Good morning, ladies and gentlemen and thank you for standing by and welcome to the Masco First Quarter 2020 Earnings Call. My name is Carmen and I will be your operator for today’s call. As a reminder, today’s conference call is being recorded for replay purposes.

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

Thank you, Carmen and good morning. Welcome to Masco Corporation’s 2020 first quarter conference call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco’s Vice President and Chief Financial Officer.

Our first quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can’t take your question now, please call me directly at 313-792-5500.

Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We describe these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted.

We reconcile these adjusted metrics 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..

maintaining our strong liquidity and ensuring we are positioned to win in the recovery. Our liquidity remains strong at $1.8 billion at the end of the first quarter.

We are actively reducing our costs and conserving liquidity by cutting discretionary spending, implementing a hiring and wage fees, delaying discretionary capital expenditures and suspending our share buyback activity indefinitely. Our goal is to ensure we are able to support our customers in any scenario in the most cost efficient way possible.

While we are focused on short-term cost control during this pandemic, we remain committed to driving a long-term growth and will continue to invest in brand, innovation and service to ensure we win in the recovery.

We are in dynamic and uncertain times and accurately predicting the depth and duration of the impact of this pandemic, it is difficult at best. However, I would like to share with you how we are currently thinking about the second quarter, understanding that we have withdrawn our formal guidance for 2020 and 2021.

With the numerous shutdown and shelter-in-place orders, we anticipate second quarter sales to be down in the rage of 20% to 25%. This assumes that in the United States and Europe, our closed facilities began reopening throughout the month of May and that there are no further restrictions enacted in additional states or geographies.

With the sudden nature of the shutdowns and restrictions and distribution, our decremental margins will likely be in the 40% to 45% range in the second quarter and will improve throughout the year to a full year decremental of roughly 35%.

These decremental margins are a result of the inefficiencies of the rapid shutdown and operating in reconfigured plants due to the safety precautions we have enacted. Additionally, we anticipate healthy demand upon reopening.

Transitioning now to our supply chain, at the beginning of the quarter, the main concern about COVID-19 was its impact on our Asian supply chain.

While our factory and third-party suppliers in China were shutdown for the majority of the first quarter, our factory and nearly all of our third-party suppliers are now operating at or close to 100% which we hope is a good sign for the rest of the world.

As we managed through the near-term ever-changing environment, we are working closely with our leaders across the organization to assess the impact on 2021 and we are determining how to best position Masco to win as we move through the recovery.

We believe our work over the past few years to refocus our portfolio on lower ticket, less cyclical, repair and remodel oriented products and our strong position in DIY oriented products positions Masco particularly well to weather this storm and to outperform during the recovery.

With that, I will now turn the call over to John for additional detail on how our first quarter and the trends we are seeing so far in Q2.

John?.

Thank you, Keith and good morning everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to Slide 8, we had a solid first quarter and sales increased 4% and grew 5% in local currency.

Foreign currency translation unfavorably impacted our first quarter revenue by approximately $9 million. In local currency, North American sales increased 8% in the quarter. This performance was driven by strong volume growth in our paint and plumbing businesses. This is partially offset by lower volumes in our lighting and hardware businesses.

In local currency, international sales decreased 3% in the quarter driven by lower volumes in unfavorable mix partially offset by pricing actions. Gross margins were 34.8%, up 30 basis points. Our SG&A as a percent of sales decreased 50 basis points to 20.4%.

We delivered solid bottom line performance as operating income increased 11% to $228 million, with operating margins expanding 80 basis points to 14.4% despite the increased tariff costs that we discussed last quarter. Our EPS was $0.46 in the quarter, an increase of 24% compared to the first quarter of 2019.

Turning to the reminder of the year, as Keith mentioned, we have withdrawn our guidance for 2020 and 2021.

However, to be as transparent as possible given these dynamic times, we have provided our key assumptions such as our normalized tax rate, general corporate expense and share count, along with other items on Slide 22 of the earnings call deck posted on our website.

More importantly, to help you better understand the status of our business I will provide additional color on the sales trends we are seeing in April as I walk through each segment and wrap up with more detail on our liquidity position before I turn the call back over to Keith.

Turning to Slide 9, plumbing sales increased 3%, excluding the impact of currency. Foreign currency translation unfavorably impacted this segment sales, by approximately $9 million in the quarter. North American sales increased 6% in local currency as we experienced strong demand across our wholesale retail and e-commerce channels.

