David Chaika - Masco Corp. Keith J. Allman - Masco Corp. John G. Sznewajs - Masco Corp..

Philip Ng - Jefferies LLC Neal BasuMullick - JPMorgan Securities LLC Stephen East - Wells Fargo Securities LLC Garik S. Shmois - Longbow Research LLC Michael Dahl - Barclays Capital, Inc. Timothy Ronald Wojs - Robert W. Baird & Co., Inc.

Trey Morrish - Evercore Group LLC John Lovallo - Bank of America Merrill Lynch Michael Wood - Macquarie Capital (USA), Inc. Keith Hughes - SunTrust Robinson Humphrey, Inc. Robert Wetenhall - RBC Capital Markets LLC Adam Baumgarten - Macquarie Capital (USA), Inc..

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

Thank you, Kim, and good morning. Welcome to Masco Corporation's 2017 first quarter conference call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer.

Our first 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. Please limit yourself to one question with one follow-up. 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 risk and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We describe these risk 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, earnings per share, or cash flow 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 our President and Chief Executive Officer, Keith Allman..

Thank you, Dave, and good morning, everyone, and thank you for joining us today. Please turn to slide 4. We're off to a strong start in 2017. We delivered good top line growth and saw strength across our end markets, channels and price points that we serve. Our top line increased 5%, excluding the impact of currency.

Our operating margin increased 60 basis points to 14.4%, largely driven by the outstanding performance in our Plumbing segment this quarter, particularly in North America. We continue to leverage our top line growth across the organization into greater margin expansion through our operating leverage and cost productivity initiatives.

Importantly, our adjusted earnings per share grew 28% to $0.41 per common share. I'd like to provide you with some additional insight into the drivers behind each of our segments' performance. Let's begin with Plumbing.

Our portfolio of Plumbing businesses continued its outstanding performance by growing sales in North America by 9% and growing sales internationally by 6% in local currency. With our strong operating leverage and a favorable price to commodity relationship in Plumbing, this volume dropped substantially (3:24) to the bottom line.

Of note, Delta Faucet Company achieved record sales and operating profit for the quarter with very strong growth in its wholesale channel. Delta's luxury high-end Brizo brand continued its outstanding performance in the wholesale channel with strong double-digit growth.

Outside of North America, Hansgrohe's growth was led by continued strong performance in Europe, Asia-Pacific, and the Middle East. In our Decorative Architectural segment, we achieved 2% growth against a difficult 9% comp last year.

Our Pro paint sales grew double digits and significantly outpaced the market as our mutual efforts with The Home Depot continued to drive share gain in this channel. We remain committed to investing behind this important growth initiative.

Additionally, we benefited in this segment from our innovative Liberty Hardware shower door program this quarter, which is now fully launched nationwide. Turning to Cabinets, this segment is a good example of our focus on developing and leveraging our talent across the organization.

As you know, for the past few months, we've been utilizing Joe Gross' impressive turnaround leadership on a temporary basis at Milgard, our West Coast Window business, while he has also been serving as President of Masco Cabinetry.

He's done a fantastic job at this double duty, and was recently promoted to the position of Masco Group Vice President for both Cabinetry and Windows. Gordie Fournier, formerly Masco Cabinetry's Chief Financial Officer, was promoted to the position of President of Masco Cabinetry.

Gordie was instrumental in working with Joe in the highly successful turnaround of Cabinetry and I'm confident that Cabinetry's impressive momentum will continue under Gordie's leadership. Turning to the segment's performance, our new products launched in the dealer channel this quarter were very well received.

These new products, under both the Merillat and Quality brands, will support growth later in the year as they gain traction by providing consumers with more options at an affordable price.

In the retail channel, our Cabinet team delivered another strong quarter of growth as our KraftMaid programs, with our channel partners, continued to drive consumer demand. In our Windows segment, we returned to profitability in the quarter as the team rapidly applied its business improvement plan to reduce costs.

We expect that this segment will achieve mid-single-digit operating margins for the full year, a significant improvement over 2016. On the subject of capital allocation, we continued our share repurchase activity in the quarter by buying back 2.8 million shares.

