David Chaika - VP, Treasurer and IR Keith Allman - President and CEO John Sznewajs - VP and CFO.

John Lovallo - Bank of America Stephen East - Wells Fargo Chris Counihan - Credit Suisse Mike Dahl - Barclays Phil Ng - Jefferies Scott Rednor - Zelman & Associates Bob Wetenhall - RBC Capital Markets Alex Rygiel - FBR & Company Neal BasuMullick - JP Morgan Mike Wood - Nomura Instinet Nishu Sood - Deutsche Bank Stephen Kim - Evercore Josh Chan - Baird.

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

[Operator Instructions] I will now turn the call over to David Chaika, Vice President, Treasurer, and Investor Relations. You may begin your conference, sir..

Thank you, Kim, and good morning. Welcome to Masco Corporation’s 2017 Second 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 second 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 analysts’ 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 risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We described these risks and uncertainties in our Risk Factors and Other Disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial measures. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted.

We reconciled these adjusted measurements to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I’ll now turn the call over to our President and Chief Executive Officer, Keith Allman..

Thank you, Dave. Good morning, everyone, and thank you for joining us today. Please turn to Slide 4. In the second quarter of 2017, we continued executing on our strategic plans. Our top line increased 4%, excluding the impact of currency. Driven by strong growth in our Plumbing, Decorative Architectural and Windows segments.

Our operating margin increased 30-basis points to 17.4%, largely driven by the quick turnaround in our North American window business and strong margin performance from our Plumbing segment. We continue to be pleased with our EPS growth and achieved EPS of $0.60 per common share in the quarter.

Let me give you some additional insights into the drivers behind each of our segment’s performance, beginning with Plumbing. We had another terrific quarter in the Plumbing segment with solid growth against a very difficult comp from last year. Delta, Hansgrohe and Watkins each achieved record quarters for both sales and operating profits.

Once again, demonstrating the sustainable competitive advantage of our brands, innovation and industry-leading positions. In North America, our trade business was particularly strong as we gained share with our high-end Delta and Brizo branded showroom products.

Internationally, Hansgrohe continued its global expansion driving significant growth in its focused markets. In our Decorative Architectural segment, our Pro paint sales grew double digits, and we achieved outstanding sales growth from our innovative Liberty Hardware shower door program.

In DIY paint, we outperformed the overall DIY market with sales in the quarter matching last year’s. We are positioned to continue to outperform the DIY market with our powerful Behr brand, its outstanding product quality and service ratings and our strong channel partner, The Home Depot.

In our Cabinetry segment, we grew our repair and remodel business despite being up against a difficult double-digit comp. This growth was more than offset by losses in our new construction business as we exited certain low-margin builder accounts. We’re now pivoting towards growth in cabinetry as we described during our recent Investor Day.

In the third quarter, KraftMaid, our leading repair and remodel brand, will capitalize on its already strong performance with one of the largest new product launches in the brand’s history.

New door styles and decorative accessories will address the growing consumer trend towards transitional style, and new finish options will be expanded to provide designers with a more robust finished pallet.

We are confident that our growth strategy of new product introductions, customer program alignment and selective new construction gains will result in growth for 2017 and margin expansions for the full year.

In our Windows segment, Milgard, our North American window operation, achieved 10% sales growth and a significant increase in profitability due to its strong brand, market-leading position and operational improvements.

I’m very pleased with this rapid turnaround and as I shared with you last quarter, I remain confident that we will achieve mid-single-digit operating margins for the full year, a substantial improvement over 2016.

Demonstrating our commitment to actively managing our portfolio, we completed the divestiture of our Arrow Fastener business, realizing proceeds of $126 million during the quarter. We further strengthened our balance sheet by tendering for some of our higher coupon debt and replacing it with lower coupon, longer maturity debt.

We were able to execute this transaction due to the work we have done to vastly improve our credit profile, which allowed us to take advantage of favorable credit markets. We also continued our share repurchase activity in the quarter by buying back 1.2 million shares.

And our Board of Directors announced its intention to increase our annual dividend by $0.02 per share beginning in the fourth quarter, showing confidence in our long-term prospects. This is the fourth consecutive year we have increased our dividend.

Lastly, on our prior earnings call, we updated our 2017 target for earnings per share to be in the range of $1.90 to $2.

Based on our results through the second quarter and our anticipated performance for the second half of [indiscernible], we now expect our earnings per share to be in the range of $1.93 to $2, exceeding our target of $1.80 that we set 2 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 onetime items. Turning to Slide 6. Our continued execution drove solid top and bottom-line growth.

