

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

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

In the quarter that just completed, it's hard for us to estimate with extreme accuracy the effect of weather, but clearly that quarter that we just finished was one of the lightest winters we've seen nationally in a long time. So there was probably a couple points of benefit there.

As we try to figure out what that is, we look at the exterior sales and they were extremely high when you look at the quarter over quarter comps. So there's a component of that. But we expect to continue to take share, particularly in our core business, as well as we've done consistently in our Pro business.

And having said that, we do face a tough comp coming up..

Yes, and Bob, I would remind you, though, I don't think there's a ton of pull-forward into the first quarter of the year. If you recall, the fourth quarter was a relatively flat quarter for us last year and that had to do with some timing issues due to the preceding year 2014.

So I think overall, the fourth quarter from an organic basis was a pretty solid quarter..

Okay. And then just taking off that, if you're hitting a tough comp volume-wise year-over-year, so you're not going to get a lot of incremental volume growth on a gallon basis and you cited some mix headwinds and some cost pressures on TiO2.

How should we think about your operating margin moving forward?.

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

That said, hopefully as we get into the spring selling season, our MARQUEE volume has been very strong, which is a nice favorable mix for us. And if we see a better paint selling season than we saw in 2015, that kind of volume could help us negate some of those.

But generally speaking, I would think about margin pressure in the near term and the longer term in this segment..

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

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

Thanks and good luck..

I'd characterize, as we have consistently, our capital allocation strategy, Bob, is balanced. We have good generation of cash flow. And we expect M&A to play a part of our value creation as we go forward.

We're focused and continue to be focused on bolt-on acquisitions with our pipeline targeted towards plumbing and paint, although we would look at others if it helped drive organic strategies.

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

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

Your next question comes from the line of Susan Maklari with UBS. Your line is open..

Thank you. Good morning.

Good morning..

Good morning, Susan..

One thing that you've mentioned over this call is that you're definitely seeing an improved mix where you're getting consumers that are trading up to some of your better, best kind of options there.

Can you just talk about those trends that you're seeing and maybe how is that contributing to the margins that we should be thinking about, especially in Cabinets?.

I'll talk about some of the trends, and then, John, you can touch on some of the impacts on margin. Susan, it's broad-based. We're seeing consistent move-up in some of our lower-price per unit products.

If you look at faucets, we're seeing a move up in the showroom to more expensive, more featured products, both in terms of finish as well as functionality, be it our touch technology or magnetized docking or our in2ition showers, all those higher margin, higher contented products.

At that price point, we're seeing a move up as we talked about with BEHR MARQUEE. So in the lower price point range, we're seeing a mix up. In the bigger ticket items, we're also seeing it.

Our KraftMaid Vantage program is doing very well and it's helping the consumer move up in terms of wood species, the finish level, content in terms of drawer guides, et cetera. So I would characterize it clearly as broad based across the continuum. From a channel perspective, we're also seeing it. We have favorable mix in retail.

Clearly in our Plumbing wholesales, we're seeing the favorable mix. We've talked about our dealer network in wellness, and we've got a couple new spas that are out. And people are willing to pay for that value. So I would characterize the mix move-up across really all of our segments and across all of our channels and price points..

one is the commodity benefit that we've been enjoying; at the same time, the mix benefit. And it's reflecting itself clearly in our Cabinet business.

That's probably the one where it's most evident as you've seen the progression we've made in the Cabinet business over the course of the last four quarters as we launched Vantage about this time last year. So you can see the impact that business has had on the Cabinet business, and you can also see it in our Plumbing segment.

We've had pretty consistent margins from 2014 to 2015, and now in the first part of 2016, we're seeing continued margin expansion, and I think that's really attributable primarily to the mix shift and some of the volumes that we're enjoying as a result of that favorable mix..

Okay. And then in terms of Milgard, you've noted that you're gaining some share there.

How sustainable do you think that is and who do you think you're actually taking that business from?.

Milgard's got a fantastic position in the Western U.S., Susan, as I think you're very well aware. And as we grow that business in the Western U.S., I think we're taking share from a number of competitors.

Clearly, it's a highly fragmented business, and we're taking share from some of the smaller competitors, but at the same time, just given our growth, I feel like we're probably taking share from some of our more mainline competitors as well.

The Milgard team has done a great job of refocusing the business away from the production builders and really more toward remodelers and the custom builders, and so we've really enjoyed very nice growth with both of those customer segments in the last year to year and a half..