We've now repurchased almost 40 million shares against our 50 million share repurchase authorization, returning over $1 billion to shareholders through share repurchases and thus delivering on our commitment to drive shareholder value.

Lastly, at our Investor Day in 2015, we set a lofty target to more than double our earnings per share and achieve $1.80 in earnings per share for 2017.

Based on our continued execution of our strategies and our strong start to 2017, we are now updating our target for earnings per share in 2017 to be in the range of $1.90 to $2.00, exceeding our target of $1.80 that we set two years ago. 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. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to slide 6, we continued on our positive momentum coming out of 2016 with a solid start to 2017.

The first quarter of 2017 was our 22nd 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 $22 million, as the U.S.

dollar strengthened against both the euro and the British pound. North American sales increased 5% in the quarter due to strong demand for our repair and remodeling products across all channels of distribution and across the price continuum as we continued to experience strong consumer demand for our better and best product offerings.

As a reminder, repair/remodel activity represents approximately 83% of our total sales. International sales increased 5% in local currency as our international Plumbing businesses continued to drive growth. Gross margins expanded approximately 120 basis points compared to the first quarter of last year to 34.3%.

Our SG&A, as a percent of sales, increased this quarter by 60 basis points to 20% of sales. This was primarily due to the strategic growth investments we made in 2016 such as the 200 new Behr hub store employees we hired last year. We will leverage these investments throughout 2017 to drive profitable growth.

And we delivered strong bottom line performance as operating income increased 8% to $255 million with operating margins expanding 60 basis points to 14.4%. Our EPS was $0.41 in the quarter, an improvement of 28% compared to the first quarter of 2016.

Starting with the first quarter of 2017, our adjusted EPS calculation will assume an expected tax rate of 34%. Reduction from our previous guidance of 36% is driven by the adoption of a new stock-based compensation accounting pronouncement and the continued execution of our tax-planning strategies.

Lower tax rate benefited our earnings per share in the first quarter by approximately $0.01, and we anticipate that it will increase EPS for the full year by approximately $0.06. Turning to slide 7, our Plumbing segment continues to deliver outstanding results.

Segment sales increased 8%, excluding the impact of currency, driven by growth in our faucets, showers and spas. Foreign currency translation negatively impacted this segment's sales by approximately $15 million in the quarter.

Our North American sales grew 9% in the first quarter as we experienced strong consumer-driven demand for our innovative brands with both our wholesale and large retail customers. As Keith mentioned, Delta delivered another record quarter of sales and profits.

Additionally, our spa business continues to outperform the competition as Watkins leverages its strong dealer network, innovative new products and industry-leading brands. Our international Plumbing sales increased 6% in local currency as Hansgrohe continues to outperform and benefit from investments in brand, design and innovation.

Revenue growth in the first quarter was aided by a relatively easy comp from the first quarter of 2016 as sales were pulled into Q4 of 2015. Additionally, I want to remind you that we face a difficult comp in the second quarter as this segment's revenue grew 10% from the second quarter of last year.

Operating profit for the segment increased 19% in the quarter, driven by incremental volume and a favorable price commodity relationship. Turning to slide 8, the Decorative Architectural Products segment grew 2% despite facing a difficult 9% comp from the first quarter of 2016.

This performance was driven by another quarter of strong double-digit growth of our Behr Pro business and solid performance of Behr MARQUEE, our highest price point offering.

Liberty Hardware also contributed to the top line growth as they benefited from the expansion of its innovative shower door program, in addition to growth in its core hardware business.

Operating income decreased 4% as increased volume was more than offset by the strategic growth investment related to the staffing of the 200 new hub store employees with Behr Pro reps in 2016, the timing of additional advertising expense, and a slightly unfavorable price commodity relationship.

Turning to slide 9, in the Cabinetry segment, sales declined 2% in the quarter due to the deliberate exit of certain low margin builder direct business in the United States and in select low margin accounts in our UK Cabinet business. These actions, in aggregate, reduced segment sales by approximately $16 million (13:24).