The second quarter of 2017 was our 23rd consecutive quarter of year-over-year sales and operating profit growth. Excluding the impact of foreign currency, sales increased 4%. Foreign currency translation negatively impacted our second quarter revenue by approximately $23 million as the U.S.

dollar strengthened against both the Euro and the British pound. North American sales increased 4% in the quarter due to strong demand from repair and remodeling products across all channels of distribution and across the price continuum as we continue 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 4% in local currency in the quarter as our international Plumbing businesses continue to drive growth.

Gross margins expanded approximately 60 basis points compared to the second quarter of last year to 35.8%, largely due to the improvement in our North American Windows business. Our SG&A as a percent of sales increased this quarter by 40 basis points to 18.5% of sales.

This slight increase is partly due to the strategic growth investments we’ve made, such as the 200 new Behr hub store employees we hired last year. We will continue to leverage these investments to drive profitable growth.

We delivered solid bottom line performance as operating income increased 4% to $357 million with operating margins expanding 30-basis points to 17.4%, our strongest operating margin in nearly 15 years. Our EPS was $0.60 in the quarter, an improvement of 30% compared to the second quarter of 2016.

As a reminder, our results in the second quarter of 2016 included a one-time loss on debt extinguishment of $40 million or approximately $0.08 per share to complete the retirement of debt maturities. Turning to Slide seven. Our Plumbing segment once again delivered outstanding results despite a difficult 9% comp.

Segment sales increased 5%, 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 $16 million in the quarter.

Our North American sales grew 4% in the second quarter against a 9% comp as we experienced strong consumer-driven demand for our innovative products and industry-leading brands with wholesale, large retail and dealer customers. As Keith mentioned, Delta, Hansgrohe and Watkins each delivered a record quarter of sales and profits.

Our international Plumbing sales increased 5% in local currency against an 11% comp as Hansgrohe continues to outperform and benefit from investments in brand, design and innovation. Additionally, we’re focused on growing key markets as yielding results as they experience strong double-digit growth in China.

Operating profit for this segment increased 3% in the quarter driven by incremental volume, which was partially offset by some of our strategic growth investments. Turning to slide eight. The Decorative Architectural Products segment grew 5%.

This performance was driven by another 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 performance as it continues to benefit from the expansion and growth of its innovative shower door program.

Liberty continues to win new retail programs and was recently awarded an expanded cabinet hardware program, which will be set in the third quarter. As a result of this program win, we anticipate incurring approximately $10 million in program reset costs in the third quarter.

Operating income in the second quarter increased 1% driven by increased volume, which was partially offset by an unfavorable price-to-commodity relationship in coatings as we discussed last quarter. Turning to slide nine. In the Cabinetry segment, excluding the impact of currency, sales declined 3% in the quarter.

This is principally due to the exit of certain low-margin builder business in the United States and in the U.K. These actions in aggregate reduced segment sales by approximately $10 million. Foreign currency translation also negatively impacted this segment’s sales by approximately $2 million in the quarter.

Starting in Q3, we expect to see year-over-year segment sales growth. Our repair and remodel business continue to perform well in the quarter. KraftMaid had solid performance in the retail and dealer channels, delivering mid-single digit growth through increased volume. This performance was achieved against a tough double-digit comp.

Segment profitability declined in the second quarter by $7 million as we experienced a more normalized sales and marketing spend as compared to the second quarter of 2016 and softness in our U.K. Cabinet business.

As we look to the third quarter of 2017, we expect to incur incremental costs of approximately $7 million related to new product launches as we continue to enhance KraftMaid’s product assortment and due to the recently announced antidumping duties and countervailing tariffs on imported Chinese plywood.

We expect the effect of these duties to be temporary as we work to mitigate the impact through supply chain and other initiatives during the remainder of the year. Turning to slide 10.

Excluding the $5 million impact of currency translation, our Windows segment sales increased 7% in the second quarter driven by growth in Milgard, our leading Western U.S. window business, which grew 10% in the quarter.

Milgard’s strong growth was due to increased volume, a positive mix shift toward our premium window and door product lines and favorable pricing. Segment profitability in the quarter increased $20 million over the prior year driven by the lapping of last year’s warranty expense, cost-savings initiatives and favorable pricing.

We are extremely pleased with the rapid progress that Joe and his team have made on Milgard’s turnaround and their improved results delivered in the first half of 2017. We also completed the sale of our Arrow Fastener business at the end of the second quarter.

This will reduce second half of 2017 sales and operating profit by $38 million and $8 million, respectively, split roughly evenly between the two quarters. We remain confident in our ability to achieve top-line growth and mid-single-digit margins in the segment for the second half of 2017 and the full year despite the sale of Arrow.

