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

Stephen Kim - Evercore ISI Nishu Sood - Deutsche Bank Neal BasuMullick - JPMorgan Samuel Eisner - Goldman Sachs Chris Counihan - Credit Suisse Dennis McGill - Zelman & Associates of Stephen East - Wells Fargo John Lovallo - Bank of America Alex Rygiel - B. Riley FBR Keith Hughes - SunTrust Robinson Humphrey Phillip Ng - Jefferies Ken Zener - KeyBanc.

Good morning, ladies and gentlemen. Welcome to Masco Corporation’s 2018 First Quarter Conference Call. My name is Regina and I will be your conference operator for today’s call. As a reminder, today’s conference call is being recorded for replay purposes. [Operator Instructions].

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

Thank you, Regina. And good morning. Welcome to Masco Corporation’s 2018 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 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 will now turn the call over to Keith..

Thank you, Dave. Good morning, everyone. And thank you for joining us today. Please turn to slide 4. We had a good start to the year as our top-line grew 5% excluding the impact of currency.

Our operating margin decreased to 160 basis points in the quarter mainly due to the planned growth investments we discussed last quarter and our Plumbing and Cabinetry segments. And a lag in our price cost relationship in Plumbing and Cabinetry.

We are confident that we will leverage these strategies growth investments to achieve profitable growth and the margin expansions in the second half of the year. Additionally, we have implemented price increases across all our segments and we expect our price cost relationship to improve starting in the second quarter.

While our operating profit decline our adjusted earnings per share grew 13% to $0.45 per share due to lower interest expense and the benefit of the recently enacted tax reform. I’d like to provide you with some additional insights into the drivers behind each of our segments performance, starting with Plumbing.

Our Plumbing segment grew 11% or 6% in local currency. North American Plumbing grew 9% led by Delta Faucet and Watkins Wellness, our leading spa business and the acquisition of Mercury Plastics.

Delta’s performance was led by its high-end Delta and Brizo showroom brands in the wholesale channel, strong growth in the ecommerce channel and strong sales from its recently re-launched [indiscernible] brand in the retail channel.

Watkins Wellness drove high-single-digit growth as they leveraged their expanded product offering through their existing dealer network and through new channels of distribution. Outside of North America, our international Plumbing operation achieve 3% growth in local currency led by Hansgrohe, our leading international faucet and shower business.

Hansgrohe continued to drive growth in both China and Germany with particular strength in its premium [indiscernible] product line. Decorative Architectural segment sales increased 10% due to continued growth from both Behr and Liberty as well as the Kichler Lighting acquisition, which closed in early March.

Kichler integration is going well and I am pleased to announce that Kichler recently received recognition for its product innovation receiving four [indiscernible] awards for superior innovation, design and aesthetics, highlighting Kichler fit with Masco and our focus on brand innovation and surface.

Congratulations to the Kichler team on this great recognition. Our pro paint sales experienced strong growth in the quarter and together with the Home Depot, we began another expansion of this initiative.

As we discussed last quarter, we are recruiting and hiring additional pro hub store employees and outside programs demonstrating our commitment to continuing to invest in this successful program. Turning to Cabinets. Our repair and remodel sales grew mid-single-digits delivering another quarter of strong performance.

We also made great progress executing on the program launch of our new Menards business by resetting over 300 stores with new displays as showcased our Cardell brand. Initial sales of this business are strong and we’re confident that we’ll reach the 80 million annual sales run rate by the fourth quarter of this year.

Our window segment grew 12%, excluding the impact of the divesture of Arrow led by mid-teens growth for Milgard, our leading Western North American Window business.

Milgard experience strong demand for its products across all its markets in the Western United States, as its value proposition and strong brand continued to resonate with dealers and consumers. Our UK window business offset a portion of this growth due to softness in the UK cabinet.

Additionally, the bottom-line was impacted by restructuring actions taken in the quarter. We also continued our share repurchase activity in the quarter by buying back 3.7 million shares for $150 million through an accelerated share repurchase plan.

With this recent buyback activity, we now expect to deploy at least $100 million to $150 million for share repurchases or acquisitions for the remainder of the year. Our first quarter results were in line with our expectations and we are on track with our plan for the year.

We affirm our expectation to achieve earnings in the range of $2.48 to $2.63 per share. Now, I would 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, the inventory step-up for the purchasing accounting for the Kichler acquisition and other one-time items.

In addition, any reference to prior period comparisons has been adjusted to reflect the adoption of the new revenue recognition and pension accounting rules. Please refer to page 19 of the earnings call presentation for the details. Turning to slide 6, we delivered solid top-line and earnings per share growth in Q1.

On a reported basis, sales increased 8% or 5% in local currency. Excluding the divestitures of Arrow Fastener and Moores, and the acquisitions of Mercury and Kichler, sales increased 7% or 5% in local currency.

