Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to Masco Corporation's 2019 third quarter Conference call My.
My name is Twond and I will be operator for today's call.
As a reminder, today's conference is being recorded for replay purposes.
The asked the question for stalled in the number one of your telephone keypad <unk>.
Withdraw your question. Please first about.
I would now called over to David Chico. Thanks.
Treasurer and Investor Relations you may begin.
Thank you its Wanda and good morning, welcome to Masco Corporation's 2019 third quarter conference call.
With me today, or Keith Allman, President and CEO , Masco, and Johnson advice, Mascus, Vice President and Chief Financial Officer.
Our third quarter earnings release in the presentation slides that we will refer to today are available on our website under Investor Relations.
Following our remarks, well 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 a 31379 to 5500.
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've described these risks and uncertainties in our risk factors and other disclosures in or Form 10-K , and our Form 10-Q that we filed with the Securities and Exchange Commission.
Our statements also include non-GAAP financial metrics.
Our references to operating profit in earnings per share will be as adjusted unless otherwise noted.
We reconciled these adjusted metrics the gap in our earnings release presentation slides, which are available on our website under Investor Relations.
Finally, please note that we have accounted for windows businesses as discontinued operations for all periods presented.
With that and I'll turn the call over to Keith.
Thank you Dave.
Good morning, everyone and thank you for joining us today.
For.
The third quarter, our topline increased 3%, excluding the impact of currency.
Driven by growth in plumbing and strong performance in our paint business.
Operating profit grew 8% and operating margins expanded 80 basis points to 16.7% in the quarter due to higher volume pricing actions and disciplined cost control.
Our EPS grew 11% to 68 cents per share.
Turning to our segment performance.
Our plumbing segment grew 1% or 3% in local currency.
Delta had a record sales quarter led by growth in Beijing, and sanitary Ware products, Brizo, our showroom, Brad and pricing actions.
Additionally, I'm proud.
That 45th time Delta Faucet company achieved the Watersense sustained Excellence award.
This is the highest partner recognition from the U.S. EPA awarded for Deltas continued outstanding efforts to advance the water sense program and promote water efficiency.
Watkins also had a nother record sales quarter as it continued to gain share on the spot market with its broad assortment of price points programs and innovative products.
International plumbing grew 5% in local currency due to strong growth in Germany, China.
China and France, as how is growing launch new products into the market as we discussed last quarter.
And our decorative architectural segment sales grew 5%.
This growth was led by low double digit growth in our paint business, including high single digit growth and be iwai paint and double digit growth in propane.
We capitalized on pent up demand and gain share on the paint market with our industry, leading brands quality and service along with great execution by our bear team and our partner the home depot.
During the fourth quarter, we will continue to work with the home depot to enhance the shopping experience, what new color centers, new color selection tools and new products.
Moving on to Cabinetry.
Our cabinet sales declined 3% in the quarter.
This decline was largely due to mix as our lower price point merillat quality and card L brands performed very well in the quarter.
Despite the lower sales, we expanded margins in this segment by 210 basis points in the quarter.
And achieved operating margins of 11.7%.
Due to pricing actions and cost control.
Turning to capital allocation.
We continued our share repurchase activity in the quarter by repurchasing 3.8 million shares for approximately $151 million.
Bringing our year to date share repurchase total to $440 billion.
As it relates to our divestitures.
We completed the divestiture of our UK window business in early September .
And our very pleased to have signed an agreement to divest milgard for $725 million.
We anticipate closing this transaction in the fourth quarter, and et cetera, and expect net proceeds after tax and expenses to be approximately $560 million.
We will likely deployed $200 million of these proceeds towards retiring our March 2020 notes and the remainder toward share repurchases during the fourth quarter.
In addition, we're making good progress on the sale of Cabinetry, and we remain on track with that process.
Lastly, due to the treatment of our windows businesses as discontinued operations.
And our continued performance as expected.
We are narrowing and updating our anticipating anticipated earnings per share for 2019 to be in the range of $2.52 to $2.56 from our previous range of $2.62 to $2.72.
Now I'd like to turn the call over to John will go over our operational and financial performance in detail John .
Thank you Keith and good morning, everyone.
As Steve mentioned most of my comments will focus on adjusted performance from continuing operations, excluding the impact of rationalization and other onetime items.
Turning to slide six sales increased 2% and grew 3% in local currency.
Foreign currency translation unfavorably impacted our third quarter revenue by approximately $15 million.
In local currency North American sales increased 3% in the corner.
This performance was driven by volume growth in our paint business and disciplined pricing actions across all segments.
This was partially offset by lower volumes in our lighting and hardware businesses the mix impact in our chemistry business.
In local currency international sales increased 5% in the corner with strong growth in central Europe and China.
Gross margins were 34.4% up 80 basis points.