As Keith mentioned, Delta delivered another record sales quarter with low double digit growth their increased volumes in their Faucet showering and bathing products North American sales growth in the quarter was unfavorably impacted by approximately 2% as a result of facility closures at our spa business in California due to the state order.

International plumbing sales decreased 3% in local currency Hansgrohe mid single-digit growth in its home market of Germany. This growth was more than offset by an approximately 20% decline in China declines in other European markets, including the UK, France, Spain and Austria as a result of the impact from COVID-19.

Operating profit in the quarter increased 4% driven by incremental volume in a lower stand partially offset by the full impact of tariffs. Let’s turn to the trends we have recently seen in our plumbing markets.

While we typically do not discuss inter quarter trends as results from only a few weeks in a quarter can be misleading due to short-term sale fluctuations, we feel that any data points in this unprecedented situation are helpful.

In aggregate our expectation is that plumbing segments sales in the second quarter excluding currency will be down between 30% and 35% over prior year and segment sales in April will be down approximately 35%. This decline is being driven by closure orders affecting our spa business, lower demand in several other businesses in this segment.

We anticipate our spa sales will decline by approximately $100 million in the second quarter as Mexico and California are principle spa manufacturing locations issued shelter-in-place orders in late March in early April. These orders caused us to seize production.

Our expectation is that we will begin limited production by the end of May and ramp up thereafter. Interestingly enough demand for spa both through our specialty dealer channel and through our online customers, remains robust.

Additionally, our international business is being impacted by shelter-in-place orders in many European countries, including the shutdown of our UK operation. In April, we are seeing high double digit sales declines in the UK, Italy and France and approximately 20% declines in Germany, our largest market.

China appears to be rebounding nicely from both the supply chain and demand perspective as their economy begins to reopen. To illustrate this, China sales were down approximately 20% year over year in the first quarter but we currently expect April to be flat to up slightly from last year. Due to shelter-in-place orders in many states in the U.S.

and Canada many plumbing wholesalers and plumbing showrooms remain closed impacting our North American plumbing sales. Some of this demand has shifted to the e-commerce channel and based on what we are hearing from customers we believe there will be additional pent up demand as the economy reopens.

Turning to Slide 10, Decorative Architectural grew 9% for the first quarter. This performance was driven by high-teens percentage growth in our paint business with strong double-digit growth in DIY and mid single-digit growth in Pro.

Our outstanding DIY paint results benefited from resurgence in DIY painting as Steve issued shelter-in-place orders beginning in March.

While it is too early to call this a trend, we are well positioned with Behr’s compelling quality and value proposition and a strong partner with the Home Depot to capitalize on any potential shifts in consumer behavior. In addition, we remain committed to our investments in the Pro and are pleased with the performance in the quarter.

Strong paint sales were partially offset by lower sales in our lighting and builders hardware businesses as we mentioned on our fourth quarter earning call. Lighting sales were impacted by approximately $50 million due to the loss of a portion of a private label program and inventory rebalancing at a customer.

Similar to our plumbing segment, we experienced strong increase in online orders in all three businesses in this segment. As consumers shifted their purchasing habits, operating profit in the quarter increased by 17% driven by incremental volume partially offset by the tariff impact on lighting and builders’ hardware.

We took steps to strengthen our lighting business during the quarter by closing the East Coast Distribution Center and consolidating that activity into our other facilities.

Turning to April trends, we expect segment sales in April will be down approximately 10% over prior year and anticipate segment sales in the second quarter will be down in the range of 5% to 10%.

As a reminder, second quarter lighting sales will also be negatively impacted by approximately $15 million due to the loss of a portion of a private label program in inventory rebalancing at a customer.

Turning to Slide 11, our balance sheet remains strong with net debt to EBITDA at 1.6x and we ended the quarter with approximately $1.8 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Borrowing on our revolver is subject to two main covenants. Both of which have plenty of cushion.

The first covenant is a net debt leverage covenant of less than 4x and at the end of the quarter, we are at 1.6x. The second covenant is an interest coverage covenant of no less than 2.5x. At the end of the quarter, we are at 8.5x. Turning to our debt maturities, we are in good shape as our next maturity of $400 million is not due until April of 2021.