Foreign currency translation favorably impacted our first quarter revenue by approximately $49 million as US dollar weakened against both the euro and the British pound. In local currency, North American sales increased 7% in the quarter or 5% excluding acquisitions and divestitures.

Consumer demand for our industry-leading repair and remodeling products across all the channels of distribution and across all price points drove this performance. In local currency, international sales decreased 2% in the quarter. Excluding the divestiture of Moores, international sales increased 2% driven once again by Hansgrohe.

Gross margins declined approximately 150 basis points compared to the first quarter of last year to 32.6%, principally due to the strategic growth investments we discussed on our fourth quarter call.

The investments include increased display spending and depreciation in plumbing and launch costs related to the Cardell cabinet program at Menards, as well as a lag in price costs in plumbing and cabinetry. These items aggregate approximately $30 million.

Our SG&A as a percent of sales decreased to 10 basis points to 19.5% as we continue to leverage our SG&A while making strategic investments to drive profitable growth. We’ve achieved operating profit of $250 million with operating margins of 13%. Our EPS was $0.45 in the quarter, an improvement of 13% compared to the first quarter of 2017.

As a reminder, our adjusted EPS calculation assumes a 26% tax rate. If you look to the balance of the year, we anticipate some of the strategic growth investments will continue into the second quarter. These investments will diminish in Q3 and Q4 leading to a stronger second half of 2018.

As Keith mentioned, our performance in the first quarter was consistent with our operating and we are affirming our annual EPS guidance of $2.48 to $2.63 and our free cash flow estimate of $800 million. Turning to slide 7, our Plumbing segment delivered another quarter of strong top-line results. Segment sales increased 11%.

Excluding the impact of currency and acquisitions, sales increased 5%. This solid performance was driven by growth in our faucet, shower and spa businesses. Foreign currency translation favorably impacted this segment sales by approximately $43 million in the quarter.

Our North American sales grew 8% in local currency in first quarter as we experienced strong consumer-driven demand for our industry-leading brands with wholesale, large retail, and dealer customers.

We also benefited from approximately $10 million of pull ahead sales as customers pulled orders from Q2 into Q1 in advance of the launch of Delta’s new ERP system in early May.

Additional our spa business continued to outperform the competition as Watkins Wellness leveraged its strong network, innovative new products and industry leading brands to drive growth.

Our international plumbing sales increased 3% in local currency and Hansgrohe’s focus on key markets continued to yield results with strong growth in both China and Germany.

The main drivers of the operating margin decline in Plumbing were higher strategic growth investments including display costs and increased depreciation and as we mentioned on our fourth quarter call, a lag in price costs. These items collectively amount to roughly $20 million.

The higher strategic growth investments will persist into the second quarter but then moderate in Q3 and Q4. We anticipate the price cost lag would dissipate in Q2 as our pricing and cost containment actions are fully realized.

As a reminder, there will be incremental cost of approximately $5 million in each of Q2 and Q3 related to Delta’s ERP implementation.

While we have recently made investments in our Plumbing business, we will leverage these growth investments and when coupled with the improving price cost relationship, we expect in 2018 this segment will grow 4% to 6% with operating margins similar to our 2017 margins. Turning to slide 8, Decorative Architectural Products segment grew 10%.

This performance was driven by another quarter of strong growth in various pro initiatives and our acquisition of Kichler in early March. Excluding the acquisition of Kichler, sales grew 4%.

And as a reminder, that this segment is mostly impacted by the new revenue recognition accounting rule, and all comparisons reflect the application of this new rule in both 2017 and 2018. Operating income in the first quarter matched the first quarter of 2017.

The benefit of increased volume was offset by strategic growth investments and increased legal and other variable expenses. We continue to face raw material cost pressure in the paint category, we are diligently working to mitigate the impact of this inflation.

And as a remainder, the acquisition of Kichler will increase our depreciation and amortization expense by approximately $20 million on an annual basis. Turning to slide 9.

In the Cabinetry segment, sales declined 6% in the quarter, excluding the impact of the Moores divestitures sales decreased 1%, primarily due to declines in our new construction business. This build of business continues to be impacted by the effect of lost business in the second quarter of 2017, which we will anniversary here in the second quarter.

Our repair and model business performed well in the quarter, KraftMaid solid performance in our repair remodeling business delivered mid-single-digit growth to increased volume. In addition, [indiscernible] of our Cardell program [indiscernible] is on schedule and we were pleased with this program initial performance.

Segment and profitability declined in the quarter by $12 million principally due to the approximate $10 million investment related to the Cardell retail cabinet win and a price cost lag. We expect this lag will abate in the second quarter as our cost control and pricing actions are realized.