Our rest DNA as a percent of sales matched prior year at 17.7% is we remain focused on cost control.
We delivered solid bottom line performance is operating income increased 8% to $326 million was operating margins expanding 80 basis points to 16.7%.
Our EPS was 68 cents in the quarter, an increase of 11% compared to the third quarter of 2018.
We are narrowing and updating our annual EPS estimate range to $2, a 52 cents to $2.56 per share to reflect discontinued operations accounting for our window segment.
This compares to a full year 2018, adjusted EPS of 2039 cents per share with windows in discontinued operations.
Refer to slide 18 in the appendix of earnings call deck for historical quarterly information restated for when the window segment in discontinued operations.
[laughter] E. P. S estimate range also assumes that though this three terrace remain at 25%.
No that's for Charles remain at 15%.
Portion of which was effective on September 1st.
Any changes to announce tariffs at this point in the or will have minimal effect on our fourth quarter results.
Turning to slide seven.
Plumbing segment sales increased 1%.
Excluding the impact of currency sales increased 3%.
Foreign currency translation unfavorably impacted this segment sales by approximately $15 million in the corner.
North American sales increased 2% in local currency in the third quarter against a tough 9% comp in the third quarter 2018.
Growth was led by our spot business, which delivered another record sales quarter.
Delta also achieved another record sales quarter to your pricing actions and growth in our showing oriented brizo products.
In a delta branded bathing sanitary ware products.
International plumbing sales increased 5% in local currency.
This performance was driven by Han's grows growth in Central Europe , and China has experienced strong demand for its recently introduced products.
The segment's operating profit growth of 5%, that's driven by higher volume and pricing actions.
For full year 2019, we continue to expect plumbing sales growth to be in the 1% to 3% range and margins similar to 2018.
Feel more the cost impact of tariffs the fourth quarter.
As a reminder.
Our 2018 fourth quarter results benefited from approximately $10 million sales pulled forward.
Turning to slide eight.
Decorative architectural products grew 5%.
This performance was driven by low double digit growth in our paint business.
High single digit growth in D. I lie.
And double digit growth in pro.
Exterior paint index teens experienced strong growth in the quarter two dependent demand from earlier in the year and solid execution by our beer team and our channel partner.
Sean paint sales were partially offset by lower sales in our lighting and bill does hardware businesses.
Disciplined pricing actions impacted volumes in the corner.
Operating income in the third quarter.
Grew compared to prior year due to increased volume selling price increases.
Continued focus on cost control and productivity initiatives.
Partially offset by higher year over year commodity costs in paint lighting and builders' hardware.
For full year 2019 continue to expect decorative architectural products sales growth will be in the one that 3% range, including the benefit of the kistler acquisition.
Operating margins will be in the higher end is a 17% 18% range driven by a strong performance and cost control year to date.
For the fourth quarter recall that we face a difficult 8% sales comp is we experienced approximately $20 million and sales pulled forward in Q4 20 team.
And we will feel more of the impact of tariffs on material cost in the fourth quarter of this year.
Turning to slide nine.
And the chemistry segment sales decreased 3% in the corner.
This performance was driven by softer market mix in a difficult 11% sales comp against the third quarter of 2018, when excluding the more as the divestiture.
This decline was partially offset by pricing actions and growth in a lower price point offerings.
Segment profitability increased in the quarter by $4 million margins up 711.7%.
An increase of 210 basis points, driven by pricing actions and cost control, partially offset by mix.
We continue to expect full year 2019 sales growth between zero and 3%.
However, based on our year to date performance and continued cost control. We now expect full year margins to be approximately 10.5%.
Improvement of approximately 150 basis points from our prior guidance.
And turning to slide 10, our balance sheet remains strong with net debt to EBITDA at 1.8 times and we ended the quarter with approximately one and a half billion dollars a balance sheet liquidity.
Working capital as a percent of sales improved 20 basis points versus the prior year to 16%.
As a result of moving a windows business to discontinued operations.
Now expects full year working capital as a percent of sales will be approximately 15.5%.
During the third quarter, we continued our focus on shareholder value creation by repurchasing 3.8 million shares for approximately $151 million.
Lastly, as Keith mentioned, we were pleased to enter into an agreement to sell Milgard windows in September which will likely close the fourth quarter.
We expect there proceeds after tax expenses to be approximately $560 million from this transaction.
At this time, we anticipate using the proceeds to pay down our $200 million.
Debt maturity.
And for approximately $40 million of share repurchases.
With that I'll now turn the call back over to Keith.
Thank you John .
I'm pleased with our performance so far in 2019, and the second half of the year is progressing as expected.
Our teams have done a tremendous job to position us to offset the impact of tariffs while delivering on our commitments.
Our markets are largely performing as planned with modest improvement expected in the second half of 2019.
Furthermore.