In the past month, both Moody’s and Fitch reaffirmed their investment grade ratings with Fitch reaffirming its positive outlook on our improved – due to our improved portfolio of businesses following the divestitures of our Cabinetry and Windows segments. We are pleased that we closed the Cabinetry sale in February for $1 billion.

As a reminder, we received $850 million of cash proceeds, approximately $630 million in net cash after taxes and expenses. We also received preferred stock of the buyer with a liquidation preference of $150 million. Working capital as a percent of sales improved 130 basis points versus prior year at 17%.

We now expect full year working capital as a percent of sales will be in the range of 16% to 17%. Lastly, during the quarter, we continue that focus on shareholder value by deploying approximately $600 million to repurchase roughly 14.2 million shares.

Keith mentioned we are suspending our share buyback activity indefinitely therefore estimate our 2020 average diluted share count will be approximately 266 million shares. And with that, I will turn the call back over to Keith..

Thank you, John. The COVID-19 pandemic may have lasting effects on the economy, consumer behavior and homeownership, all of which we will continue to assess.

There could be increased interest in single-family housing with more space in the house and more distance from neighbors, increased remote working could lead to lower home turnover, but also increased remodeling spending.

Homeowners may take on more do-it-yourself projects themselves, especially easy to do projects such as painting as opposed to having other people in their homes. And consumers could increase their preference for trusted brands, particularly in products such as ours that touch water.

What we do know is that our actions over the past 6 years to create a less cyclical, more resilient portfolio, together with our strong brands and innovation pipeline positions Masco extremely well to outperform the competition, the outstanding partners to our customers and create shareholder value through a recovery.

Our lower ticket repair and remodel products performed well in the downturn and only declined 15% peak to trough in the 2008 to 2009 housing led recession. Many of our products are DIY-focused, particularly paint. And we have invested in and are well-positioned in all channels of distribution, including the rapidly growing e-commerce channel.

We have strong liquidity and generate significant cash flow in good times and bad allowing us to gain share by investing in new products and programs even in slower times. We have positioned our balance sheet to be a tool that will allow us to take advantage of opportunities that may arise such as share buyback or attractive M&A.

With that, I will now open the call up for questions.

Carmen?.

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

Thanks very much guys and yes, congratulations on doing extremely well in a tough environment. Hope you guys are all doing well.

I wanted to ask a question regarding your outlook, particularly on the decremental margins, you had suggested that you are assuming a reopening in May, no resumption of second wave effects that might result in significant shutdowns.

And you suggested that the decremental margin would be 40% to 45% in 2Q and then improve I think you said the 35% for full year just want to make sure I heard that right? And if you could give us a sense for how those decrementals may look in between the two divisions whether there is just to make sure that we are thinking about it clearly? And then also when you eventually go to incremental margins, when that happy day arise, can you give us a sense of where you think the incremental margins will be as a result of your comments with the decrementals in the near-term?.

Stephen thanks for the question. I talked in my prepared remarks a little bit about the sudden nature of the shutdown and some efficiencies that we are experiencing operating our plants as we improve social distancing and take on – and address our number one priority which is the safety of our employees.

So there are some inefficiencies there that are affecting the decrementals. We are holding on to some cost at this point to be able to be better prepared to serve our customers in the rebound if you will.

Keep in mind that prior to the pandemic, we were guiding towards low incremental margins lower than we typically would in plumbing through the high tariff headwinds and even lower incrementals in decorative architecture due to tariff headwinds and some loss of the private label business and lighting that we called out last quarter as it relates to Q1, Q2 and Q3 volume losses.

So our decrementals will be higher in Q2 and we do expect to improve them throughout the year. You are right in terms of full year decrementals in that 35% range.

When we anticipate how our cost take-outs will flow and the way we will look at – looking at our comps we would expect to see strong incrementals, excuse me, strong improvement in our decrementals in Q4 to get to that full year range of roughly 35%.

Admittedly, there is lot of variables in there, but that’s the more color in terms of how we are thinking about the decrementals.

In terms of incrementals, John, you want to talk about?.

Yes. In terms of incrementals, yes, I would expect them to be materially different from our decrementals, I mean, I think as volume comes back, I would think that you would see them in that 30% to 35% range which we have traditionally enjoyed on volume as we have grown our business over the years..

Your next question will be from Mike Wood with Nomura Instinet. Please go ahead with your question..