Turning to slide 10, our Windows segment sales increased 4% and excluding the impact of currency increased 2% in the quarter. Excluding the divestiture of Arrow Fastener, sales grew 12% or 9% in local currency. Foreign currency translation favorably impacted this segment sales by approximately $4 million.

This performance was driven by strong growth across all channels in Milgard, which grew mid-teens percent in the quarter. Milgard’s strong growth was due to increased volume, a positive mix shift towards our premium window and door products and favorable pricing.

Segment profitability in the quarter decreased 4 million, largely due to the Arrow divestiture in restructuring costs in our UK Window operations. And turning to slide 11, we ended the quarter with approximately $500 million of balance sheet liquidity, as well as full availability on our $750 million revolving credit facility.

During the quarter, we repatriated approximately $425 million to partly fund the acquisition of Kichler. Working capital as a percent of sales increased 340 basis points versus the prior year to 18%, largely due to the impact of the Kichler acquisition.

Kichler’s total working capital is added to the numerator of this metric but only 21 days of sales were added to the denominator. As such working capital as a percent of sales will decline throughout the year as an increasing the amount of Kichler sales impact this metric.

Further, while Kichler’s business model lends itself higher levels of working capital, than most of Masco’s other businesses, we believe to our deployment of Masco operating system tools, there is significant opportunities to further improve this metrics overtime.

During the quarter, we continued our focus on shareholder value creation by repurchasing 3.7 million shares valued at approximately $150 million. Finally, I am happy to report that Moody’s recently upgraded our credit rating to investment grade.

And as a result of its action, our credit rating is now investment grade with a three leading credit rating agencies, Standard & Poor’s, Fitch and Moody’s. And with that, I’ll now turn the call back over to Keith. .

Thank you, John. I am pleased with our team’s execution. We are on plan and we are off to a good start in 2018. Fundamentals driving our business remain 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. Consumer confidence is up 8% year-over-year, the highest levels it’s been in 18 years. And US 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.

We are executing our strategies to capitalize on these strong fundamentals. In Plumbing, we are driving strong top-line growth while investing for the future across our diverse plumbing platform, particularly at Delta and Hansgrohe.

In Decorative, we are investing behind our powerful Behr brand to continue the growth of our pro paint initiatives along with our partner the Home Depot. And we are excited about the opportunities with Kichler, our new lighting business.

In cabinetry, we are on track with a significant new retail program launch and continue to drive sales growth in our repair and remodel business. And in windows, we are increasing share with our market leading Milgard brand.

Our leading brands on a strong execution generate robust free cash flow and we will continue to deploy that cash flow with a disciplined and balanced approach to acquisitions with a right fit and return, share buybacks and dividends to create value for our shareholders. With that, I will now open up the call for Q&A. Back to you Regina. .

[Operator Instructions]. Our first question will come from the line of Stephen Kim with Evercore ISI. Please go ahead. .

Thanks very much, guys. And appreciate all the color. In particular I wanted to ask about the strategic and price cost lag. I was curious -- you gave a lot of information but I was curious if you could help us out a little bit with a breakdown of how much was related to specifically strategic growth versus price cost in your segments in the quarter.

And then also as part of that particularly in Plumbing, I think that you’d indicated you thought that you would do about $4 million in the first half of ‘18.

I was wondering whether or not that expectation had changed for strategic growth?.

So yes, Stephen, good morning. If you think about that $30 million of strategic growth and price cost that you called out, and obviously a big chunk of that $10 million is related to Menards spend for the recap program we’re launching under the Cardell brand. As it relates to the Plumbing segment, there are really two pieces there.

One is what you highlighted, some of the display spend that we incurred in the quarter. The other portion of that is increase depreciation and as you may recall, I think we [cost out] in the last several costs.

[We placed] to new facilities in Hansgrohe, our distribution center last year and we’re investing in a new plating facility for them over in Germany and Ireland, so that is causing our depreciation to tick up a little bit.

But that obviously was funding future growth for that business, which has performed very strongly globally for the last several years. And then the last piece of that. And that’s all in, I come to have plenty investment of achieving a display spend and the depreciation roughly split evenly about 5 million each, so 10 million in aggregate.

And the third $10 million is really price cost. And that affected principally the Plumbing segment, but also a little bit in the Cabinetry segment as well..

And then when you talk about the price cost improving beginning in 2Q, I believe Keith that with your expression. Just wanted to be clear there and you’ve laid out, I think the strategic growth investments, so we can model that.

But on the input price lag, price cost lag, could you give us a sense, are you actually expecting that to flip positive in 2Q or simply diminish the negative headwind in 2Q.

At what point, I mean do you anticipate that will actually flip positive?.

Stephen, John here. As we look at it, I think what we’re doing is the pricing that we put in the market and across our segments is actually just recovering prices. So, I think by the end of the second quarter will be flush with the raw material inflation that we’ve incurred in the market. .