And turning to Slide 11. We ended the quarter with approximately $1.1 billion of balance sheet liquidity. Working capital as a percent of sales increased 170 basis points versus the prior year to 15%, principally due to the higher inventory to support our growth in new program wins.

We believe we will have this inventory work down to a more normalized level by the end of the year. During the second quarter, we continued our initiative to create shareholder value by repurchasing 1.2 million shares valued at approximately $42 million.

And we also took further actions to strengthen our balance sheet by refinancing high coupon debt, thus reducing our interest expense by approximately $3 million per quarter starting in the third quarter. And with that, I’ll now turn the call back over to Keith..

Thank you, John. We had a very productive second quarter. Our businesses continue to perform well. We executed our strategies. And we are well-positioned across our segments to achieve higher growth in the second half of 2017. We completed the divestiture of Arrow Fastener and improved our capital structure with our debt transactions.

We moved our corporate headquarters into a new building, downsizing from 415,000 square feet to 90,000 square feet. This new modern headquarters will facilitate our culture of collaboration, continuous improvement and execution.

And lastly, we had a very well attended Investor Day with nearly 300 participants and had thoughtful discussions about our strategy and the demand drivers underlying our industry. And we committed to a $2.50 earnings-per-share target for 2019.

Fundamentals driving our business are strong, and the strategy we laid out 2 years ago and reiterated this quarter at our Investor Day, is working.

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 return, 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. With that, we’ll open the call for Q&A..

Thank you. [Operator Instructions]. Your first question comes from the line of John Lovallo with Bank of America. Your line is open..

Hey guys. Thanks for taking my questions. First question is, Sherwin and PPG both kind of talked about in the paint division, weakness in exterior and then also a little softness in DIY.

Do you think that your performance in the quarter could represent some share gains? And also along those lines, what is your mix of exterior versus interior?.

John, I’ll answer the first part of that question. No doubt in our mind that we gained share. In terms of specifically exterior, we had a very solid quarter with exterior paint, and we grew that business. So no question there was a share gain there.

And then, we matched our sales this quarter in DIY versus prior year second quarter, which unquestionably, shows us that we’re gaining share there as well as we continue to outperform the DIY market. And we intend to continue to do that. We’ve got the Behr brand with the leading product quality in the space.

We have the leading customer service with regards to JD Powers. We’re investing a significant amount of resources together with our channel partner, The Home Depot, to train and ensure that we have that shopping experience consistently delivered. So we like our progress. We think we’re gaining share without question.

And we’re continuing to invest it so that we can continue to do that..

And John, just to address your second question about interior versus exterior sales. While we don’t break that out specifically, I can give you some guidance and that’s generally, interior sales far outpace exterior sales at least in our business..

Okay. That’s encouraging. And then, I guess the second question would be the $10 million in paint spend that you guys outlined for the third quarter.

Is that incremental? Or is that -- should we kind of think about that as being neutral versus the $10 million last year?.

So this will all hit in the third quarter, John. This year -- and it’s not -- it’s paint. It’s actually in the Liberty Hardware program reset that we’re doing. And so relative to the third quarter of last year, it will be incremental..

Thank you. And your next question comes from the line of Stephen East with Wells Fargo. Your line is open..

John, maybe I’ll follow on that last question.

If you look at all your 3Q investment costs, can -- I guess, can you summarize what’s incremental versus last year, whether there’ll be any follow-on in 4Q? And are these charges included in your $1.93 to $2?.

Yes, Stephen. So the way I look at it is pretty simple, yes. In terms of these charges in the $1.93 to $2, yes, they are. So the way I think about it is you have $10 million in the Decorative Architectural segment for Liberty, you’ve got the $8 million hit in the second half of the year for the Arrow profit that -- given the divestiture.

Then we’ve got the incremental $7 million in the Cabinet segment for the launch costs as well as the incremental tariffs. So in aggregate, approximately $25 million.

Favorably offsetting those charges is the $3 million per quarter of interest expense, so call that roughly $19 million to $20 million of headwinds in the second half that are included in our guidance for the $1.93 to $2 which equates to roughly $0.04 a share..

Great. That’s perfect. That’s what was I was looking for. And then, I guess more broadly, can you all talk about what you’re seeing on the raw material inflation front, whether you’re getting the offsets, and I know you’re typically able to get it a lot easier in Plumbing.

But are you able to get it moving forward on paint also? And just where you’re seeing the pressure points for the raw materials?.

Steven, as you know, we’ve got a track record. Over time, and there are some leads and lags with regards to supply chain activity that we do to mitigate cost increases and price and those sorts of things, so there are some ebbs and flows. But over the long haul, we’re able to maintain a flush position between price and commodities over time.