The fundamentals of our markets remained solid and supportive of long term growth.
Existing home sales have improved nearly 5.4 million units for the past three months up about 3% from last quarter.
Home prices.
Which are highly correlated with repair and remodel spending continue to appreciate.
And the consumer remains healthy with wages continuing to grow and unemployment at a 50 year low.
As many of you know, we recently held in Investor Day, where we outlined our strategy and the initiatives that will drive growth over the next two to three years.
In addition.
We further detailed the next chapter of Masco, as a focused and more resilient plumbing and decorative products company.
We have already begun to execute on these strategies with the completed divestiture of our UK window business.
Signed agreement to divest milgard for $725 million and very good progress with the cabin three sale process.
Against solid fundamentals and focused execution on our strategies strong cash flow and balanced capital allocation, we will continue to create value for our shareholders.
With that well now open up the call for Q and <unk>.
Thank you ladies and gentlemen asked the question. Please press Star then the one key on your telephone keypad.
To withdraw your question please press the pound Keith.
Again, it start I want to ask the question.
In order to ensure that everyone has a chance to participate.
I'd like to request that you limit yourself to asking one question and one follow up question you want to Q1 they session.
Our first question comes from a lot of Stephen Kim with Evercore. Your line is open.
Thanks, very much guys congratulation on a good quarter.
Wanted to ask if I could about your.
Plumbing business in particular.
The international business, which seems like it performed well you attributed that to.
Germany, China in France last quarter, I think you called out some weakness in Latam, Italy in Turkey.
But what I'm trying to understand is you attributed a lot of the strengths to introducing new products into the market.
I was wondering if you could help us understand how much of the strength. We saw there in the plumbing international was due to like a load in kind of a process how much of it you see as underlying.
Growth, which can continue.
And whether the market you called out last quarter, which were soft have improved or if Germany, China in France or simply.
Offset that through the due to new products.
Well I'll take that one Stephen good morning, the the overall growth was more from the.
A good sell through of those products than it was load and there was always a you know a little bit of loading in the channel, but fundamentally those those products are taking off well in there.
There are well received with regards to Latin America in Italy, and Turkey, I haven't seen a or anything that's a remarkable with regards to how those are performing in other words really not much of a change there from how how they've performed it's really bad.
Okay, So solid performance and good traction with our new products as we look across central Europe , and China. You know our brands are the how to grow a on the high end to XR, Brad is very well regarded in that space. When you look at.
Both through distribution and particularly when you look at the international projects hotels cruise ships and the like so we have strong brands and the new products are doing well.
Mortgage sale more more from the sales of those products and in some of the challenged markets. They kind of remained stable where they were a when we talked last quarter.
And even though the one thing I'd, probably add to that keeps comments would be that if you look at a high performance in the third quarter 2018, I think we're up against a relatively easy comp.
Here in the third quarter between 19, so I think that also aided in a this that the topline growth you saw.
Okay got it that's helpful. Thank you guys second question relates to the cabinet business, which put up a very strong margin.
In this quarter stronger than we were expecting I know you took your guide up for the year.
I was curious as to.
If we as we think about the fourth quarter, though.
It seems based on our numbers that we're looking for a pretty notice or you're looking for a pretty noticeable.
Declining momentum in the margin there and so I'll just curious if you could comment on if there's any change in the margin trajectory in cabinets that is tied to actions that are worth calling out.
And has there been any shifting of overhead out of cabinets.
In the period that we all also that are also worth calling out.
Oh, no real no real change in the margins trajectory.
There hasn't been a shift of overhead if you will out of the business Steven with regards to.
The topline we are lapping a pretty soft Q4 from 2018.
You know if you recall the activity in this this part of our business really slow down late last year, and we don't anticipate that happening I'm. We're also launching some significant new products in the quarter a few new doors more of the focus is on.
Finishes and paint.
And the like and we've we've as you may recall.
But in some new technology and paint and we think that has us in a very competitive position, where we can do color changeovers almost in a batch of one type scenario with very minimal loss of productivity. So were able now to launch more frequently new colors, and <unk> and do it in an efficient way and I think you see that.
When you look at the very competitive margin that we have against a you know some of the broader industries and at relatively low volume when you look at.
Where we stand so [noise].
Working hard to lever Joe's investments, we're up against a little bit of a soft comp, but no real change in terms of any kind of overhead.
Great. Thanks, Keith.
Thank you.
Our next question comes from the line of John Veilleux with Bank of America. Your line is open.
Hey, guys. Thank you for taking my questions. The first one is the you gave us the P.S. guide, which is helpful. Just curious if there's any other moving pieces indeed for a comparable EBITDA forecast for for the full year looks like it looks like DNA is expected to be 145 and the interest.
Like is it on change but are there any other pieces or maybe can you just provide us with a 29 teen EBITDA guide.