Okay.

And as part of that are you expecting input costs to continue to inflate from here in your outlook or is that, are you anticipating it just sort of where we are right now?.

Look across our portfolio of businesses. I think the base metals copper and zinc have been -- they rose is in the second quarter starting on early second quarter of last year. And have been relatively narrow trading then since then. So, we’re not anticipating significant movement in either copper or zinc.

So, I think that should be relatively stable through the balance of the year. And across our other product categories, I think for the most part will be stable. The one that we will keeping close eye on, the input costs to paid. All-in-all now approaching $70 a barrel and as affecting derivative to go into paint.

We are keeping to close eye on how that both the engineered resins that go into paint move as well as CIO2 moves and I think as we said earlier in the year mid-single-digit inflation and input costs to paint, would be out of realm of possibility here in 2017..

Your next question comes from the line of Matthew [indiscernible] with Barclays. Please go ahead. .

I guess maybe shifting to the growth side of things. Keith talking about some of these investments you’re making in Plumbing across the new displays and then some of the investments John, you just mentioned with Hansgrohe.

Is there a way to just kind of help us understand some of the timing of the fruits of all that investment? And maybe just elaborate on where do you see growth kind of heading in that segment as we move through the year and into next year? Thank you. .

As often as the case Matt, when you make these growth investments you earn your way [and] you leverage them in subsequent periods and that’s the case certainly with some of the investments we’ve made to support growth in our Hansgrohe business.

But we’ve invested in a new logistics center in Germany which obviously supports the base business but also is key as we endeavor to be a leader in the e-business space which requires that quicker delivery with higher fill rates et cetera.

We have made some investments across many of our segments, in pro paint for example, but in plumbing also where we’re investing in [field industry] and people to drive revenue and their productivity comes overtime.

Really what we are looking at is to start to leverage these investments, specifically to your question on plumbing, into the back half of the year.

So, while we think about our expectations for growth, that hasn’t changed, when we think about margin, we think it’s going to be similar to the full year versus last year -- full year ‘18 versus last year ‘17.

And with the pressures that we’ve seen in price costs and all the growth investments that we are putting into this segment, we think that that’s pretty good performance..

Got it. Thank you for that. My next question, I wanted to ask about cabinets, alongside some of the investment spending with Menards, did you actually recognize revenue from that new business during this quarter or is that still something that we’re going to expect to more meaningfully impact the top-line as we move through the year? Thank you..

Yes, Matt. It’s John. We did recognize a little bit of revenue here in Q1. But to your point, I think what you’ll see as the year progresses, that you will see greater and greater revenue come from that program as it begins to approach its run rate of about $80 million on an annual basis..

It’s a good program for us. We’ve worked hard to capture a chunk of our business. It supports our profitable growth objective in this segment. And as John mentioned, its meaty, it will be $80 million program and we expect to hit that run rate by the end of the year. .

Your next question will come from the line of Nishu Sood with Deutsche Bank. Please go ahead..

Thank you. Yes, going back to Plumbing for a minute, the price commodity effects in first quarter, I think as you folks have talked about it in the past, it normally takes about two quarters for cost increases to come through and most of the time even I think in the fourth quarter you are able to get price ahead of that.

So just wanted to understand what was mechanism, why the shortness in the effect in first quarter? And does it have to do with -- I think you mentioned some pull forward of sales ahead -- I don’t know if I heard this right, the ERP implementation, was that a confounding factor here, I was just wondering if you could talk to that a bit please?.

Sure. As it relates to price commodity element, recall that commodities elevated starting in the second quarter of 2017. And so, the P&L impact hit our income statement exactly as we would anticipate in the first quarter. And to your point, as we get out in pricing, obvious we don’t get pricing in every customer at the same time.

So, there was a little bit of a lag of putting price into the marketplace. And so, we feel really good about where we -- how our team's reacted to the commodity inflation and how they are actively offsetting price with -- are offsetting inflation with both price, as well as cost containment activities within their own operations.

As it relates to the pull forward, no I don’t think that the pull forward effective 10 million in Delta, really compounded the price costs affected all. That is really more or customers ensuring to take that inventory on hand as we go through our ERP implementation..

Nishu, this is Keith. I think when you think about the impact of the growth investment that’s continuing into Q2 as depreciation as we talked about. And then continued display spending and some ERP spend Delta. And if you look at -- if you recall last year, Q2, we had real strong margin performance. So, I think it was north of 21%.

So, thinking about our Plumbing margins, they will likely be down in the second quarter to the same degree that there were down last year. But definitely expect expansion in the third quarter as we begin to particularly leverage the growth investment. So, for the full year, we expect Plumbing margins to be similar to last year.