As we mentioned on our fourth quarter call, this exit will be completed in the second quarter and will impact the second quarter's revenues by approximately $5 million. Our core business performed well in the quarter. KraftMaid had strong performance in the retail channel resulting in high single-digit growth and year-over-year share gains.

In the dealer channel, we drove low single-digit growth through increased volume and favorable mix as our KraftMaid and Merillat brands continued to offer new styles, finishes and features that resonate with our dealer base and consumers.

Segment profitability declined in the first quarter by $7 million, driven by $5 million in launch costs related to the new product introductions that we discussed on our fourth quarter call.

Finally, I'd like to mention that we will not be affected by the recently announced tariffs on Canadian softwood lumber, as we do not purchase any material amounts of Canadian softwood lumber.

Turning to slide 10, our Windows segment sales increased 3% in the first quarter, excluding the impact of currency, driven by growth in Milgard, our leading Western U.S. Window business. Milgard's continued growth was driven due to positive mix shift toward our premium window and door product lines and favorable pricing.

Excluding the $6 million negative impact of a stronger U.S. dollar, our UK Window sales increased 7%, driven by improved mix and favorable pricing. Segment profitability doubled in the quarter to $6 million over the prior year, driven by cost savings initiatives and improved mix.

We're pleased with the progress that Joe and his team have made on Milgard's improvement plan and we continue to be on track to deliver improved results in 2017. Turning to slide 11, we ended the quarter with approximately $900 million of balance sheet liquidity.

Working capital as a percent of sales increased 110 basis points versus the prior year to 14.4%, and during the first quarter, we continued our initiative to create shareholder value by repurchasing 2.8 million shares valued at approximately $92 million. And with that, I'll turn the call back over to Keith..

Thank you, John. I'm pleased with our team's execution and our start to 2017. The fundamentals driving our business are strong. Demographics, namely the large Millennial group, are increasingly favorable and should drive household formations and housing for years to come.

Home prices are appreciating, up over 5% year-over-year, boosting consumers' confidence to invest in their homes. Housing turnover, a leading indicator for our business, is up over 5%, reaching an annualized rate of 5.7 million units this past month, the highest housing turnover rate in more than a decade. And U.S.

residential housing stock is aging, a key driver of repair and remodel spending with 70% of homes in the United States now over 25 years old, an increase of more than 19 million units in the past 10 years. The strategies that we've laid out last year to leverage these fundamentals are working.

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

Our operational execution, coupled with our strong balance sheet and liquidity position, provides us with multiple levers to continue to drive shareholder value and outperform the industry. We hope to see many of you at our Investor Day on May 16 in New York City when we will update you on our progress towards our goals and our longer-term strategy.

With that, we'll open the call up for questions and answers..

Your first question comes from the line of Phil Ng. Your line is open..

Hey, guys. Your Plumbing margins were actually quite strong. How much of that upside was driven by mix? And then, from a price/cost standpoint, I think in your prepared remark you said it was favorable.

How should we think about that dynamic over the course of the year, just because metal prices are up dramatically?.

Hey, Phil, good morning, it's John. Yes, so, you're right. Mix was a little bit of a benefit for us. I think the strongest benefit in the quarter came from volume, just because of the strong volume in both Delta and Hansgrohe.

In terms of commodities, we are seeing a little bit of inflation in copper, but recall it takes about two quarters for any inflation to flow through to our P&L. So, we still had a little bit of a benefit here in Q1. I will tell you that we have not been trying to put pricing into the market, either, to offset some of that commodity inflation..

Okay. And just one last one for me, just from a capital deployment standpoint, you guys are actually generating a lot of cash. There was obviously some paint assets that were available, which looks like wasn't a good fit. But, talk about M&A going forward.

What are some of the pockets that look compelling to you and how you think about evaluation? Thanks..

Phil, we really haven't changed our strategy with regards to M&A. We're actively seeking inorganic growth opportunities. It's important, obviously, to have the right strategic fit and our portfolio can generate the proper returns.