In terms of what we’re experiencing as we look forward in this year, we have experienced some inflation in TiO2 and Decorative Architectural business that began to impact us in 2016. And that will continue into the first half of ‘17. We have some, or excuse me, second half.

We also have some pressures in resin-related costs mainly driven by methyl methacrylate and that supply input. Copper and zinc are both up year-over-year, and we’re working with various cost-outs and price increases there. And then we talked about the recently announced antidumping tariffs related to Chinese plywood.

So we’re working very closely with our suppliers. We’re driving that, those costs down. And for the full year, we expect as a company, to continue to have margin expansion..

And your next question comes from the line of Susan Maklari with Credit Suisse..

This is Chris Counihan on for Susan.

I was wondering if you guys could speak on the current health of the M&A pipeline, kind of what the level of activity you guys are seeing out there and what you’re thinking about potential opportunities?.

Yes, Chris. Our pipeline continues to be healthy, both in terms of its size and the movement that we have going through it. We’re spending a lot of time across the organization on cultivation, and we’ve also moved deals through the pipeline that we’re talking quite seriously to. So I would say overall, the pipeline is very healthy.

We continue to see pretty robust valuations. But oftentimes, there’s good growth that go with some of those more robust multiples. So we’re looking at it very patiently. We have to have the right strategic fit, first and foremost. And secondly, we need to drive a return on invested capital that exceeds our WAC, risk-adjusted.

So we’re working very hard at it. The volume is good. The valuations still are a little higher than what we would see typically. And we’re being patient, we’re being strategic, and we’re going to make sure that we drive return on invested capital..

Okay. Great. And then going back to Cabinets. I was wondering if you guys could talk about the current mix shift you guys are seeing, and when do you think you expect that benefit to hit. Would it be in 3Q, 4Q in regards to exiting that lower-margin business? And if you guys could just give us a little outlook on that, that’d be great..

Yes, Chris. We think largely that the builder-direct business and the builder-oriented businesses that we’ve been purposefully exiting over the course of the last 4 to 6 quarters is largely behind us now. Could there be a little bit of spillover into the third quarter? Clearly, there could be just a touch.

But we really do think that starting now, here in the third quarter of 2017, we should begin to see that segment reposition itself from one that’s been contracting to one that’s going to start to grow..

Chris, as John mentioned, we do have significant investment planned in new product introductions coming forward, and we have the hit that will take largely in Q3 on the countervailing duties and tariffs associated with Chinese plywood. But we do have, and continue to have, solid drop down on our incremental volume.

And when we look at the productivity improvements that we’re driving, the benefits of the incremental volume, we believe we will continue to expand margins for the full year..

Thank you. And your next question comes from that line of Mike Dahl, Barclays..

Hi, thanks for taking my questions. Just to follow on, on Cabinets, and those last comments about growth resuming in the third quarter, I think may just need a clarification on some of the comments around the full year.

Is it growth will resume and be positive for the second half? Or do you expect an acceleration to the extent that it will actually drive full year growth as well?.

We expect single-digit growth for the year..

Okay. That’s helpful. And then shifting to the paint side.

Just given the -- or I guess, on a hardware side, the program cost that you’ve laid out, can you help us frame what the revenue opportunity is as you kind of reset and win this business?.

Well, we’re not going to disclose the revenue of the program win. We’ll let our customer do that. But I’ll tell you, we do have an outstanding shower door program that’s performing very well, and we’ve had a significant Cabinet hardware win that will continue to drive growth and is a very solid program for us..

And your next question comes from the line of Phil Ng with Jefferies..

Looks like the turnaround in your Windows business is definitely in good shape at this point.

Just curious, do you have enough bandwidth to kind of support the growth you’re seeing? And would that have any bottlenecks on operations and profitability down the road?.

Our capacity is in good shape. As we’ve talked about, there is a tight labor market up there in the Pacific Northwest and in California. We don’t expect that to magically free up. So it’s tight on the labor side. But I will tell you that we’ve had significant productivity improvements.

So that the requirement for that labor has gone down quite materially. And the turnover profile that we generally see, and it’s fairly consistent across all our businesses, is that the turnover happens in the people that are hired recently. So while the turnover is tough, it tends to churn on the folks that are less than 90 days.

And when you have a kind of productivity improvements that we’ve made, that really takes out the need, and thus, the significant impact on the turnover. As the -- we see some mix shifts, there’ll be certain pieces of equipment that maybe are strained a little more than others, but by and large, we’re well prepared to support the growth.

We’ve had good growth this quarter. I mean, really solid growth this quarter. And very pleased with how our lead time and fill rates have continued to remain consistent and really industry-leading, and that’s the value prop for Milgard windows in the West Coast. And that’s in part why we have been able to really bounce back as quickly as we have.