And as I mentioned given the work and the money we’re spending on growth and the way we handle to price costs. We think that’s good performance. .

And then on paint. Obviously, the outline volumes in the market has been kind of soft, but there has been outperforming also very strong, strong performance on the pro side.

Just trying, if you could give us a sense of how DIY volumes and the momentum in pro paint continued in the first quarter?.

We think, we’re about flat in DIY all-in and overall for the DIY market that low-single-digit. We really haven’t come out low-single-digit growth, we really haven’t changed our opinion and where that will fall out. In terms of pro, we continue strong growth in that segment and we are continuing to invest even more into that.

So overall, when we think about the paint market, we think it’s pretty good particularly, when you look at our performance versus that market with the strong BEHR brand, our outstanding partner in Depot and our quality and service levels. .

Your next question will come from the line of Michael Rehaut with JPMorgan. Please go ahead. .

It’s Neal BasuMullick for Mike. So, I guess continuing on [page 8] you touched a little bit on this.

But can you talk a bit about what you’re doing right on price cost?.

Well, I think what we’re doing right is continuing to perform like we demonstrated over the better part of a decade. And that is over the price commodity, over the commodity cycles as we go through them, while, there is leads and lags on both side of that. We’ve been able to come out flush and mitigate those impacts overtime.

I think, what we’re doing extremely well in this segment is working with our partner to Home Depot to keep these pressures and balance strategically and to together invest for growth in this segment and that’s really paying off. I think our relationship with Depot has never been stronger as evidenced by our performance overall and both DIY and pro.

And I think I’ve point to that as something we’re doing well as well. .

And then I guess kind of factoring that what do you see as pace of margin recovery through the year.

Specifically, how much do you think, you can pick-up in Q2?.

Well, it’s important to note as John mentioned that the decor segment has been affected by the revenue recognition accounting standards, more than any other of our segments. So, when you recast our margins for decor, they were 19% last -- prior year quarter and 17.2% this quarter. A big driver of that, far and away was the Kichler’s acquisition.

Their margins are in that low double-digit range, lower than the high teens that we’ve typically experienced in this segment. So, recast that Kichler acquisition is call it 150, 200 basis points on average per quarter.

So, when we look at our base business with the inflation we’ve experienced in the paint rods, and the actions we’ve taken to improve that price cost relationship, plus the expansion of our pro initiative, plus additional hub store employees and outside pro reps to continue to drive the volume, we’re expecting modest margin erosion for the full year.

And again, when you look at all the investments we are making and the state of the commodities, that’s pretty good. .

Your next question will come from the line of Samuel Eisner with Goldman Sachs. Please go ahead. .

Yes, thanks so much. And good morning, everyone. Just maybe sticking on the just Keith your comment on the modest margin erosion. I think prior to the Kichler acquisition you had made a comment that you expected margin degradation given price cost headwinds that would less than the 2017 levels, obviously that was before the Kichler transaction.

So, I was wondering if we can may be just parse out, do you still expect kind of the base core business to still see margin compression this year, what your prior comment inclusive of Kichler as well, just any kind of greater clarity there would be helpful?.

Sure, Sam. With -- restated for the accounting changes, with Kichler our revised long-term margin expectations are in that 16.5% to 18.5% and we’ve been operating at a higher end of that range and we expect to continue that through ‘18. With regards to the base decorative business, that’s what my prior comment referred to.

We are expecting modest erosion in that base business. .

That’s helpful. And then maybe your I recognize it’s maybe a little bit for this question but Kichler you own now for just about two months.

Maybe you can talk about kind of looking at that business what surprises you both positively and negatively now that you guys have your hands on it, where there are opportunities for margin expansion given the fact that it's going to be a driving on the business going forward.

Maybe just an overall update on how Kichler stands two months in?.

No negative surprises whatsoever. The surprises for me really have been positive.

I knew going in through the due diligence that they were particular focused on the consumer and that they were product driven and understood the trends ahead of the actual trend being realized and we had a very short development cycle, that’s really impressed me and has been a positive side.

In terms of the integration process, very smooth, very smooth. We have integrated treasury, risk management and legal. We are rolling out the introduction to the Masco operating system and they’ve been very receptive and very eager to be part of the team. We have met with a significant number of key customers and that transition has been seamless.

This is a good business for us. It fits in many ways in terms of the channel and the overlap. It fits with regards to the importance of influencers in this purchase journey in terms of designers and showroom associates which is very close to a lot of the work we do and in Plumbing and what we do in the aisle and paint.

So, we’re excited about being able to add value to Kichler. And honestly, we’re excited about being able to learn from them as well. So very positive integration. .

If I can just sneak one more in just John on freight cost this quarter or for the year. How you’re thinking about that? What is the percentage of COGS just an overall kind of update on freight as a relates to your price cost discussion that you’re getting earlier? Thanks. .