Hi, good morning. Thanks for all the data that you have provided.

You gave the impact of the spot business shutdown on sales in 2Q, are you able to give us any information in terms of the profit impact that that will have?.

Well, I think if you think about those, our typical decrementals, I think that’s a good way to look at it..

Yes. And to Keith’s point, because those plants are shutdown, we are carrying some extra costs. So it is probably that’s one of the reasons we are driving higher income decrementals in the second quarter because we do view the short-term – the shutdowns are short-term in nature. And so we have the fair number of employees around.

So we are able to produce when that plant comes back, those plants come back up online..

And in terms of the….

Go ahead..

I am sorry, go ahead..

I was just going to highlight a comment we made which is really a testament to the strength of that business in that what we are seeing in our demand patterns for our spa business and this is definitely an ecommerce channel and most definitely in our specialty retail channel is a continued demand strong demand for our products and that this issues that we are facing in this particular part of our business relate to shut down of our manufacturing capabilities in our plants because of shutdown orders in Mexico and in California I think that’s an important nuance to point than a nuance I think its an important fact that this is more of a supply related short-term issue that we are addressing and we will come out it as these state orders and in the case of Mexico country order left..

Understood. Thank you. And in terms of the 2Q guidance that you provided I understand how you try to incorporate when facilities may reopen and that no additional shelter in place orders could go into affect how are you thinking about the impact that this has in terms of paint gallon sales.

In terms of you called out consumers increasingly paining because they are at home and they are pulling forward may be some of those honey to-do list projects are you expecting that that continues if you can just talk about what you might think is temporary or permanent in terms of consumer behavioral trends related to this? Thank you..

When we think about the impact of COVID-19 buying patterns on psyche of our consumers it is difficult to say what will be a structural change and what will stay and what may be as a change that is more fleeting for sure we are seeing a move to online and we are seeing that even in our rough plumbing business where pros buy how much of that sticks remains to be seen with respect to our paint business while we worked really hard form a mixed prospective to more or less neutralize the mixed impact of pro to DIY there is a little bit but we have worked hard and we are leveraging the volume on our pro business so that those are both good businesses for us but we are definitely led about 75% mix skewed towards DIY and there is no question that we are seeing a resurgence of DIY demand for those reasons that we all know and that I talked about in my comments so do we anticipate that this to stack I think that’s going to stick through Q2 if that is a longer term structural change I think realistically that remains to be seen but we like our positioning definitely with our strong partner and a strong brands and our quality and DIY and we also like our positioning and how we have been able to manage the profitability business on the pro so not sure of this trend towards DIY we will stick indefinitely but we are the way I see it is going to stay through Q2..

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

Hey, good morning. Thanks for taking the question and hope everyone is doing well.

I wanted to ask back on the 2Q revenue guide sort of what you are seeing out of end consumer demand it sounded like your seeing something perhaps better there relative to the discrete impact of the shutdowns which you attributed somewhat severe particularly in the spa business are you able to sort of quantify or ballpark where the end demand feels like it is tracking relative to the discrete impact of the shutdowns across the business? Thank you..

When you say in demand, Matthew, what do you – can you help me understand your question a little bit better?.

Certainly.

So were consumer demand relative to your selling demand for the customers and then speaking really specifically about the plants that were shut down which is a little bit different than what the consumer demand is of course?.

So in terms of how our demand from the consumer relates to lets say a change in inventory position in our channel we are definitely seeing this is consumer demand we are not due to some of the issues as it relates to some of the intermittent shutdowns of our facilities for employee safety and some of the longer shutdowns due to state orders.

We have seen a little bit of our inventory and I think in the channel, it’s safe to say there is little bit of inventory reduction in the channel. So, this is POS. This is good demand, particularly as we see it in paint. John, I don’t know….

Yes. The other thing I would point to is just, Matthew, is Keith comments on the demand we are experiencing spas right. It’s a high ticket item, the fact that demand for spas in both online channel and our specialty dealer channel remains very healthy.

We think that it is a good sign that the higher end consumer is out there shopping and looking to continue to improve their homes. So I think both paints, as Keith just mentioned, spas is a pretty good indicative sign of where the consumer is..

Your next question is from the line of Ken Zener with KeyBanc. Please go ahead..