So, that's fundamentally the main criteria that we're evaluating against in terms of strategy and return on invested capital. Our pipeline is large. It's getting larger, active, we measure both the size and the movement of the pipeline. There's many opportunities out there, frankly. It takes time to cultivate them and we're going to be patient.

And it's important that we balance our M&A activity with our share repurchase activity, depending on the opportunities in each category. So, we look at the opportunities.

We've certainly looked at what came out of the Sherwin-Williams/Valspar divestiture, but it wasn't exactly the fit that we're looking for, for various numbers of reasons and we're continuing to move. It's an important part of our strategy..

Okay, thanks a lot, guys..

Your next question comes from the line of Mike Rehaut. Your line is open..

Hey, guys. This is Neal BasuMullick on for Mike. I guess going back to the Plumbing margins, you'd mentioned there was some incremental spend related to a trade show this quarter, but yet you had strong margins despite that.

Was it more so due to timing? I guess, what is it that you're doing right, besides what you mentioned?.

Yes, so we did have about $4 million, $5 million in trade show expense this quarter that we called out in our fourth quarter call 90 days ago. That said, I think that what was favorable in the quarter was the strong volume that we experienced, and it was pretty consistent volume across both our wholesale and large retail customers.

So, I think that's – because this segment generates about 30% dropdown on incremental volume, that was a big factor in what helped us, aided by the other things that we mentioned, favorable mix and a slightly favorable price commodity relationship. Also, aided was some cost productivity initiatives that we drove in the quarter, as well..

Just to add on a little bit, our Plumbing segment is really humming, to put it simply. The teams there are executing the Masco Operating System quite well. John mentioned that we're able to get some price in the market ahead of some of this commodity inflation that we're seeing, and that's helpful, particularly in Europe.

We are investing in growth and when we look at the full year in 2017 we'd expect our margins to maybe see a little bit of modern expansion, in spite of these investments, because of how well we're doing in operations and a strong dropdown that we have..

Okay, that makes sense. I guess a follow-up on investments.

The hub store initiative, how has the outlook changed, if at all? And do you see maybe more potential for future investments there?.

We're going to continue to invest behind our Pro growth initiative, our DIY initiatives. This is a good segment for us and it certainly is worthy of our money and generates a great return. So, we're going to continue to invest behind this category. In terms of specifically the hub stores, we've got 200. We've got them all hired.

We're bringing them up to speed. There's a bit of an investment in front of the revenue here, and so we're going to work these into a very solid payback for us and then we're going to continue to investigate with our partner, The Home Depot, where the best location is for further investments to grow. This is a good initiative for us..

Okay. That's all for me. Thanks..

Your next question comes from the line of Stephen East. Your line is open..

Thank you and congratulations, Keith and John. Keith, if you look at, you've got the highest first quarter margins since 2001.

Can you just talk a little bit about what's driving that? Obviously, you've talked about volume, but I know you've done a lot in the past, so I'm just trying to understand how independent this is versus what commodities are doing, et cetera.

I don't know where your capacity utilization is today versus in the past, that type of thing, so maybe just sort of a broad-brush explanation of how you all are driving what you're driving..

Well, I think we've talked a little bit already on Plumbing where we've got a little bit of price in Europe ahead of the commodity increase, so that's helping a little bit.

But fundamentally, I think it is about incremental dropdown on our volume and the success that we're having with our Masco Operating System to drive continuous improvement across the entire supply chain, from sourcing to operations, manufacturing, efficiencies, and the like. And that, of course, leads into fixed cost improvement.

We intend to maintain our diligence and our control in SG&A. As we've talked about, we're going to – my favorite investment is to invest in the core and we're going to continue to do that, so we'll work our improvements and our leverage on those growth investments throughout the year.

When we think about where we'll end up, maybe a little bit of modest operation – or excuse me, margin expansion in the back half and for the full year is about how we're thinking about it. And that's pretty good, I think, considering where commodities are and as much as we're investing into the business for growth..

Okay. I appreciate that.

And then, just following on that raw material inflation, you got out ahead of it a little bit on Plumbing, but as you look forward through 2016 (sic) [2017] (25:37) are you seeing more inflation, have you seen announcements, is more inflation coming through, and will you be able to stay in front of it, if so, or is this going to be some lag as you try to catch up to the raw material inflation?.