We’ve got a great dealer network out in the West Coast. And when we deliver on our promise to them, they deliver on their promise to us to go after growth. So I think it’s early in the turnaround. But I like what I’m seeing, and we’re in good shape..

Got you. And I guess for paint, I mean, you guys have clearly outperformed your peers both on DIY. But the Pro initiative has been a nice source of growth, and it’s been impressive you’ve been able to kind of keep your margins intact because it’s supposed to be a lower-margin business.

Just curious, how much more runway do you have? And can you sustain this level of growth going forward the next few years?.

Well, we’re committed to continuing our double-digit growth trajectory and we’ve enjoyed that for quite a few quarters. And we continue to do that. And we put investments behind to drive that, it’s just not something we’re hoping for. And those investments are paying off. We doubled our hub store profile relatively recently.

We’re fine-tuning that model, quantifying it, training to it. And that’s -- we like how that’s coming along and it’s really developed into a franchisable model, if you will, that we can deploy further.

We’ve got what I would call competitive pricing and terms with our Pro Rewards program and the credit set-up between us and the work we’re doing together with The Home Depot. I’ve talked about our top-ranked products, and that’s an external assessment. Numerous locations, that’s important for the Pros to go to and access jobs across regions.

I’m really proud of our regional sales reps, our hub store employees and the service that they provide. And our data clearly shows that we’re winning in that service piece. And we’re saving the Pro time and money.

We’re a better mousetrap where they can do one-shop stopping and have bundled purchases that they’re already making with our great partner, Home Depot. So yes, we intend to continue a double-digit growth..

And your next question comes from the line of Scott Rednor with Zelman & Associates..

John, I guess -- I’m not sure if this is clear, but in terms of raising the low end of the guidance, it seems like Arrow on the negative side and the debt refinance on the positive side washes.

So what implicitly are you guys more optimistic about than you were 3 months ago?.

I think you see the fundamental growth in that business over the course of the first half of the year. And what we’re seeing and hearing from our customers, Scott, gives us the confidence. We’re hearing about good showroom traffic at our Cabinet dealers and our Plumbing wholesale dealer -- our Plumbing wholesalers and Plumbing showrooms.

So we’re seeing good demand, continuing good demand in our paint business. So all that combined, I think gives us the confidence to raise that lower-end of the range..

Okay. Cool. And then just a couple quick ones on the model. Anything unusual in the corporate line that’s stepped up this quarter with the relocation? And then just tied to that, John, the buybacks? It was the weakest in some time and the guidance to get to $400 million to $500 million implies a pretty sharp step-up.

So just wanted to get your comfort with that level?.

Yes. A couple of things, Scott. Maybe on the corporate expense side, we are up a little bit this quarter, probably due to the stock comp expenses, the share price rises, obviously, that hits us a little bit harder in the corporate expense side. So that was the principal driver there.

That said, we still think we’re going to be in approximately $100 million for the full year. And in terms of the share repurchase activity, there are number of things going on. Obviously, we had our Investor Day and you were there and we had the debt transactions going on.

So we were out of the market a little bit more around in some of those events than we would typically have been in a normal quarter. That said, we still have our guidance out there for the $400 million to $500 million for this year. And as we’ve discussed in the past, we’ll be opportunistic about how we buy back those shares.

And so yes, I would look for slightly stronger activity as we go into the third quarter and beyond..

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

Nice turnaround in Windows, very impressive. And it’s coming in ahead of expectations. I think Joe gets a raise. What’s driving this big turnaround here? And can you give me a margin-walk through year end or into ‘18 a little bit? I mean, this is, this was kind of something I was not a fan of.

Quite honestly, I thought it was a subpar business, and I was wrong. You guys have really crushed it. So what’s driving this operationally? And how do you see this kind of playing out? I’m not really looking for color about the quarter, but more about what you’re doing strategically..

Yes, Bob. I told you to hang in there. I’m glad you did. Really, it gets back to something I touched on earlier with the brand and the dealer network.

So when we deliver on our promise, that dealer network really responds because it tends to be kind of quoted business, right? There is a quick lead time there between when the quote is needed and when we deliver the product. So when we’re at the ready with our Milgard value proposition, it’s easy business to flip our way.

So that’s a huge fundamental strategic point of view that I have of why I like this business so much is that we have a strong share position to begin with. And we have a strong value prop. So when we can deliver that, it really just creates momentum, and we’re able to outgrow the market. So that’s number one.

And then secondly, the Masco Operating System is really driving productivity improvements, and we’re getting more effective at deploying it.