Yeah, John maybe maybe a me all push it differently with the disc ops, and maybe give everyone a little bit better color as to how.
This impacted yeah pulling the winners business out of a continuing ops and into disc ops affected more of the bottom line and maybe on an EBITDA, but help me be able to get to there and I don't get hearing your question. Just let me know so we if you think about as we exited the second quarter.
But because right now consensus estimate on us it a little tough because people. Some people have already pulled windows out, but if you think about it at the end of the second quarter before anyone started pulling it out.
Our consensus for Q3 at that time was 71 cents per share.
And a consensus at that time for the Windows segment was about $21 million now. The one thing you have to add to that when you put on windows from continuing ops into disc ops, you have to add back about a million dollars in a corporate expense against it was allocated to the window segment, so call it $22 million.
$22 million is roughly six cents a share. So that's 71 cents consensus for Q3 should have been about 65 cents for Q3 once you pull the windows business out.
And then it particularly that that seem kind of math for the full year John .
A full your guide at the time was 2062 cents to 2072 cents again as we exited the second quarter two the midpoint of that range was $2.66.
Now when you remove the windows from continuing ops and put into disc ops, you pull about a $40 million of operating profit at consensus out, but then you have to add it back about a add to that I should say about $5 million a corporate costs have come back to masco, so about $45 billion in aggregate.
$45 million, an aggregate adds it adds up to about 12 cents <unk> S.
So it can think about 10 to 66 midpoint.
Well, let's say 12 cents is about 2054 cents this year, which is right in the heart of our current revised range of 2052 cents to $2.56. So right right in the spot where we thought we would be.
As we have to do the second quarter song now I'm hopeful that's helpful and hopefully that answers your question.
You know, let me know.
No. That's that's very helpful. Thank you.
Then as a follow up the debt pay down that you guys are talking about now that seems like maybe a slight change of plan for the sale proceeds.
Thinking about that right or.
It was just kind of contemplated roll off.
You know it doesn't contemplate it all along John Reid recall that that's a March 2020 maturity is only $200 million not index eligible to refinance it always contemplated.
Paying that down and we did they also get that out you mentioned that at the Investor day. So I I don't think Theres anything no. There's no new news there on that okay. Thank you guys.
Thank you.
Next question comes from the line of Michael Wood with Nomura Instinet. Your line is open.
Hi, good morning.
Just to follow up on the guidance a that reiteration at the midpoint, excluding the discontinued ops I see the cabinetry and decorative looks like they were increased in terms of the profitability from the prior guidance. So can you just talk about what the offsets to that work.
So I think John or Mike, sorry, you offset to that.
Maybe perhaps a little bit lower volume that so we experienced here in a little bit in Q3 in upon excitement in a little bit in cabinetry segment as well is it some of those that particularly might continue as we go into the fourth quarter.
We've been putting in pricing some of that may have to a little bit of with price elasticity there.
Okay and did the exterior paint and staying boost that you talked about have more of an impact in either pro or de iwai. So could you just.
Talking about what you saw I guessing growth for those two sub segments in interior.
Well, if you look Mike paint volume was a probably the largest contributor or in this segment in terms of the of growth. We did have some price.
But we're pretty pleased with a low double digit growth that we saw in the segment.
It feels like we gained a bit a share both in pro.
Andy I why our investments continue to pay off in the pro and we continue to expand our capabilities pleased with the rollout of the new color Center, along with the home depot, that's going well that really enhances the shock that make shopping experience and leverages, our leading quality position the great value. So we think we.
ER outperformed the market a little bit understandably. It is hard to pin the exact sizable market in quarter, you know from quarter to quarter.
But with our low double digit growth, we think we ended the quarter.
Yeah, Mike It maybe to be more specific to the question. Yeah. We didn't know we don't think we saw real distinction between performance in next year index things and progresses DIY, we think it was pretty consistent across both.
Those end customers.
Okay. Appreciate it thank you.
Thank you.
Our next question comes from the mine of Mike Dahl with RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions and John Thanks for the.
Clarity on the moving pieces around the the guide.
Follow up to your.
Response to one of mikes questions on plumbing and do you asked us see calm and I think that was an area that.
Hi, Keith focused on a you focused on that at the Investor day as well. So just hoping you could give us a little more color on how the environment has evolved over the past couple of months as as you look to implement a additional pricing to cover tariffs and just how you're thinking about the price volume trade off.
Right now on implementing specifically.
Like as Keith we really we really haven't seen a change in terms of the elasticity or the dynamic of volume as it relates to pricing.
Continue to see that the lower price point products tend to be more sensitive.
To price movement.
Understandably there still is a lot of pricing activity occurring in the market. So it remains a challenge frankly to understand the specific skew level elasticity when.