Yes, Steve, you said 2016, I assume you meant 2017..

2017..

Yes, we are seeing some inflations in copper and zinc and across some other commodities, and as we've talked about in the past, over the long-term, we feel that our ability to basically come out as flush between price and commodities is very strong due to our operational performance that I talked about, the strength of our brands, our innovation pipeline that gives us that must-have position on the shelf.

So, there's a number of things that help us feel good about overall price commodity mix, and I think we'll be able to offset that, as I talked about overall, with some slight margin expansion as we earn our way into leverage on our growth investments throughout the year..

Yes, Stephen, this is John, just to follow up on Keith's comments. There might be a little bit of lag, depending on the segment, depending on the quarter, where we might be a little bit behind the inflation versus price.

But, we feel like, to Keith's point, that we can maintain it over the course of the longer-term, and that's really what's reflected in the $1.90 to $2.00 that we put out earlier today..

Okay. Thanks a lot..

Your next question comes from the line of Garik Shmois. Your line is open..

Thank you. Just wondering if you could speak a little bit to the paint business and outside of Pro, and you called out MARQUEE, as well, but what are you seeing just on core, I guess DIY sales? I think some of your competitors were speaking to some sluggishness in that category this last quarter.

Did you see that and what is your expectations moving forward?.

Yes, Garik, recall that we were up against, and I think both Keith and I mentioned in our prepared remarks that we were up against a tough 9% comp. And you reflect back on what took place last year, we had very strong exterior paint sales in the first quarter of 2016 due to some very favorable weather conditions.

While the weather was still pretty good, and you never really like to cite weather, we did have some impact on our exterior paint sales here in the first quarter, no surprise to anyone. But overall, our gallons were up modestly Q1 versus – Q1 of this year versus Q1 of last year. So, feel good about how we played in our core DIY market..

Just to add on to that a little bit to John's comment.

As he mentioned, we think that the DIY market was down slightly in the quarter, mainly due to some of the – specifically in the weather-sensitive categories, around stain and exterior, but we believe we've outperformed the market, and then when you couple that with our DIY performance, we feel good about it – or excuse me, our Pro performance..

Okay, thank you.

And then just as a follow-up on Cabinets, you had some compared headwinds in the first quarter, profitability was down because of that in Q1, but what's your expectation moving forward through the rest of the year in that business with respect to profitability and margins?.

We think we'll see some margin expansion from 2016..

Garik, recall in our first quarter 2016 call, we identified about $4 million of underspend in Q1 of 2016, so slightly inflated margins a year ago. And the $5 million of investments this year, you know, margins were pretty well flat year-over-year..

Your next question comes from the line of Scott Radnor (29:38). Your line is open..

Hey, good morning, Keith and John. Question on Cabinets. If you exclude the exited sales, your overall segment is running about mid-single digits. I think that's been pretty consistent with the disclosures you've provided the past few quarters.

Within the guidance, should we see that type of growth in the back half of the year when those exited sales are no longer in the comparisons?.

Yes, Scott (30:04), that's what we're anticipating at this point, yes..

And then when we think about the margin in that segment, I know you'd specified nothing on the softwood lumber side, but there were also tariffs on imported Chinese plywood.

Could you maybe just talk to how there may or may not be an impact on the cost side?.

Yes, that's still yet to be finalized at this point. We do think that that will have a, at this point, based on what we know, a several million dollar impact. So, we'll see. I mean, I think we're still driving to low double-digit margins..

Got it. And then maybe just squeeze in a quick one, last one in. John, the international cash is about half or so of your what's on the balance sheet.

Could you maybe talk to how you could create value with that cash? Whether it is repatriation or M&A?.

Absolutely, Scott (31:02). So, it really depends on what tax policy comes out of Washington over the course of the coming months as to what we do with it. But, there's a couple of things that we could do with it.

If we make an international acquisition, that would be anything outside of the U.S., whether it's Canada, Mexico, or anywhere else in the world, we could use that cash to make such an acquisition and not pay any tax on that cash, obviously.