So taking some price where we need to, to make sure that we’re driving volume into our more profitable segments of business, driving productivity, variable and fixed cost productivity, focusing, as I said, on that R&R dealer business, which is more profitable.

So it’s a combination of really well-positioned strategically to build off a strong base of market share with pretty good productivity..

Got it. So that’s very convincing. So it sounds like the trajectory is going to continue to have a lot of positive momentum. I’m excited for that business. I wanted to ask John on Cabinets. I’m trying to understand kind of the back half of the year in terms of profitability.

You’re guiding towards some incremental spending but you’re looking for margins to continue rising. And I think the implication is that the incrementals in the core Cabinet business on the legacy piece have to be really high to get that margin guide in the context of higher spending.

Am I thinking about this the right way? Or how should we be thinking about profitability in that business? There’s obviously a couple of cross currents in there. I was hoping you could unravel that..

Yes. Sure, Bob. In terms of the margin profile of the business, right? We’ve got very strong incremental margins on this business. And it’s not only on the core business, but the repair/remodel businesses is quite good. But then also, the builder business that we are looking at going forward, can be strong as well.

And so we generally look at this segment to have between 35% drop down on incremental sales. So very good position there. So as you think about how we developed though in 2016, we had very strong margins in the first half, Bob.

You might recall, we had I think 10.5% margins or so in Q1 last year, then they popped up to about 14% on some like-spend in Q2. Then they tailed off a little bit in the second half of the year because I think we were closer to 8%, 8.5% margin for each -- of Q3 and Q4 last year.

So as you think about the comps that we’re up against on the second half of last year, and the trajectory that we’re having in the business, the fact that Keith talked about earlier about both top line growth and margin expansion in the year for this segment, we feel pretty confident that we can achieve those..

Even though you’re investing incremental spend in the business just because you have the weak comp in 2H, [indiscernible] more runways.

Is that the right way to think about it?.

That’s the right way to think about it, Bob..

And your next question comes from the line of Alex Rygiel with FBR & Company..

Thank you. And congratulations on a nice quarter as well.

Can you talk a little bit about some of the variables of you being able to achieve double-digit margins within your Windows business by year-end ‘18? And if there is a shot at achieving double-digit margins for the entire year of ‘18?.

Long term, as we talked about on our Investor Day, we’re targeting 3% to 5% growth and 10% to 13% margins. In terms of this year, we’re expecting mid-single digit growth, if you exclude Arrow and mid-single-digit margins. So as I think about ‘18, I think we should -- we would be able to continue to drive towards that long-term Investor Day guidance.

Whether we get there a little quicker or it’s right down the middle, that takes us a couple of years to get there. But I would think about it kind of with those brackets..

Yes, Alex. To give you -- I mean, a little bit more detail on that. I think obviously, a big chunk of that comes down to volume and what we see going into 2018. Obviously, we love the progression that we’ve made so far here in 2017.

And so I think if we get higher volumes that -- and clearly, [indiscernible] will help -- recall we’ll have -- we still have a little bit of ERP headwind going into 2018 that’s why we’ll still -- and not -- it won’t be incremental at all, but we’ll still have $3 million to $4 million a quarter of ERP spend as we go into 2018.

So that could be a little bit of a governor on net margin expansion. But I think once that falls off, then I think we’ve got a pretty good path to getting to that double-digit margin..

And then circling back to the hub store program.

Can you sort of quantify how many additional hub stores were added in the quarter? And what your plans are for the second half of the year?.

They really weren’t added in the quarter. They were added last year, there was 100, but they weren’t in last year, Q2. So the 100 incremental is what we’re reflecting. So we have a total of 200 hub stores roughly speaking.

Of the first 100 have been in there, what, John, a couple of years?.

About 1.5 years..

1.5 years and then about 0.5 year for the other 100. And as I mentioned, we’re focused with our Masco operating system to codify time and territory planning and how to execute sales calls. And we’re really driving a regimentation of execution to make this as productive as we can..

And your next question comes from the line of Michael Rehaut with JP Morgan. Your line is open..

This is Neal on for Mike. I guess, continuing on paint. Obviously, you had continued double-digit growth, which is impressive for BEHR PRO, but how are some of the smaller DIY initiatives trending, I mean, obviously, the Pro contribution [indiscernible].

I’m sorry, Neal, you broke up. You had asked about DIY, but I wasn’t clear on the question.

Could you repeat it?.

Yes. Just some of those -- the smaller DIY initiatives.

How are those trending?.

Well, we’ve had some pretty big DIY initiatives. If you go back to -- way back to a new color center to adding in-store sales reps and focusing on training in developing our BEHR MARQUEE paint, having a clear positioning in the aisle. And again, this is all jointly developed with our partner, The Home Depot.