The competition around that probably particular price point in the assortment is so dynamic. So we we feel we have a good handle on elasticity and we have factored that in a as it relates to how we go out with subsequent price increases to try to hit that sweet spot and lessen the volume impact.
With regard to specifically to where we stand.
In the tariffs, we've largely implemented price and other measures to offset the 25%, let's three tariffs and we continue to work and will win all its very dynamic and we'll see what happens ultimately with the second part of lists for and whether or not there is any changes to list three so it's it's a dynamic environment, but fundamentally not.
A lot has changed with regards to.
What we're driving.
We're going to continue to work with our customers and with our supply chains were driving internal productivity teams to.
Mitigate existing in any potential future tariffs.
That's helpful. Thanks, Keith I'm, a follow up question, just shifting gears to paint and the environment, there, obviously strong volumes and margins in the quarter.
One of the areas that I think that's been a point of concern for some of the investment community Israel, just the promotional environment and what we're seeing you know more at a retail level between the big box customers can can you talk about just how the promotional environment.
Has evolved to in pain, and whether you expect and include any change in that dynamic within your your fourth quarter commentary.
Yeah, Mike the promotional environment has picked up a little bit so far this year I'd say.
I would add that our partner has been disciplined with their promotional activity and we think that makes a lot of SAP.
We have selectively promoted certain products that have held a certain events and well do that if we think it will drive profitable sales, but ultimately we.
We're choosing to compete on the quality of our products. The selection the service the store environment, rather than just simply price and I think our Q3 results reflect that.
And Mike I'd like to one thing I'd like to reinforce that he said it really the promotional cadence and amount is really determined by the retailers is not determined by the manufacturer. So it's really in their hands to determine those actions.
Okay. Thank you bye.
Thank you.
Our next question comes from the line of Phil Ng with Jefferies. Your line is open.
Hey, guys. The competitor of Yours mentioned, a slower start to Threeq you in general but activity picked up in September and October . So curious if you've seen a directional change in activity inter quarter in thoughts leading into fourth quarter. Given your comments on the macro found macro front done a pretty positive.
[laughter].
Yeah, Phil we really don't like to talk about a short term you know trends in a very short term trends in our business and so yeah. We posted a good Q3 and you know there's always month to month changes in our business. So you know it you know I don't want to take too much away from any short term pressure.
Forms and then the company.
Got it and can you give us an update on where you are with the cabinets divesture and given which were able to get from a proceeds standpoint on windows seems like there could be some upside to what you guided a at the Investor day.
In the process is going well, it's a it's a competitive process and.
Yeah that speaks well to the quality of the business.
We'll talk more in detail as we get a signed agreement for and I'll, just say that the process is going as planned.
Okay, all right that's sort of color.
Thank you. Our next question comes from a lot of Justice.
Zelman and associates.
Hi, Good morning. Thank you guys I was curious on your comment on raw material headwinds in the fourth quarter and decorative.
I I would've expected tailwind so I just wanted to get some context there.
Just I wouldn't you know I think it's important to note that raw materials at our and our cost basket are still up year over year.
We are seeing some moderation for resins and T O too.
You know long term I'd remind you that when we look at our relationship between price and commodities, we tend to be flush overtime.
So we're not expecting significant material benefits to our margins and there was you know there's other costs at play here as well, including labor and freight to name a couple but fundamentally we are seeing some moderation, but our basket is still up year over year.
And it does that.
Cost basket you mentioned that does that also include.
I think last quarter, you mentioned in store displays ban.
Increasing year over year in second half in particular in the fourth quarter is that still the case, maybe if you can give some context, how much that had one is to profitability incrementally this year versus last year.
Yeah, you know Justin that a would be would be relatively small and that was really calling out. The other thing that you know, we'll we'll have an impact on the fourth quarter is the fact, we will feel more of all the more fuller effect of the tariffs in the in the fourth quarter a in that particular in that segment because.
The call both Liberty hardware and.
And pichler.
Face more of an import I've ever more of an important model I should say so that then rolls into the cost basket as well.
Okay that I was just following up on that one last question. Just if you can give us a sense.
For how you're preparing for for the step up in tariff as you look to next year, maybe elaborate on how you feel about pricing and productivity and he touched on it but those efforts.
Whether or not you can you think you can fully offset.
Did you see it today care if as you look for next year.
Really no change from what we commented at the Investor Day, we.
We think we've we've done a good job.
Through a combination of levers both the productivity I'm working with our supply base to drive costs down some value engineering work that we've been really has been ongoing and then of course of course, some pricing actions to cover list three.
We have a go get.
Out there for list for and we're working on doing that with regards to what might happen.
If it's less three goes up or the second phase of list for goes and we'll have to see what when that.
If if and when that comes in terms of how we're approaching it.
Again really no change we're working hard on costs out we're working hard on value engineering, and we're gonna continued to drive price factoring in.