Good morning, gentlemen. Thank you. Appreciate your comments on the quarter, can you perhaps discuss obviously the spa you called that out specifically as its related to a supply issue, but can you maybe talk about how different markets are responding in terms of demand, so obviously, plumbing is down a lot, but there is big variances within America.

Northern California, where I am, is very severe in terms of being shutdown.

But other places like Denver or Dallas, could you give us a feel for how state home orders is affecting and what you are seeing in both plumbing, which is less I guess DIY perhaps than paint? If you could just explain some of that, the differences that you are seeing that would be very much appreciated? Thank you in terms of demand..

Sure, Ken. Thanks for the question. I will talk to demand as is relates to a couple of parameters, geographical and then maybe talk a little bit about channel, which maybe helpful for you. Let’s just start east to west here in China we talked about that a little bit. The demand appears to be rebounding quite nicely.

We were down as we mentioned about 21% in Q1. And we think in Q1, we should be flat to maybe even up a little bit, in Germany, down in that 20% range in April, but we are seeing that starting to improve, seeing in Europe, we do see significant sale decline in UK, Italy, Spain and France.

Those are due mainly to shelter-in-place and temporary closures of some of our distribution outlets or our customer’s outlets for plumbing. Obviously, in the U.S. and Canada, we have been impacted by shelter-in-place across many states.

I don’t really have a lot different to offer beyond what we all know that and Florida has been – and Texas has been hit a little bit less and up in the New England and the Northeast has been hit a little bit harder. In terms of channels, many large retailers remained open and sales is only up modestly in those stores.

Retail tends to skew a little bit towards DIY as we have said and that’s helping it out a little bit. Paint sales as I talked about and retail have been very nicely positive year-over-year. Plumbing wholesale continuing here with the channels, by and large, plumbing wholesalers have closed their showrooms, but kept their counter, their back-end open.

Sales are impacted a little bit more since many homeowners are reluctant to have someone in their house. And sometimes that tends to be more of a Pro install and we do see some construction being limited by states here in Michigan.

And then from a channel perspective, e-commerce category is performing quite well and is up year-over-year really across the board. So, I think our diversification both in terms of geographies and channels is helping the situation out and we are positioned to win really as these channels changes..

Ken, what I would add to the Keith’s comments, yes, we do think consumer demand is good. But the question that we are very closely watching is, how long does this last? As you well aware, stimulus checks hit a lot of consumers kind of mid-April and that could temporarily boost things.

And that’s why we are kind of reluctant to get too far out there how strong demand is until we really get a good sense over the longer term and short term over a couple of weeks how demand is and consumers are going to react to things. So I just want to keep that in the back of your mind as well..

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

Hey, guys. Thank you for taking my question.

Questions on CapEx, I think you mentioned that maintenance is about $75 million, so it seems like there is about $40 million or $45 million sort of non-essential spend in your outlook, can you just help us understand what that non-essential relates to and how quickly you could pullback on that if needed?.

Sure, John. As Keith mentioned and I mentioned, one of the things that we, I think continuing to invest in even through the recession is innovation.

And a lot of that of the non-maintenance CapEx goes to tooling for new products, so jigs and fixtures and things for new plumbing products and shower products, some new things that we are delivering in the paint area.

So that’s generally where that capital is going, because we think it’s important to continue to drive the consumer to our retail partners, our showroom partners, even though at times maybe tougher having new product out there, continues to give us good shelf space with our partners and draws consumer footsteps into their locations.

And so whether that’s their online locations or whether that’s on their physical locations, we think it’s important to continue to drive innovation across the entire portfolio..

John, in terms of some of those projects that we will look at cutting sometimes there is information technology upgrades and those sorts of things that we can delay a little bit, so those sorts of things and some are related to equipment that we can delay a little bit. That’s really what we are talking about..

Thanks guys..

Your next question is from the line of Mike Dahl with RBC Capital Markets. Please go ahead with your question..

Good morning. Thanks for taking my question and helpful information so far. It’s good to get so much of this detail out there. I had one follow-up on the plumbing business and you have given some of the components and channel commentary.

When I think about the impact of the spa business, in particular, it looks like that to the prior question, it looks like that impact alone is a 10% year-on-year Delta in plumbing sales and you highlighted some fairly severe declines in Europe. So I guess if I am – I guess the question is really can you breakout then your core U.S.

business expectations for plumbing ex the spa business, because it seems like they assumed 30% to 35% for the segment with some of those other components would imply that core U.S.

plumbing may or maybe down something in the teens or so?.