Having this clear positioning of good, better, best. Having -- and consistently improving the service proposition, there’s not one silver bullet that’s driving it. It’s a combination of a tremendous partner, a great brand, great quality and service and a customer experience that’s leading with clear positioning.

So all those things I think lead into the fact that we’ve been able to steadily outperform the market..

Okay. That’s helpful. And I guess going back to Plumbing margins. Obviously, you’ve been successful offsetting raw materials with price.

Do you think you’ve got a little bit ahead of commodity increase? Or I guess, what are you doing right?.

Yes, Neal. I’d say we probably did, in the first quarter in particular we got a little bit ahead of raw material with price. That said, in my prepared remarks and I think Keith referred to as well, we had a little bit of pricing headwinds in the second quarter.

And just given where the commodities are we anticipate probably some very modest inflation going into the second half of the year. But nothing that we’re too concerned about..

The team does a great job leveraging fixed overhead. So we continue to see good drop-down on incremental volume. And at the base of the success of this platform is the brands, customer innovation and the strong channel relationships that we have. So those have been following us a while.

No, this is not been something that we just flipped the switch, this has been over a period of three, four years that we’ve really been building the momentum here..

And Neal, I misspoke just a second ago. I said price headwinds, I meant commodity headwinds..

And your next question comes from the line of Mike Wood with Nomura Instinet. Your line is open..

You cited some showroom traffic being improved in Cabinets.

So I’m just curious if you could opine on what you think is explaining the lull in the second quarter industry sales in Cabinets?.

We think that our repair, remodel top line growth of kind of mid-single digits is right in line with industry growth and if not, a little bit better. We didn’t really see a lot of choppiness that the [indiscernible] may have implied in our business. And we had pretty consistent performance through the quarter, Mike.

So we’re really pleased with how the KraftMaid brand is performing, and we’re really excited about this new launch that Keith described a little while ago. So we think there’s opportunity for continued steady growth in our repair/remodel side of our Cabinet business..

Great.

And could you also give us some color in terms of what type of growth you saw out of the builder hardware business this quarter?.

A big chunk of that growth was driven by our new shower door program, which, incremental stepwise growth as we went from the West Coast to, up to the Rockies and then into the Plains, and now full national coverage with that shower door program with Depot.

And then as we’ve talked, we’ve also got a nice win in Cabinet hardware coming up in the second half of the year here. So really, really solid performance by the builders’ hardware team down at Liberty..

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

So in paint, you mentioned price/commodity pressure, but the margins were pretty nice at 21.5%. So I was just wondering if you could put those, that comment into context. Are you laying that out as a potential pressure for second half? Just trying to understand that against the pretty good margin you had..

Yes. I think, Nishu, that the TiO2 will really come through in the back half, so we are expecting some margin pressure from that. We have approximately $10 million of new program reset costs that we talked about that are in that segment.

And again, these investments that we make are ahead of the growth oftentimes, and we have to earn our way into that leverage. So as you think about the full year in this segment, we expect to be in the mid-single digits driven by volume, and we may see some modest margin erosion..

Recall, Nishu, that the second half, or I’m sorry, the second quarter, all margins were at about 21%. They were down from the second quarter of last year, so we did start to see some of that commodity headwind hit the segment in the second quarter.

And to Keith’s point, we’ll probably feel a little bit more margin pressure in the second half of the year..

Got it, got it. Okay. The divestitures from a modeling perspective, there was the $5 million impact that you had cited of divesting some of the Cabinet lines in 2Q. I think you mentioned, John, that it might be a little bit in 3Q. And then on Arrow, the $38 million.

Should we expect something similar for first half of ‘18 in terms of the $38 million and $8 million? Or is there some seasonality that would make that higher or lower?.

Yes, Nishu. It’s going to be roughly equivalent in the first half of ‘18, so that’s good catch. I should have probably mentioned that in my remarks. So yes, that’s a, that will be the waterfall effect of the remaining piece of the over divestiture. And just to be clear, on the Cabinet piece, there’s no divestitures per se.

But rather, we are deliberately walking away from some low-margin builder business, both domestically as well as internationally. And so that’s the impact. Yes, it was about, as I mentioned, it was about $10 million of impact in second quarter.

And could there be a little bit of spillover into third quarter? Yes, there could be, but we don’t anticipate very much..

And your next question comes from the line of Stephen Kim with Evercore..

Most of my questions have been asked, but just want to clarify, your, you itemized I think about $25, well, net of the $6 million interest expense, about $19 million of sort of issues, adjustment issues.