What we're learning and this has been a learning process as it relates to the dynamics of the various assortments and all the moving parts and the price elasticity. So we're going to continue to be strategic and all asbestos aspects, particularly in how we applied price.
Thank you for the color I appreciate it guys.
Thank you.
A question comes from the line of Michael <unk> with JP Morgan Your line is open.
Hi, good morning, Thanks for taking my question.
First just wanted to hit on and go back to the the Windows proceeds and apologies if I.
If I didn't hear this right in the prepared remarks, but.
Just wanted to get a sense number one.
You know relative to your proceed guidance.
Back at the Analyst day.
We you know what was the dealt a you had given to the proceeds did appear to be a bit more than we were expecting I I was just curious if you.
Based on your.
Original proceeds a a guidance if there was some delta that that you'd like to share with us and as a result of that does that change at all.
The timing.
And split of proceeds as it relates to share repurchase I know that initially you guys talked about maybe half of fraud and half over the next nine months.
Given the change in.
You know what appears to be the change you know higher than expected proceeds for windows does that change any of your thoughts in terms of the capital allocation.
Yeah, Mike So a couple couple of questions embedded in there and.
The first one you know with respect to you know our total anticipated proceeds from the transactions and we said at Investor Day, then we would expect at least a billion dollars an after tax from these.
Transactions and I think we're on you know definitely on pace.
To achieve that though you know.
You've mentioned, we're working hard on the cabinet business and.
You know why we'd like to progress you know its if that's not there's not much to talk about it at this point on that one with respect to you know.
I thought on allocating the capital at the proceeds that we receive.
From the window sale, and you think about that and how our cadence of cash flow comes in with the business.
You know sort of expect about $560 million of after tax proceeds from from that.
Transaction any consider that we've been roughly putting out a about you know in inline with our 600 million dollar initial guidance of share repurchases a year.
And were about 450 year to date, so that would imply we've got 150 million to go plus the 560, so call it roughly $700 million of capital allocate based on the proceeds from the Milgard transaction, what you're thinking about the $200 million a debt retirement plus.
Approximately 400 million to maybe a little bit more than that of share repurchases in the fourth quarter. This year, you get pretty close that $700 million that we look to allocate so I think our capital allocation is very much in line with what we communicated at the Investor day, So Uh huh.
We feel confident we you know we like Moran, we'd like how transactions have evolved and so we feel good and confident about how we're allocating the capital.
Well, that's great China I appreciate the detailed answer there there was helpful. I guess secondly, I'm just going back to an earlier question around cabinet margins I know you don't like to get to bogged down.
On these calls you know on segment margins by quarter.
But you know the.
The implied guidance unless I'm doing the math wrong and I'd love your thoughts here, but.
The implied guidance for roughly 10.5% margins for cabinets for the full year does imply.
Pretty steep fall off in the fourth quarter something around even 70%.
If I'm doing the math, right, which would be a nice year over year decline. So just curious if there's anything.
I bet that I'm doing wrong, there any any items driving you know for Q, that's such a down year over year quarter. After you've had such strong results for the first three quarters of the year.
Yeah, Mike I don't think there's anything significant that's driving that Don I do you know, but I would remind you that.
Usually the fourth quarter tends to be one of our slower quarters and so even one of the national seasonal slowdown in that business that is driving the lower margin in the fourth quarter other than that there's no one offer unique items and we anticipate flowing through in Q4.
Okay.
Alright, thank you.
Thank you.
Next question comes from a lot of kids with Keybanc. Your line is open.
Good morning, gentlemen.
Good morning Kathryn.
But make sure have you guys.
Well, if I could ask a question a little differently about you know plumbing trends the strength that you guys have seen instability is there given how last year in the second half of 18.
Demand it kinda deteriorated incident housing.
Dynamics can you comment regionally to the extent you feel comfortable without any insights you might have I mean, because for example, the west which had.
Track did.
Slow down has improved I mean can you discuss maybe a little bit how.
Regional cadences flow through your business just to give us any insight.
Well I, yeah, there's there hasn't been.
A significant material difference as we look at the different regions from what we typically expect Oh, there's different things that happened from weather that we tend not to talk about that very much but certainly there is some regional impact is storms and whether roll through we have some ebbs and flow.
Those are in different regions as it relates to new construction activity, but all right remember that we're about 90% repair and remodeling so that that tends to have less of an effect on us.
We have.
Different.
Inventory and volume flows through channels that can affect us. So if you step back and really look at it we haven't experienced a significant variability in terms of regional trends other than what.
We all talk about as I said in terms of.
So some weather patterns really not I'm not a whole lot of different.
Okay appreciate that it is.
I might ask you now Keith I heard your comments on earlier on price elasticity.
Yes. It this way is the lower price point impacted by terrorists more simply because terrorists or greater percentage of the actual price versus the higher end, it's a smaller.
