Q4 2019 Earnings Call
Good morning, ladies and gentlemen, welcome to Masco Corporation's 2019 fourth quarter and full year Conference call. My name is Regina and I'll be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes.
Asking question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press the pound key I will now I'll turn the call over to David Czajka, Vice President Treasurer, and Investor Relations you may begin.
Thank you Regina and good morning, welcome to Masco Corporation's 2019 fourth quarter and full year conference call.
With me today, or Keith Allman, President and CEO Masco Johnson advice mass was vice President and Chief Financial Officer.
Our fourth 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 was wonderful.
We can't take your question now please call me directly and 31379 to 5500.
Our statements today will include our views about our future performance, which constitute forward looking statements.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements.
We described these risks and uncertainties in our risk factors and other disclosures in our form 10-K, and our form 10-Q that we filed with the Securities and Exchange Commission.
[laughter] our statements will 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 in presentation slides, which are available on our website under Investor Relations.
Finally, please note that we have accounted for a windows it cabinetry businesses as discontinued operations for all periods presented.
With that I'll turn call over to Keith.
Thank you Dave.
Good morning, everyone and thank you for joining us today.
I'll begin with some brief comments on our fourth quarter before I turn to our full year results and conclude with her thoughts on 2020.
As Dave mentioned, our financial results have been restated to reflect cabinetry and windows as discontinued operations for all periods presented.
Turning to slide for.
The fourth quarter, our topline increased 1%, excluding the impact of currency.
Driven by solid growth in North American plumbing and pain.
Inline with our expectations operating profit was down and our operating margin was 15.7% in the quarter.
As we previously communicated this was due to higher input cost due to the full impact of tariffs and an increase in variable cost as compared to the fourth quarter of 2018.
Our earnings per share for the quarter matched prior year at 54 cents per share.
Turning to our segments plumbing growth in the fourth quarter was led by our North American plumbing business, which grew 5%.
This was driven by record sales for both Delta and Watkins.
Delta experienced growth in trade.
Retail and E commerce in the fourth quarter, and Watkins continued to outperform the market with its industry, leading portfolio of products across price points and channels.
And our decorative architectural segment.
Bare continued to perform well with mid single digit pro paint growth and low single digit DIY growth.
This was aided by increase your into ordering that pulled forward sales from Q1 of 2020.
Similar to what we experienced last year.
We saw good results from the recently reset college solution centers as well as other new innovations such as our easy poor paint can.
And our new bear Ultra scoped defense paint.
Our paint growth was offset by lower sales in our lighting business and industry that has been significantly impacted by tariffs.
Lastly for the fourth quarter, we made significant progress on our strategic plan by completing the sale of our Milgard windows business for after tax net proceeds of approximately $560 million.
And signing an agreement to sell our cabinetry business for $850 million in cash at closing and preferred stock with the liquidation value of $150 million.
We now expect the cabinet resale to close by the end of February.
With the proceeds from the sale of Milgard and our strong free cash flow, we executed share repurchases of $456 million in the quarter and retired approximately $200 million of debt that was scheduled to mature in early 2020.
Further strengthening our balance sheet and reducing our interest expense.
We were pleased with our fourth quarter performance and they concluded a transformational year for masco.
Please turn to slide five.
As we look back on the full year, we effectively navigated this challenging year, while executing our strategy to transform vasco into a stronger more stable less cyclical and higher return building products company.
For the full year sales grew 2% excluding impact of currency largely driven by pricing actions as we mitigated the impact of tariffs and other inflation.
Despite the challenges of increase tariff costs and slower end markets.
Delta Hansgrohe bear and Watkins each achieved record sales for the year.
Delta gain share with Bath fixtures at retail and its Brizo brand in showrooms, while also expanding its line of voice enabled faucets.
I just ROI launched several new products early in 2019, helping to drive solid growth, particularly in Germany in China.
Our innovation excellence was demonstrated at the recent kitchen, and Bath industry trade show or KBS as we earn two of the best of Kb as awards.
Our Brizo brand one the Cape is best of show award for its new Kansu, BAF collection, and our brands growing brand one the KBS impact award for its range affinity shower system.
Watkins.
Leaving spot business also had another outstanding year, driven in part by innovations such as freshwater salt system.
This unique water care system provides a maintenance free disposable cartridge that uses less chemicals to provide a simpler and cleaner spy experience.