The other thing that we're looking at is to the extent that tax reform does take place and there's an ability to bring that cash at a very attractive cash rate, we may look to do that, depending on what M&A activity is bubbling up in our pipeline at that time..

Great, thank you..

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

Hi, thanks for taking my questions. One question on paint side. A lot of focus on the price/cost relationship in paint over the past quarter, both for you and your competitors.

And clearly, I think you're demonstrating that there are levers through which you can still drive very strong operating margins, and wondering if you could just lay out what your expectations are for the year now, as you think about starting to leverage the hub store investments, but then also potentially facing some greater material headwinds.

Just what should we expect from paint margins?.

Hey, Mike, this is Keith. When we look across the pluses and the minuses and contemplate the growth investments that we're making and the time that it's going to – there's some investments, as I talked about last call and this one.

Those investments are a little bit ahead of the revenue, so we've got to drive the volume, but we fully expect to do that throughout the year and get them to pay off.

We are and expect to see some commodity increases in TiO2 and some of the inputs into resin, but we also have a very strong brand and a strong innovation pipeline that gives us some favorability with regards to where we are in that price/cost relationship.

Overall, when we look at where we think the year will come in, we're expecting some, I would call it, modest to moderate compression on our margins, and we're at a very high level, but we expect to finish the year above the margin in terms of the long-term guidance that we've talked about in this segment..

Thanks. And shifting over to Windows, starting to see the signs of improvement and I think you mentioned that Joe's taking over as Group President officially.

Can you talk about what your expectations are for Windows margins? I think you laid out mid-single digits for 2017, but as you look at the potential for improvement over the next two years to three years, what kind of the task is for the team there?.

Well, we really haven't changed our long-term outlook on that. We call it the 10% to 13% margin expectations long-term for this business. It's going to take us some time to get there, but you know, we might – Joe's doing a great job. The team, frankly, is pulling point together very nicely. They are behind Joe.

It's a nice team that we have out there and we're going to work hard to get back to those levels or get to those levels as quickly as we can..

Okay, thank you..

Your next question comes from the line of Tim Wojs. Your line is open..

Hey, guys, good morning. Nice job..

Thank you..

Thank you..

I guess just going to the international business, I think EBIT margins were down there year-over-year for the second consecutive quarter.

Is there a – can you talk about any investments that you're making in the Hansgrohe or is there any sort of different price/cost relationship that's happening internationally versus in North America?.

Yes, Tim, there was a little bit of investment in Q1 across the international businesses. One was this international trade show that we go to that cost us $4 million, $5 million in the first quarter. So, that's a component of it.

And then similar to some of our other businesses, we're just making some small investments in management and some growth investments that – the four other small businesses that we have over in both UK and Germany. So, it's just some small investments that we're making across those businesses..

Okay.

And then just maybe bigger picture in the paint business, I mean, are you seeing – there's been some speculation that there's just a structural change in the dynamics between Pro and DIY and I'm curious what your thoughts are on that, if you're seeing just maybe a lot more pressure on the DIY market as people maybe turning towards more professional painting..

We've heard that, Tim, from others in the market, and our view is that while that may be a near-term phenomena, our view is that as the 90 million Millennials come through the system here and start getting into homes, whether they're multi-family homes or single-family homes, that they're going to be a little bit cash-strapped with their student debt and the like, and so therefore an easy home improvement initiative to undertake is painting your house.

And they're more likely to be DIY painters than do-it-for-me painters. So, yes, we think while there might be a near-term – short-term issue, longer-term the dynamics play in our favor..

Great. Good luck on the rest of the year..

Thank you..

Thank you..

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

Hi, guys. It's actually Trey on for Steve. Thanks for taking some time for our questions. So, first I wanted to go back to your guidance of $1.90 to $2.00. You talked about it being a $0.06 benefit due to tax for the year.

I was wondering what the other pushes and pulls are that caused you guys to change your guidance by, call it, $0.09 at the midpoint ex tax?.