In terms of freight or distribution logistics costs, for the most part, a lot of our products are sent on standard distribution runs. And we’re not expecting around incurring much incremental inflation. We are seeing just a tough of inflation is on some of the more ad hoc or short-haul runs that we make.

And so, at this point in the game, it’s not really that impactful to us. Keeping to close eye on it and but if I make certain that it doesn’t exacerbate over the of course of the year. But right now, we think, we got that in pretty good control. .

Your next question will come from the line of Susan Maklari with Credit Suisse. Please go ahead. .

This is Chris on for Susan. Thanks for taking my questions. Can you mention Cabinet sales….

Chris, could you speak up just a touch?.

Yes, sure. So, you mentioned before that your lower Cabinet sales and build to direct channel due to your margin rationalization efforts in that business.

Once you left that impact, how quickly do you expect to return to positive growth and what do you expect your run rate growth to be exiting 2018?.

Yes. [indiscernible] for the full year 2018 excluding the divestiture of Moores, we expect the top-line growth in this segment coming [ph] at 5% to 7% range. And so [indiscernible] we can pivot to growth further quickly. Once we get the anniversary of this loss business behind us. .

And turning to Windows, I mean you had strong performance at Milgard this quarter.

Can you just walk us through some of the aspects driving the favorable pricing environment there and just the overall strength you’re seeing on that side of the business?.

Really, Milgrad's growth was driven by their brand strength and their value proposition. This business has done exceedingly well with regards to lead times and fill rates. And we found clearly when we stub our toes and don’t do well that affects us. And we’ve got some of the problems that we’ve had a year ago, well behind us.

We’ve got a new leader in that business and a new leadership team and that focus is really what’s driven the growth. That value proposition resonates with dealers, so we’ve got an outstanding dealer network out there and that’s very productive for us both in terms of big box and dealers and also the build a business that we choose to do out there.

So, it’s really the Milgard value proposition that’s driving the growth. .

And the other thing Chris that I point to you. As you recall this time last year and we were in the midst of the turnaround and I’d say that we did have a relatively easy comp in Q1 compared to Q1 of last year. In the comps we’re going to be a little bit more difficult.

So, you might not see the same mid-teens growth out of Milgard as you go deeper into 2018..

I would say we’re expecting full year sales growth in that range of 6% to 8% excluding the Arrow divestiture on that. And on the margin side, we’re going to see some expansion, but I’d remind you that, we do have continued ERP expense. And the ERP implementations are going very well and we will have continued ERP expense.

So, while we are expecting margin expansion for the year, we probably won't make it to that long-term guidance for that 10% to 13%..

Your next question will come from the line of Dennis McGill with Zelman & Associates. Please go ahead. .

Hi. Good morning, guys. First question is on cabinets. You talked to mid-single-digit growth in repair and remodel.

Can you split that between home centers and dealers and then also just discuss what you are seeing if any variance on price points and promotions?.

Yes, so a couple of questions and again in terms of our remodeling growth between the various channels of distribution, we are really not breaking that out obviously, traffic stands across both home centers and dealers and both are positive. And so, we are feeling good about how that performed in the quarter..

I think the retail promotion environment was a little bit elevated year-over-year in Q1 but just a touch. We would expect may be a slight increase in promotions for the full year but really not a whole lot. I think the retailers who view this class, this aisle is something that has a lot of add-on sales obviously so I think that’s lucrative for them.

And obviously as you know Dennis, they set their price and their promotional schedules and we support them where it makes profitable growth sense for us. So, pleased with the promotional levels. I think we are competitive where it's at [indiscernible]..

And then the other part of my three-part question there was on the price plan ‘18, anything that stands out as far as within the cabinet business?.

Our semi-custom product is doing real well and that’s obviously on a bit of a higher end of the continuum. And when you look at the market data whilst it’s tough as you know with the -- to take a judgment on the market with a couple of month's worth of data but the semi-custom piece is doing well. We’re outperforming the market gaining share.

So, I would say that for the areas that we compete in that semi-custom space is pretty strong. .

Okay. And then Keith for you.

On the ERP within Delta, [indiscernible] a little bit across just the ERP implementations, I think it drove the disruption in the windows business as well, how confident are you that this can be implemented without disruption for you guys or your customers?.

I am really confident in our preparation. We have been at this for a long time. At Delta we have moved some of our high potential talent over there. We have highlighted -- excuse me hired external people to come in, in both program management as well as quality.

While -- you mentioned Milgard, while we had a little bit issue initially I will tell you that our last two implementations, planned implementations on Milgard are going very well and it was one of our biggest plans that we recently did. So, there’s always inherent risk with ERP systems. I am really confident in the Delta team..