Yes, Mike, it’s John. In terms of the math, you have done on most of it, that’s right. I would say as we look at North American plumbing, we are probably down a little bit better higher than that, but probably down closer to that 20% range or so would be the way I would characterize how we are currently viewing North American plumbing..

Okay, got it. Thank you..

Your next question is from the line of Michael Rehaut with JPMorgan. Please go ahead with your question..

Thanks. Good morning, everyone and also just want to extend my wishes. Hope everyone is healthy and safe out there across your organization.

First question, I just wanted to circle back if I could to an earlier question around decrementals and very much appreciate the commentary there and obviously in the initial stages makes complete sense that you would have a higher than normal decremental.

As you look towards the full year at 35% that would then certainly point to something better than that by the time you get to the fourth quarter.

Initially or over time, we had thought of decrementals in a kind of a normalized basis, perhaps of 30% to 35% of the business where decorative was a little bit lower, plumbing was a little bit higher within that range.

Just wanted to kind of circle back on those assumptions and if given the full year trend is it correct to assume certainly that you be at a better position in that 35% or so by the end of the year and that decorative would be a little bit lower than plumbing?.

First, I think just to make sure we are clear I think decrementals by segment or incrementals by segment however you want to look at it, they're approximately the same.

I don't think there's a material difference between how you look at the incrementals or decrementals between plumbing and decorative architecture they are both in at 30% to 35% range the one thing that I would mention and because of the nature of these circumstances we are finding ourselves through if that always a straight line quarter to quarter right and so what Keith was and I were trying to point out is obviously we have got high decrementals here the first part of things but if things begin to normalize then they tend to revert back to a more typical incremental/decremental margins and so that’s how we are seeing it for the full year so if you think about the way that we see the progression through the year I think that should help if things through how that should work..

Okay, I appreciate that. I guess secondly, I just wanted to circle back a little bit on paint and there has been obviously a decent amount of press and coverage around room-by-room DIY projects as you have alluded to in the shelter-in-place backdrop and we also have the strong U.S.

census retail sales out of home improvement for March I was hoping to get a sense if possible around how the monthly trends occurred for the paint business in the U.S.

it is an overall 9% segment growth for the quarter I am assuming that there was a perhaps a particularly strong March and then you are expecting a 10% decline in April any sense of how strong March was and if there was any if you have any type of sense of triangulation standpoint around perhaps what might have been put forward or a certain jump in activity around those proceeding week or two as people lined up projects before shelter-in-place..

Mike you are exactly right on the inside the quarter monthly trends. That's what we saw.

We saw a nice, call it, a single-digit pickup in January and we got near to 20% range in March so that is where we saw come in in terms of if that’s full head volume or if there is more volume if that’s consistent that’s not the same really don’t know at this point I think the key for us and the team that John said I don’t know I trying to communicate across this broad geographies broad channels with a lot of uncertainty is that we certainly are thinking about our estimation of where this overall market will end as we move through this pandemic what is more important for us is in so much precision of our forecast what’s important for us is flexibility and having the capacity and the appropriate costs to get through this as effectively as we can while being ready to win and position to win and recovery and that includes capacity and it includes investment in technology and R&D and brand so that’s the way we are thinking about it.

But specifically to that, inside the quarter, you hit it in what was on.

Great. Thank you so much..

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

Hey guys.

I guess one more question on the decremental margin, I am just curious how much of that – does that account for any raw mat deflation particularly in your paint business with oil down pretty dramatically? And any potential lift from any cost pick initiatives that you might be pursuing down the road?.

Yes Phil I mean the decremental margins are all inclusive of what we see and what we anticipate in our business across the board. So in terms of raw materials, let me just – I think you touched on that, let me just give you a sense of how we are looking at raw materials now across the portfolio.

So, copper and zinc are down more than 20% year-over-year and most of that decline took place here in the first quarter. So, we will, but that will probably help offset some of the tariff impact that we have been feeling, particularly in the second half of the year. To your point, oil prices have declined here recently.

Clearly, that will help our freight cost out, but as I think you are pretty well aware, freight is a relatively small piece of our overall cost structure. In terms of the commodity basket for paints, the TiO2 producers have announced price increases. And obviously in this environment, you will see how that plays out.