And I was curious how much of that was anticipated at the time you initially gave your guidance? From what I can tell, it looks like maybe the Cabinet -- sorry, that the hardware win and probably the refinancing probably weren’t contemplated in, but maybe the Arrow divestiture was.

So just trying to get a sense for what are the pieces that were sort of incremental to what you were thinking about the last time you gave guidance?.

So Stephen, when we gave out the $1.90 to $2, obviously, the Liberty reset costs were not included in that number. Some of the Cabinet launch costs we were -- in our forecast, but the plywood tariffs were unknown at that time. And that’s the bulk of the $7 million number there.

The Arrow divestiture was underway, but not particularly well publicized at that time. And so it was not necessarily called out-- so in -- for the interest savings. So you can make an argument that Keith and I knew about the -- that we’re going to divest Arrow, but probably the Street didn’t.

And there was a high degree of -- there was a huge factor on that Arrow in our $1.90 to $2 guidance..

Okay. So that basically is another $0.03, $0.035 that the lower end of your guide....

Yes, that’s right. $0.035, $0.04..

Yes. Great. Great. Just wanted to clarify that. That looks good, I just want to be sure. Second, when you talked -- Milgard. I think you addressed it in part. But in the margin turnaround I was kind of expecting -- the sales growth was what I was a little bit more cautious on.

And they think that’s probably -- arguably a harder thing to deliver on as opposed to just simply cutting costs on a short-term basis. I think you had indicated that you thought sales rebounded quickly because dealers responded when Milgard was finally able to deliver on its commitments.

I was wondering if you could just be a little more specific there.

And in particular, I’m just wanting to make sure that there wasn’t something from a timing perspective or maybe you had some catch-up sales or something, which boosted the growth this quarter or whether as Bob had indicated earlier, this is really the kind of momentum that we’re seeing in that business on the sales line that we can expect going forward..

Yes. There really wasn’t a onetime windfall good guy, so to speak, that drove that. It was broadly positioned across multiple dealers up and down the West Coast. So this is -- I think maybe there’s an effect there where we had such bad weather recently that could have pent-up some demand. But by and large, it’s been pretty steady.

And that’s a good part of the country right now, and it’s a growth market for us. So I would expect that type of success going forward now.

There was some currency effect though, wasn’t it, John?.

There was currency effect. And also Stephen, we’ve been factoring the Arrow divestiture in the second half of the year. That said, we still think that Milgard can grow nicely. Probably, slightly easier comp. Recall, we had a little bit of an ERP issue in the second quarter of last year. And so that probably impacted a little bit of our revenue.

But we feel really confident about what Joe and the team have established with respect to the Milgard brand and then how they brought sales back so quickly. So we do think that there’s good growth in front of us.

We’re seeing very good demand with our customers out there, both our dealer customers as well as we do sell a little bit into the major retailers in the Western U.S. And we’re seeing good demand on both sides of -- with both of those customers in the Western U.S. at this time..

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

This is Jake on for Keith. Just wanted to touch on the Cabinet business real quick.

In regards to the UK business, was that driven just by the existing businesses or was there any other type of weakness that we’re seeing there?.

Yes. They were doing the same thing that the U.S. business was doing, but they also ran into a little bit of weakness. I think -- we’re starting to see a little bit of softness broadly across the U.K. since -- with their election taking place in the quarter and the like. There was some softness and there was a little bit more discussion on the Brexit.

So we’re seeing a little bit of the consumer pulling back in the UK. But it’s not really a material part of the business, so we’re not too concerned about it..

And your final question comes from the line of Josh Chan with Baird. Your line is open..

Just want to ask about KraftMaid, the new product introduction in Q3.

Is that going to come with more promotion in the channel? Or I guess more broadly, how would you describe that promotional channel overall in Cabinets?.

I’d say that it’s in the retail promotional environment, it’s a little bit elevated year-over-year, but I would -- in Q2 versus prior year Q2, but it’s on par, I would say, with the back half of 2016 and 2017. And I would estimate that that’s going to stay consistently at that level.

There’s no, in particular, promotions, increased promotions that are linked to new product launches. It’s more a face-to-face interface with our designers and with our dealer partners to get out the product knowledge and the sales pitches, if you will, of our new products and to launch them into the channel than it is a promotional expense..

Okay. Great. And then my second question is on Plumbing. Very good growth against -- over tough comps. Just want to make sure there’s no load-ins or any one-time program items there that kind of drove that very strong number there..

Well, a little bit of load-in related to new product going into some store shelves. But I don’t think it was a significant -- anything significant that we should call out or nothing material to call out..

We’d like to thank everyone for your interest in Masco Corporation and that concludes today’s call..

Ladies and gentlemen, this concludes today’s conference call. And you may now disconnect..