Yes, I think a couple of things, Trey, that we've been seeing in the business over the course of the last several quarters and that's the continued strength we're seeing really across the business, in particular, Plumbing, as Keith mentioned early, is performing at an extremely high level.

Then as you look at some of the other businesses, the sustainability and the improvement in our Cabinet operations there, and we feel very confident about how it will perform in the coming quarters, particularly once we get through the exit of this low-margin builder direct business.

If you look at our paint business, again just continued solid performance from the Behr team and what they've been able to execute on both the DIY side as well as the Pro side in that business. So, that gives us a lot of confidence.

And then we really are impressed with what Joe and the team are doing at Milgard to get that Window business turned around.

So, if you think about each of the businesses and how they are performing, each is performing at a slightly higher level than we had initially anticipated, and so that gave us the confidence to raise our view of our performance for the balance of the year.

You couple that with the $0.06 benefit from tax, and that's how you end up between that $1.90 and $2.00..

Trey, you may recall last call we talked about being very confident that we would exceed our $1.80 target. We felt that it was prudent to come out with some more clarity around a range of outcomes, particularly to serve as a jump-off point for our Investor Day when we're going to talk about our long-term growth strategies..

Got you. Thanks for that. And following a bit more on paint, you cited that Behr MARQUEE was definitely a benefit in the quarter.

I was wondering if you could potentially quantify what better margin, the high-end Behr MARQUEE has against the normal Behr brand? And also, if you could, how much did raw mats impact the Decorative Architecture business as a whole in the quarter?.

Yes, Trey, just given the unique relationship that we have with a very large customer, we don't disclose those types of items, but appreciate the question..

Your next question comes from the line of John Lovallo. Your line is open..

Hey, guys, thanks for taking my call. First question is on, I guess, on the Milgard restructuring effort.

Can you give us an idea of just kind of some of the things that Joe has accomplished so far? Maybe, kind of what's left to do here, and when are you anticipating that you'll have this thing wrapped up?.

Well, we've really attacked it. Joe's organized a plan that touches across many fronts, so we've reorganized the reporting relationships and the structures.

What really happened with this business is it's changed quite dramatically from where it was say five years ago or six years ago, where we were mainly a builder line of windows making, let's call it, open to mid-price point range products and very much consistency across the factories.

And then over time, that's changed to where now we have gotten a much, much broader assortment focused, frankly, on repair and remodeling, which is good for us, more steady business, more repeatable business, higher margin business. So, it's all positive, but it did induce some change over time into the requirements of the supply chain.

So, there was a significant amount of work that Joe and the team have done and continue to do with regards to dialing in the supply chain that is comfortable with increased SKU count and proliferation, if you will, of a larger assortment to go after DIY. And we've made some changes to the team.

I would tell you that we're recruiting and are very close to landing a very talented executive to be the President for that business unit.

And the reason for Joe's promotion is obviously commensurate with his performance that he's demonstrated and the way he's done it, his prowess with the Masco Operating System, but also a strong desire to want to continue and have continuity across these two businesses.

And Joe gives us that, so we're excited about it, and Joe's going to do a great job..

Okay, that's helpful. And then any updated thoughts around currency? I think you guys had outlined about $100 million hit to revenue in 2017. It looks like some of the rates have moved in your favor.

Any updated thoughts there?.

Yes, no, we continue to look at about $100 million. No, you're right, John. If currency rates stay, that will probably come down a little bit off of that..

Okay. Thanks, guys..

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

Hi, good morning, Keith and John. I understand the tough comp in the paint gallon growth that you had this quarter.

I'm curious if you can give us any color in where that gallon growth is either tracking now at the start of 2Q or maybe where you're betting in your full year guidance in terms of gallon growth for paint?.

Mike, we've kind of walked away from giving intra-quarter numbers, just because of some of the volatility that can be induced. So, not much to comment in the quarter. I think, for the full year we do expect, again, a continued modest gallon growth over the course of 2017..

Okay. And you had called out incremental investment in Cabinets and Plumbing. Did you have any in paint this quarter? And just longer-term, is there any room for any more product expansion in paint? I know you've been pretty active over the past decade really there with rolling out new products..