Okay. Thank you..

Your next question comes from the line of George Staphos with Bank of America. Your line is open..

First, for you, John, we always talked about the SG&A leverage that the company has been exerting over the last number of years, and once again you had SG&A as a percentage of sales down.

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

You have some initiatives to invest within in the second quarter. Is there any way to size what level of investment you're considering there or what the focal points are for that in 2Q and 3Q? Thank you..

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

What I'm most proud of particularly in the first quarter is the fact that we did a nice job of holding SG&A as a percent of sales or having it decline despite the fact that we're investing in some of the programs that impact SG&A.

For instance, I think we are now up to about 150 Pro sales reps in the BEHR organization to call on the Pro-oriented contractors. So incremental costs, yet the fact that we were able to bring the SG&A as a percent down really I think it gives a sense of how the organization is responding to our desire to hold costs constant as best we can.

As we grow the business, will we have to invest some in SG&A? Yes, I think we will.

But I really think the mantra that both myself and particularly Keith are trying to get across to the organization is that, this is the way that we can really help create shareholder value is if we can grow the business and holding our costs down, good things happen to the bottom line and to profits.

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

In terms of paint investment, George, we completed our rollout of the color centers in 2015, so that's done. And we like what we're seeing from that. The in-store customer consumer experience is getting very favorable feedback on that. But that investment is done.

In terms of the promotional environment, we're seeing a bit of a tick up in the promotional levels as our competitors support recent launches. We certainly had good success in our promotions that we did last year in July 4th and in Labor Day.

And I think that you can think about our investment in advertising going forward this year to be similar to what we had last year..

Thank you, Keith. Good luck in the quarter..

Thank you..

Thanks, George..

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

Hi. Thanks for taking my questions, and nice job in the quarter. I wanted to go back to Cabinets and maybe kind of frame the margin discussion around some of the long-term objectives.

And you had outlined 7% to 10% I think last quarter, you stressed that that wasn't necessarily a ceiling, and clearly the 8% to 9% today, and people previously pointing out that that may even sound conservative. It doesn't take that many years of 30% to 35% dropdown to get back to a mid-teens margin in this business.

So how are you thinking about just the next couple of years and the opportunity, especially with some of the improved mix and what's realistic as far as the path for that business?.

I think working this business over the next couple years to mid-teens is realistic, and we're driving in that direction. And importantly as I mentioned earlier, I really like the team there. And they're doing a great job, and the nature of the improvements that we're seeing are broad based. It's SG&A. Certainly it's manufacturing, conversion costs.

We're working a lot on our wood yields and our finishing yields. We've invested into better quality system and our quality costs are coming down. And we're doing it – Joe and the team there are doing it with a process orientation. So, as I look at how we're doing it as far as what's been done, I'm confident that it's sustainable.

And now as we start to work harder on our growth initiatives and we're seeing the results of that – KraftMaid is the number one brand in repair and remodeling, and Merillat is the number one brand in new construction. As we get ourselves back and get that momentum back, I think it's sustainable.

So I do believe that those margin targets that we talked about in a couple of years are doable..

That's great. Thanks. And as a follow up, just those growth investments, can you elaborate a little bit more on now that you – so you've earned the right to compete for growth. I mean, you've clearly been focused on pruning some parts of the portfolio in Cabinets.

But what are some of the specific areas that you are looking to invest more heavily in, in terms of growth initiatives?.

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

And then with that, as you salt (48:27) these launches into the channel, you have some launch expenses; certainly there's a component of advertising that's in there, but primarily it's more on the launch side.

Outside of assortment, looking at the channel, as we grow, we have significant headroom, we believe, in share of wallet of our existing dealer base. And to help to drive that and to motivate that, there's some expense that you incur in terms of incentives.

And we also believe that there's spots, as we look at our national coverage, where we can either get more dealers or get higher quality dealers. And to start up new dealers that takes some money. So primarily, the investments are around product assortment enhancements and channel enhancements..

Okay. Great. Thank you..

Your next question comes from the line of Josh Chan with Baird. Your line is open..

Hi. Good morning and congrats on a great quarter.

We talked a little bit about weather in the Decorative business, but I was just wondering about what are your thoughts on how much weather might have helped in Q1 and maybe what trends you're seeing in April and that trajectory there?.

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

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

Okay.

Any color on whether the trajectory has continued into April?.

On the – I'm sorry, the weather or....