Percentage is that part of the dynamic that we.
We'd expect to see there at the lower price point impact from tariff price increases.
No not here, because that's not really isn't it.
Oh, sorry, there kind of stepped down a little but not not really as it relates to.
The percentages per se because the tariffs are basically a percent applied to the to the purchase cost so that that tends to be.
Relatively the same where it where it it tends to affect really as more of the sensitivity at that low price point and the fact that not always but by and large when you look at goods that are procured from China. They tend to be more on that lower price point.
Part of the assortment. So it's not so much percentage, it's that when you look at make versus buy the by tends to be a little bit heavier skewed on the opening price points and then you combine that with the more sensitivity to that price point, that's that's where the elasticity comes to play.
Thank you very much.
Thank you.
Our next question comes from the line of Truman Patterson with Wells Fargo.
Hi, Good morning, guys nice results.
First wanted to circle back on on cabinets, a little bit and the sale cabinets is having a very solid year I think third quarter out profit was up almost 20%.
So nice results at the same time when you look at the outlook. It appears more favorable we've got some anti dumping duties on you know the Chinese importers et cetera.
Is there a possibility that this sale maybe gets pushed back a little bit intelligent close in the first quarter is you a adjust your sales proceeds target and is that sales proceeds target higher today than maybe it was two or three quarters ago.
We we haven't changed our target, we we talked at Investor day about being a more than a billion and we're not moving off of that target. We feel good obviously about the transaction that.
Came through with with Windows, you mentioned anti dumping that that really is not a impact on our sales process on on the cost side, we've been working through mitigating actions for quite some time now we saw this coming.
And have moved to the majority far and away the majority of our sourcing of China for cabinets. So that's that's already been factored into it. It's a it's been a a competitive process. The process is going well and we have not changed our expectations in terms of timing.
Okay, Okay, and then on the pro paint business I believe at your Investor Day, you. So that it was maybe 7% or so of market share nationwide or around those levels. You know I know that there's kind of a multiyear run rate it runway to really grow this business, but is there certain.
Share or could you just discuss some of the share gains a that you're targeting over the next several years.
Well you know our pro sales now are approximately 25% of our coatings revenue. So we have seen good.
Growth and good market share over the past call. It five years that we've been strategically driving.
This initiative in this program.
Very very pleased with a the double digit growth that we saw and understanding that the bigger this business gets them. The more challenge. It is to grow up that big Big base, that's a factor, but fundamentally we believe in what we're doing and we think we have a very strong value proposition.
For the type approach that we're targeting and with the behr paint our product assortment the brand the service proposition.
That our partner the home depot has worked so hard to develop I think we have a strong value proposition for those propane or is that that we're going after so our intent is to continue to outgrow the market and we have every reason to believe that we're going to be able to continue to do that.
Alright, Thank you all.
Thank you.
Question comes from a lot of Megan Mcgrath with Buckingham research.
Good morning.
You think a little bit longer term.
[laughter] third quarter results in the context of some of your commentary around the analyst day.
Cabinets your revenue growth third quarter is above your expectations for the next couple of years in terms of the top line and I know some of your forecast.
You know industry forecasts about.
Following but you did talk about taking modest improvement so putting that together are you feeling I really we're only one quarter in not too far off your analyst day, but are you feeling any more constructive about those end markets and longer term contact.
Yeah.
Again, it's John I know you know I would say we were not going to.
Adjust our thinking about the long term based on one quarter's results. Yeah granted we did have a very good quarter. We're up in some instances, we're up against a tough comp, which which makes us feel good but no long term the fundamentals of the markets are what they are and we do think that that low single digit growth in the overall markets, it's going to be.
Well, we experience in the next in the coming several years and so so really no change to our long term view on the markets relative to the our performance here in Q3.
Okay.
And then just quickly on during the quarter Kitchenware, you did say that it was down again in the quarter, but.
Was there any kind of incremental movement, there was a down less than last quarter same as it has been.
Well there.
Yeah as as we've talked in the past. This this category is is going to be challenged throughout the year for us with the increased cost and as you know that the tariffs hit this in a hardware business, particularly hard and we made the strategic choice to be very disciplined in terms of our pricing actions and that that.
Has effect on the topline we are performing well and the team is performing well as it relates to realizing savings and improving our business processes and integrating the company.
Cost savings like Ocean freight and continuous improvement projects to reduce labor in a variety of other sourcing savings that we're driving so you know there's there's there's gonna be some some challenge on the topline for this business in 2019 as I've talked about in the past, but long term, we'd like to prospects of the business and are confident that we're going to achieve our.
Long term return expectations on this acquisition.
Great. Thank you.
Thank you.
Question comes from the line.
With Cleveland Research your line.
Thank you.