Yes, I'll take the first part of that and I'll let Keith talk about the new products. So, yes, we did have a little bit of incremental investment. That's related to the – it's really the waterfall effect of the hub store investments that we made in the first part in the second half of 2016.

So, we'll still feel the effects of those really pretty much through all of 2017, though it should be diminishing effect as the year rolls out..

On the innovation side, we've really been very proud of Behr and just building the team out there in terms of their steady pipeline of innovation that they've been able to deliver on, whether it's on the merchandising side with the Color Selection Center, to Paint & Primer in One, to DECKOVER.

I mean, the list goes on and on with what they have been able to do. And as we review and look at the pipelines out there, we remain confident, and I would definitely not tell you that there's no more new products to be developed in the coatings space and Behr is going to be an active part of that in the industry..

Okay, thank you..

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

Thanks. Going back to Windows, you had talked about a goal of getting to mid-single digits in terms of EBIT for this year and I think longer, more like 10%.

Are those goals still achievable?.

Yes, I would say 10% to 13% on the long-term, and yes, mid-single digits is what we're going to get..

And I think there was an ERP issue last year that (44:37) cost in addition to the other problems you highlighted earlier.

Is that now fixed?.

Well, the ERP issue really involved the rollout to one of our factories and we've got that behind us and that factory is running very smoothly. In fact, we've started to roll that out to other factories. We had a rollout to our Dallas factory in the quarter and it went flawlessly. So, yes, we're in good shape there..

Okay. Thank you..

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

Hey, thanks for all the color. I guess we can skip the Investor Day. So, great quarter. I just had like kind of a cleanup question. Would it be okay just thinking about 2017, and again this is for Mr.

Sznewajs, kind of like cash flow from operations, $750 million and CapEx at $150 million and free cash flow of $600 million as a ballpark just to think about your firepower for M&A?.

Yes, Bob, I think we've got CapEx of about $200 million for the year, so probably a little bit higher than that. But, I think your net number that you calculated is probably pretty much in the ballpark..

Got it.

And are you having increased working capital intensity in the quarter?.

Bob, we did have a little bit of seasonality going into the spring selling season, so I think our folks stocked up a little bit in order to meet anticipated demands, but I think that over the course of the year, that will tail off, and we'll get back to more normalized levels..

Got you. And just one kind of big picture question and then I'll hop off.

If you're thinking about domestic versus international markets and you look at the strength of domestic Plumbing versus Hansgrohe, how'd you qualify kind of like domestic R&R? It seems very robust, both in paint and Plumbing, contrast that with kind of what you're seeing in European markets and how you just – there's less clarity into demand side of the equation over there, what are you seeing on the ground and how do you think that evolves during the rest of the 2017 for Europe and international? Thanks and good luck..

Thanks for the question, Bob. I think demand over in Europe remains solid. It's always been a case of where some of the countries run a little hotter at one point than the others, but by-and-large, when we look at Europe, we have good demand over there and we anticipate that to continue.

Spain and Italy, believe it or not, has actually picked up and is performing nicely for us. So, on the European continent, and the UK is showing good solid demand. So, overall on the continent, it's good for us and outside, in terms of China and Asia-Pacific, very strong market and strong share gains for us with Hansgrohe.

And we're continuing to invest in sales force to drive volume in our focused markets and innovation and design, et cetera. So, we feel good and we have a jewel, frankly, in Hansgrohe and it's doing well..

Your last question comes from the line of Adam Baumgarten. Your line is open..

Hey, guys, just a quick question on Cabinets.

Can you walk through the promotional activity throughout the quarter, especially in retail?.

Yes, retail promotions are good for us, oftentimes, and certainly that was the case this past quarter, our retail partners choose exclusive promotions because they want to promote the best brand in the category, and that's KraftMaid. That's good for them in terms of its driving foot traffic and it's good for us.

It's profitable growth business for us and we participate in that. So, I would say overall the promotional environment was maybe up a little bit in the aisle, but it's a very solid business for us and continues to drive profitable growth..

Thanks a lot, guys..

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