Though there has been strong demand across the paint industry so that those could stay in place and oil prices do impact the raw material basket in paint. Specifically, resin prices follow oil to some extent, but to-date, we have not yet seen a material movement in our resin costs or other costs as a result of the decline in oil prices.

Propylene is a fairly downstream from crude and it’s held up pretty well so far. And so oil and resins are definitely a one-for-one relationship by any means, but if oil stays at these levels for a sustained period of time, our guess is that we would anticipate some easing on resin prices, particularly in the back half of the year..

Perfect.

And then just one more for me, Keith and John, you guys have seen a few cycles, can you guys give us a sense how you are thinking about the depth and perhaps the duration of this downturn, how you are positioned coming out of it? It seems like it’s more of a shock rather than any real long-term you have seen it pretty upbeat about the outlook, but just kind of walk us through how you are thinking about this cycle versus the last? Thank you..

Yes. I think it’s a little bit of a re-price of a prior comment I made and that is that the depth and duration of the impact of this pandemic is unknowable.

And that while we certainly are working hard to understand and to look at both trailing and leading indices and metrics that give us the best color that we can, most importantly, we are talking to our customers and our consumers to try to understand how they feel about the nature of demand, but it’s unknowable. So, our focus is on flexibility.

And being able to win in any shape recovery and any length of duration and that goes back to managing our cost structure in the short-term.

And then when we move into the recovery period to focus on winning and taking market share through our leading brands and it continued investment in those brands and innovation in having the capacity to support and that’s exactly what we are going do..

Okay, thanks..

Your next question is from the line of Susan Maklari with Goldman Sachs. Please go ahead..

Thank you. Good morning.

I just wanted to follow-up on the capital allocation side of things recognizing that the uncertainty has caused you to pullback on your repurchase activity, but given the liquidity position and your cash balances and things, what would you need to see to start getting back in the market again and any updates that you can give us along with that on the M&A pipeline and any changes there?.

Yes, sure, Susan. As we said in our prepared remarks, we are watching the situation closely, but fundamentally, our long-term capital allocation objectives have not changed, right. We want to be disciplined and balanced into how we approach it. And as we discussed, we are going to be conservative on our liquidity here in the near-term.

We have suspended our share repurchase activity and we will continue to evaluate our liquidity and market conditions before we resume it. So we have got some sense of things that are starting to get a little better. With respect to M&A, the situation may produce some attractive opportunities in the near-term.

Don’t know as oftentimes, it takes sellers some time to readjust their expectations to market conditions. And so you might not see as many, but we continue to evaluate M&A that will be highly selective. It’s got to be the right strategic fit, right return and then we are committed to our dividend.

We do view our current payout as reasonable considering our level of liquidity in our cash generation. So given our strong cash flow it will be conservative in the near term but then continue to evaluate market conditions and continually reevaluate how we want to proceed..

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

Hi, good morning guys. Thank you for hosting this call.

I know it is not an easy time but just a few more questions what is the typical incremental volume or incremental margins on volumes for your business in a normal type of environment?.

Typically be 30% or 35% Justin..

So for the most of the disruption associated with like discontinuing efforts and supply chain disruptions sort of things you explained I guess the Delta there?.

Correct yes here in the near-term yes..

Okay.

And then in terms of the raw material basket in general has been favorable and I know that you mentioned some, some partial offsets to the negative but in terms of price dynamics across your portfolio including your coatings business paint business as well as your plumbing business across your portfolio how do you expect price trends to hold up in this kind of air pocket kind of environment where you do have raw material tailwind but recognizing all sort of volume?.

I think pricing dynamics across the portfolio I know varies our European business is different and they generally have put in – have put price in earlier this year, maybe different by channel here from time to time we may put some price bonus in the trade or wholesale channel with respect to paint just given the nature of our relationship with one customer we don’t discuss pricing conversations with that individual customer..

Okay. And then last question for me is just the cash conversion of the model.

Just thinking of maybe the way we can kind of think about it as – look at the free cash flow as a percentage of revenues or free cash flows a percentage of net income how do you think that holds up in these types of – type of environment as you sensitize your model?.

Yes. I think it holds up reasonably well, Justin.

I mean we were – at the beginning of the year before anything of this really emerged we are talking about a 100% free cash flow conversion and net income and given the way our CapEx comes down our working capital can come in we believe we can maintain that 100% free cash flow conversion on net income to this period of time..