Yes, we’ve incorporated a lot of the lessons learnt on the prior ERP implementations. The Delta team and to Keith’s point has done just a tremendous job of preparing for this. And we are very confident in their ability to execute. .

Your next question will come from the line of Stephen East with Wells Fargo. Please go ahead. .

Keith maybe turning back to Kichler a little bit. Could you tell -- as you look over, call it, the next 3 years or so what do you think is would be normalized growth rate for you and an up-margin rate for you? And then, I believe you source primarily from China.

Steel tariffs, any tariffs impacting you all? And do you have opportunities for alternative sourcing?.

Well, in terms of -- there are a couple of questions in there. In terms of the overall margin that low-double-digit margin that we’ve talked about in the past we’re obviously going to continue to drive that up.

We see opportunities from support and synergies not only in the working capital area, but also in some of the gross margin areas around procurement costs and those sorts of things. With regard to tariffs, the primary commodity here is class.

And then on the steel side, we’re really at this point haven’t seen any tariffs because it’s not tariffs are targeted or being levied towards value added products. So, so far, we’re in good shape there and I would tell you that, when you look at the decorative lighting fixture industry, it follows a very similar model.

So, should there be any price or excuse me cost pressures, we’d be in the soup with all of our competition. So, it really comes down to supply chain management to vendor development et cetera. So, we’re pretty confident in our ability to compete those, in those areas. And we see improvement opportunities as we start to get more into the business..

Stephen, as it relates to growth, we think the growth of Kichler will be very similar to the overall segments growth of 4% to 6% overtime..

Okay. 4% to 6%. All right. That’s helpful. And then the other question I had is, we’ve had a lot of news in the paint side, the DIY channel over at Lowe’s.

Do you think as you get into the second half of this year in the first quarter of this year, promo spending for you all in this sector increases?.

No. I wouldn’t characterize it that way. I mean, we’ve seen some promo increase in the last quarter as different brands and different products are launched and that's normal. But I’m not particularly expecting any significant increase in promo.

If you look across the different players in the industry, I think our partners demonstrated some of the best discipline. .

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

First one, I think on Hansgrohe, it looks like, it was a 3% year-over-year. That seems like, it’s a bit of a slowdown over the past couple of quarters. I think it’s been running kind of in the high-single-digits.

Anything you could point to there?.

Yes. Generally, saw good growth in Germany and China as I mentioned in our prepared remarks. So, we did see a little bit softness in the UK and a little bit slower growth in some of the Southern European countries growth. But now the stronger growth as we experienced in prior quarters.

So just a little bit of a pullback in some out there, some of their core markets, but overall, their home country of Germany has done well and their emerging market growth has been just terrific. .

And we’re seeing good -- we’re seeing the growth better around higher and actual brand as I mentioned as well as our good segment and we think in terms of good, better, best. And I think that’s always from me a good indication of solid market performance when you have both ends of the price continuum growing. .

Okay, that’s helpful. And then my second question would be, I just want to make sure I understood this correctly.

In terms of the raw material pricing dynamic, I think you’d mentioned in segment quarter you’ve going to catch up on the pricing side, is that really by the end of the second quarter, would you still anticipate a negative impact 2Q?.

I think there will be modest impact in Q2 and will improve as we go through the quarter. .

Your next question comes from the line of Kathryn Thompson with Thompson Research Group. Please go ahead. .

Good morning. This is Stephen on for Kathryn. Plumbing, the margin came in lower than expected. I guess can you maybe balance the mix impact.

I am little surprised with the strength in Watkins, I figured the margin decline would be less than it was?.

The margin was really driven by our growth investment as we talked about in displays and in some depreciation of those assets that we put into support growth, new plating line, a new distribution center over in Hansgrohe. We had a little bit of a price commodity lag. So together those as John mentioned are about $20 million. .

Not much of a mix impact in the quarter, we have a little bit of mix but not much at all..

Alright. And then maybe stepping back with a higher-level view. If this strength in trend to lower price point starter homes continues throughout the year, do you see any product gaps in your portfolio that you need to invest more in or acquire or do you expect one segment to benefit more on volume side than another? Thanks. .

We’ve paid particular attention over the years to make sure that we have a broad assortment where applicable whilst the opening price point does tend generally to have lower margins. They are not as low and as not as bigger as a spread as there once was as we work on both procurement and shop floor productivity and variable cost productivity.

So, we are in pretty good shape. And I think that’s evidenced by -- I’ll go through a couple of them that stand out for me, and our Watkins spa business, world leader in that space with very strong performance in the high end. We have also worked to come in to get more reasonably priced good level of product that we can sell online.

And that’s going very well. We have recently re-launched our Peerless brand which is an opening price point brand in plumbing and that’s taken up very well and is getting good positioning on the shelf.