The demand trajectory..

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

Yeah, we have – there's no – I think, Josh, you're talking about weather here. I think we're out of it here in April – pretty clean..

Okay. Great. And then my other question is, you talked briefly about raw material inflation through the rest of the year.

How would you kind of characterize pricing ability and the ability to offset that over time?.

It depends on the product category, but generally speaking, if you're thinking about the long-term trend, we are able to get price over the long-term. Probably the place where it's most critical in the near term is in our Window business.

As I think you may be aware, there was some glass plants that went down in the Western U.S., and so glass was on allocation in the Western U.S. And so we have been passing through price here in the first quarter with our Milgard business in the Western U.S. In the other product categories, it's kind of on a case-by-case basis.

So we did get pricing in Europe in Q1 as well and our Plumbing business..

Okay. Great. Thank you for your time..

Yep..

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

Hi. Good morning. A follow up to the trade-up (51:45) question you answered earlier.

Can you compare the product mix you're selling now compared to where you were when housing was more normal historically? Thus, I'm asking, are you still cyclically depressed in terms of product mix?.

So you're asking, Mike, just so I'm clear, you're asking maybe compared to 10 years, 11 years ago and what we're seeing today versus what we're seeing then?.

Yeah, basically how much more room is there in terms of product mix to get to a more normalized mix within portfolios like Plumbing and Cabinets?.

I think we're pretty close to normal right here..

Yeah..

Clearly when we went through the crash, there was a reduction in content per unit, cabinets per house, bathrooms per house, houses got smaller, et cetera. And there was a mix down. I think we've come back from that, and I would say that we're at about normal levels..

Got it..

It's tough to put a very finite metric on that, but, yeah, it feels like we're back to the normal levels..

Okay.

What are you doing now, like what stage are you in the Pro paint initiatives? Anything that you're working on right now to keep growing that?.

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

So we're continuing to do that on all fronts.

We're putting in more resources in terms of focused Pros in the stores; we're putting in focused hub stores and high-speed tinting capabilities in our distribution centers so that we can deliver large quantities to the job site when required; we're working on the experience of the Pro in the store together with Home Depot.

So we're continuing to move a ton of levers to drive this demand and it's working..

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

Okay. Thank you..

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

Thank you. Just one final question about the pivot to growth in Cabinets.

Do you think your success will come more from the big box channel, the dealers? What area are you really focusing on first looking for growth?.

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

It tends to be higher mix, and it tends to be a better channel for us. We think we have and we know how to grow in that channel. Now that we've got our assortment and our performance and the quality of the earnings back, so our focus is on the dealer, Keith, but of course we're not sleeping on big box..

So looking at the dealers, you referred in another answer on assortments.

Do you not need to improve the assortment particularly towards the upper end of the range? I mean, you got out of countertops which is a little bit different business, but is there going to be investment that's going to need to come there in order to hit that market harder?.

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

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

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

So I think that being said, we're not going to stop being on trend on some of the higher end finishes and continue to work in that area. So I think we're okay with KraftMaid and the upper end. We are working on the lower end, and we're working to continue to improve our Merillat assortment.

The Merillat dealers are back and growing with us now, which I'm really happy about. The performance issues that we had are behind us, and then the long memories are starting to get behind us as well. So I don't know so much that it's targeted on the upper end as it is more broadly across the whole spectrum..

Okay. Thank you..

Our final question comes from the line of Phil Ng from Jefferies. Your line is open..

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

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

Well, I'll meet your expectation, Phil, and not give you much. This deal hasn't gone through yet. It's very early in the transaction. So we're pleased with our paint brand. We think we're a tough competitor, and not a lot of comment on that.

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

Got you..

I would add to Keith's comments and say, hey, look, we think we've got a very good recipe for success within our paint organization. While we pay attention to the industry broadly, we're very focused on executing on our strategy of growing our paint business with our channel partner The Home Depot.

And so while we're not blind to competition, we're focusing harder on our DIY products but we're also focusing very hard on our paint initiative because we think we've got great opportunities to continue to grow our paint franchise for the years to come..

Okay. That's helpful. And you mentioned Home Depot a big partner of yours. I believe they acquired Interline Brands last year which is a big Pro channel guy.

Is that an opportunity down the road having more – a larger avenue to sell your business on the Pro channel side and would you be open into targeting a new channel outside of Pro as well as DIY down the road? Thanks..

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

Okay?.

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

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