Excellent. Thank you, guys..

Your next question comes from the line of Garik Shmois with Loop Capital. Please go ahead..

Hi, thanks/ Thanks for scooping me in.

Just want to follow-up on the spa business your commentary just on the demand pretty encouraging just wondering if you look back on how that business performed in past recessions how did that hold up given the more and fluent nature of the target market just trying to get a sense of the how sustainable some of that point of demand could be right now if there is any lag-affected downturn?.

Yes in past cycles Garik as you can expect in particularly in the last cycle because of the housing lever session this unit saw some pretty significant volume declines in the 08 or 09 recession and so I would not certainly this is an apples-to-apples comparison today versus what we have experienced last time.

We do we would expect that there will be some softening just given the impact of the broader economy that we feel pretty good about how this company is positioned because you may recall in the last recession a fair number of their competition fell by the way side and went bankrupt and so they think of a fair amount of share as them as the market leader we expect them to maintain that position even through the cycle and I think an important piece to know Garik is this company never lost money even in the worst of the 08 09 recession we like the fundamental of this space as well when we think about wellness health benefits spas it is pretty incredible I mean new spa or relatively new about a year and I can count on one hand the time is right then home and haven’t taken the spa it is great for the social aspect of the family that is great for health particularly for aging people it helps you sleep better it is a great product that is positioned well for the demographics of the United States and it is almost international or second most international business so I think that geographic dispersion is real strong and we have a thousand plus of the best dealers out there and we have a leadership that is very strong and developing those leaders.

So, all-in-all we like this business very much..

Your next question is from the line of Seldon Clarke with Deutsche Bank. Please go ahead..

Hey, thanks for the question.

Appreciate the color on quarter-to-date trends and sales guidance, but can you just give us a sense of what this assumes as it relates to volume growth and price mix and whether the current environment has changed your pricing strategy at all just given the impact of tariffs on the second quarter?.

So, Seldon, you may remember that we put most of our pricing related to the tariffs in early 2019. And so we really cover that and feel we are covered off on that last year. The balance of the pricing dynamics, yes, we are really not going to talk about future pricing actions on this call..

Your next question will be from Truman Patterson with Wells Fargo. Please go ahead..

Hi, good morning guys and thanks for taking my question. Glad to hear all of you guys are safe.

So big picture, you have $1.8 billion in liquidity defensively positioned businesses that drive a lot of cash flow, could you just discuss your thoughts on maybe pulling forward some of the investments in your hub stores for the Behr contractor, maybe go out get a little bit more offensive try and gain more share in that channel during this downturn?.

We are committed to the growth in the Pro. It’s a segment as I talked about that with the leverage we are getting has improved in profitability over the years. So it’s a good business for us and we have a good sales picture, if you will. We have a good value proposition for the Pro there, particularly the Pro that’s already shopping at the Home Depot.

So we like that business. We are going to continue to invest in it. We are going to invest in both people, technology hub stores. We are going to continue to work and understand where that best investment is to make at any given time.

In terms of the specifics, we are not going to talk about that, but in a more general sense, we are going to continue to divest in that and we think we have a very good reason to do that, both in terms of value and ability to win..

Okay, thank you..

Your next question will be from Steven Ramsey with Thompson Research. Please go ahead with your questions..

Good morning.

Just wanted to discuss Kichler for a minute, can you maybe discuss how the current impact the adjustments you have to make in the near-term impacts the longer term cost structure reductions and changes you are making to that unit?.

We are continuing to work as we are across our entire portfolio to optimize our cost structure understanding that there is a short-term hit that we are taking as we are in what I am – I would call the crisis, but we want to have our capacity and product development capabilities etcetera in place for when we have the recovery.

So we are looking individually across our portfolio at what that means and we are continuing to evaluate it. And I think we are going to learn a lot over the next quarter or two as we really see what happens as states open up. So we are looking across the business at our cost footprint at all of our business units..

Okay. I think we are going to conclude the call. We tried to make this a little bit of a different call giving the fact that this is a different situation to delve in to as much as detail and with as much transparency as we can as it relates to how we are thinking about this business.

I want to encourage everyone to stay safe and be healthy and I hope that you and your families are getting along as well as you can in this crisis. Thank you very much for giving us your time. Bye-bye..

Thank you for participating in today’s conference call. This concludes the call. You may now disconnect..