When we look at our ability to land profitable growth in Menards, that required some outstanding value engineering and brand positioning with regards to the opening price point as well as having a packaged on the semi-custom piece.

So, our mantra is we need to be where our customers are buying from a channel perspective which obviously is e-business and we need to be where they are buying from a performance perspective as well. So, this is -- we put a lot of work and this happened over several years. .

Your next question will come from the line of Alex Rygiel with B. Riley FBR. Please go ahead..

Keith in your opening comments, you mentioned you’re very pleased with the quarter and on-plumbing an aggregate.

Could you comment on 2 or 3 surprises in the quarter either positive or negative that maybe you didn’t anticipate three months ago that you’re taking action on today?.

I expect the Kichler integration to go well, it’s exceeded my expectations. I knew that there would be, we knew that there would be a price cost lag, and that we would be able to manage that.

And that lent [ph] as expected, I would tell you, we got a little bit of a logistics headwind that I wasn’t quite ready for so of speak, we didn’t expect as a relates to some of the rules and how over the road truckers manage their time. And that’s driven the cost up a little bit. Oil started to pierce north a little bit more than I probably expected.

So, in the cost basket, there’s been some higher than expected, lower-than-expected but on average, I think we’re about ready for it. So, I think, I would characterize this quarter significantly more as on plan that I would surprises..

Your next question comes from the line of Keith Hughes from SunTrust Robinson Humphrey. Please go ahead. .

Most of the questions have been answered, but with a heavy share repurchase in the quarter, what is the ending share count?.

I think it’s around 3.10, Keith. .

And you highlighted in the prepared texts, another share repurchase number.

Is that in addition to what we saw in the first quarter?.

Yes, that was either, again, we were careful with our wording there. We said either 100 million to 150 million of either additional share repurchases or M&A throughout the balance of the year. .

Your next question comes from the line of Phillip Ng with Jefferies. Please go ahead. .

Given the moving pieces in decorative. Just curious, how should we think about margins for the full year and to offset some of these headwinds you are seeing. Is that more on the price side to cost side and then in a rising raw material environment.

How quickly can you kind of pass that through?.

As we talked a little bit about before Phillip, you think about the base business now separate that, because we’re in the middle of the Kichler acquisition. The base business, we would expect margin erosion, slight margins, modest margin erosion is how we’re characterizing it.

When you think about the effect on this segment from the Kichler acquisition that would be in a range of 150 to 200 basis point reduction. .

And then in terms of your ability to kind of pass that through from a pricing standpoint is it like a quarter lag, 2 quarters? How should we think about that?.

We have a significant customer concentration. So, we don’t talk about specific pricing actions in there. And I go back to my prior comment over the long-term of price commodity fluctuations we tend to stay flush. .

Okay, that’s helpful. And just one last one for me from a top-line perspective, pretty encouraging strong start in light of some the weather-related issues, some of the other companies have talked about. The market obviously nervous about higher rates. Just curious how inflated is your business and any early reads on the spring selling season? Thanks..

We don’t believe that rising interest rate is going to put a break on housing, full stop. The 10-year bond is up about 45 basis points since year-end. Mortgages rates are about 4.5% and we have that level of 2014. We are almost if not, almost there to 85% repair and remodeling which is significantly less than sort of the interest rates.

Our home equity lending is a very small part of the R&R market financing nowadays. The biggest driver in our opinion our expanded real wage growth and home price appreciation, consumer confidence, all those are positive. Our affordability, particularly when you look at historical standards, still very good.

Our view is that the market can digest a steady gradual increase in interest rates and that recurring model is a spend that’s more around a lifestyle decision as opposed to say a tax decision or an interest rate decision. So rising rates, generally signal a good economy and we do well in good economy.

So, we don’t expect a break in ‘18 or ‘19 as it relates to rising interest rates. .

Our final question will come from the line of Ken Zener with KeyBanc. Please go ahead. .

Good morning, gentlemen.

The last question is basically without the rising interest rates, which categories, realizing you are obviously 85% R&R and we have favorable view of R&D tied to rising prices with the homeowners equity, how if rates are going up though, full stop, I heard you guys, which categories would be more susceptible when you think about price points, so think about paint versus cabinets which might be more tied to cabinets, faucets under renovation.

Could you just discern it your comments a little bit by price point if you would? Thank you very much..

I don’t think it’s so much price continuum variation as it is new construction versus R&R. So, I would look more to the new -- the higher new construction segments as potentially being more impacted by that.

But as I am out in the market and I look at the issues around new construction, it’s not rate, it’s more capacity and skill trades and the ability to get the jobs completed. So, I would maybe twist my answer and not go on a price continuum discussion, it’s a more of a new construction impact than as I said we’re about 85% R&R..

Ladies and gentlemen, this will conclude today’s conference call. Thank you all for joining and you may now disconnect..