The paint segment Keith I.
Appreciate your comments that the color center and the product quality, that's driving this more than the promotions I'm curious on the sustainability of or the double digit growth. This quarter, how we should be thinking about that perform and moving forward.
When you when you in terms of the total paint market.
No you're paint business specifically.
You know we've got a good proposition as I've talked about.
In detail in the past I believe in it and we're continuing to invest in it.
Both in terms of the customer experience in the idle for DIY, why as well as the pros experience and our channel partners investing and continuing to drive that our commitment is to continue to outperform the market and we think that this market is is a good market for us going forward and we intend to continue to.
Take share both India and why do yeah why in in the pro.
Yeah, Eric you know, we're not moving off of our Investor day from five weeks ago men, who said that yeah, why should grow low single digit over the next several years and probably going over the in the mid single digit range over the course in the next every year so I.
I look back to that that you know discussion that we had two to think about our long term view on the growth of our paint business.
Okay, and then within that this quarter's performance is the upside relative to those targets.
Faster Marco just trying to understand what drove that magnitude of gross in the business this quarter the upside.
You know, it's it's a it's always a combination of volume and price this quarter volume was a larger contributor.
We're pleased with that results. So we think we gained a little bit a share.
So to answer your question directly it was more volume driven than anything in the quarter our investments in the pro are paying off.
As I mentioned, we're rolling out the new color solution set or along with the home depot that really helps the shopping experience.
And I think were wolpert will position that continue to outperform.
And that the follow up on Kissler can you frame at all for US just what the year over year numbers look like in the business at this point.
You know air three we don't break out the performance of individual businesses.
You know once you know once the lap the acquisition period now we just don't break those out.
Okay. Thank you.
Yeah.
Our next question comes from the line Matt.
Barclays. Your line is open [noise].
Good morning, Thanks for taking my questions I'm, just to clarify on the share repurchase post the divestitures.
At the Analyst day, you guys talked about deploying half of the proceeds immediately to buyback give or take so should we expect that that 400 million from windows, you know sort of as an <expletive> are maybe in Q4, and then perhaps there would be a second accelerated repurchase after the sale of cabinets is that how we should model that.
Yes, your math you Oh, we'll take a look at the market conditions into the need to signing a form of transaction could be NSR could be.
Open market or as our repurchase our combination thereof, and so it all depends on how we see the market and you won't make a decision based on that.
Okay got it and then just back to the elasticity question and plumbing.
So you guys talk about the volume impact there, but you know as you raise prices across kind of the spectrum of price points I mean to what extent do you guys think you actually see volumes go away versus you know, perhaps customers simply trading down to lower price points. So you know D or you suspecting that theres, possibly.
You know more of a mix impact rather than a volume impact.
It varies Matthew by category and you know if you think about.
Repair a component of it as well so in some cases or let's say, particularly in plumbing, where there's a repair a component there there really is a much of the delay. So if there was a price.
So sensitive consumer in that realm, then that would represent a a downtrading in other in other areas. There's more of a an ability to postpone I think we're seeing some of that in lighting and hardware where they can postpone a.
A purchase.
So it's it's I think it's a combination and it varies and then some in some cases or you know, there's there's less price sensitivity, we mentioned, having a a a a record quarter at our spot business. That's a that's a discretionary very expensive.
Purchase well worth the money, but cost a few cost a few dollars to get that and we had a record quarter. So it really does vary.
By type of product and.
Right.
Alright appreciate all the detail thanks again.
Thank you next question comes from a lot of Keith Hughes Suntrust. Your line is okay.
Thank you on the pro paint business at the start off a little slower year.
Got you got your double digit growth Hussein for last couple of years.
I guess question is what's happened this year, we spent a little bit more on either performance and there was a question earlier about promotions.
That's really more forgot why have you seen promotional activity in the propane.
Well this year.
I think you know one of the.
Impacts in terms of Choppiness in pro this year was that we don't like to talk about weather, but undoubtedly there was some unfavorable weather in the first half so in the prepared remarks, John talked a little bit about.
Pent up demand that's really what we were referring to there. So I think there was a there was a lift there I talked about the size of our pro business and you know the big you get to harder it is to get bigger and we're seeing some of that but again, our we believe it on investment and we believe in the value proposition for the type of pro that were.
We're going after and we're continuing together at home depot to continue to invest in that.
So you know there will be there will be quarter to quarter Choppiness. There's no question about it but fundamentally we're committed outgrowing the market and we've demonstrated that.
And in terms of promotional activity on the pro Keith.
No not not a lot no news there yeah, there's very real relatively consistent promotional activity on the pro side.
Okay. Thank you.
Thank you.
Ladies and gentlemen that concludes today's call. Thank you for participating you may now disconnect everyone have a wonderful day.
[noise].
<unk>.
[noise].
[noise].