Bare continued to perform well in 2019 driving high single digit growth in propane.
Pro paint is a large growth opportunity for us and we will continue to invest in people and capabilities along with our partner the home depot to gain share in the pro paint market.
While we were pleased with our pain performance in 2019.
The lighting category was one of the hardest hit by tariffs and this impacted our results.
The headwinds we experienced in lighting in the quarter will continue for the next three quarters as we exit certain private label skews and expect some inventory reduction to occur in the retail channel.
As we outlined in our Investor day, we believed that our performance in lighting will stabilize by the end up 2020, and we will be positioned to return to growth at that point.
Wrapping up our 2019 performance.
We delivered on our commitment to drive shareholder value as we increased earnings per share by 6%.
Executed our strategy to make masco, a better company for the long term.
Completing the divestitures of our windows businesses, and signing an agreement to divest our cabinetry business.
And we deployed over $1.2 billion of capital.
Hi, returning approximately $900 million to shareholders through share repurchases.
Increasing our dividend for the sixth consecutive year.
And reducing our outstanding debt by approximately $200 million to finish the year at a net debt to EBITDA of 1.7 times.
With our effective capital allocation strategy.
And strong operational performance, we treat we achieved a return on invested capital from continuing operations of 29% in 2019.
Before closing the book on 2019, I like to thank all of our employees, especially those that are cabinetry and former windows businesses for all of their hard work and perseverance that may 2019, another successful year for masco.
Now turning to 2020.
I'd like to share with you our view of our markets.
For the repair and remodel market.
Which is approximately 90% of our revenue.
We expect market growth to be in the 3% to 4% in 2020 with growth accelerating in the second half of the year.
For the paint market, a subset of the repair and remodel market for us we expect the DIY paint market to be flat.
And the pro paint market to grow low to mid single digits.
For the new construction market.
Which is approximately 10% of our revenue.
We expect a mid single digit growth as we have seen an improvement in both starts and permits, particularly in the single family sector.
As for international markets, principally Europe, we expect expect a flat.
To low single digit growth environment.
Based on these assumptions, we expect full year sales growth to be in the range of 2% to 3% excluding currency.
Margins to be approximately 16%.
And earnings per share to begin the range of $2.35 to $2.55.
With our strong balance sheet and the $645 million an after tax net proceeds from the sale of cabinetry expected to be she received in February.
We will continue our balanced capital allocation strategy to drive shareholder value.
We will likely deploy $500 million to $600 million of the cabinetry proceeds towards share repurchases shortly after closing.
And with our expected strong free cash flow conversion of approximately 100%.
We will look to deploy up to another $600 million towards M&A or share repurchases throughout the remainder of 2020 subject to market opportunities.
Now I'll turn the call over to John to go over our fourth quarter full year and 2020 outlook in more 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 seven we finished the year on plan.
Fourth quarter sales matched the prior year and increased 1% in local currency.
Currency translation unfavorably impacted sales in the corner approximately $7 million.
Local currency North American sales increased 1% in the quarter, driven by pricing actions and volume growth in our plumbing and paint businesses.
This was partially offset by lower volumes in our lighting business.
In local currency international sales decreased 1% in the quarter driven by unfavorable mix, partially offset by pricing actions.
We reported operating income of $257 million operating margins of 15.7%.
Operating profit was impacted by mix.
And unfavorable price cost relationship.
And higher variable costs.
For the fourth quarter, our Lps matched prior year at 54 cents per share.
Please note that this performance is based on a normalized tax rate of 26%.
Versus the previously guided 25% tax rate prior to discontinued operations.
Due to the move of cabinetry in Windows segments to discontinued operations in the change in the tax rate. We have provided restated adjusted EPS numbers for 2018.
In the first three quarters of 2019 in the appendix on slide 22.
Turning to the full year 2019 sales increased 1% grew 2% in local currency.
Currency translation unfavorably impacted the full year by $77 million.
In local currency North American sales increased 2%.
This performance was driven by disciplined pricing actions across both segments.
Partially offset by lower volumes.
Local currency international sales matched the prior year.
Well, we experienced some international market softness in 2019, Hansgrohe continued to drive share gains in its home market of Germany and in China.
Our SGN a as a percent of sales increased 10 basis points to 18.9% for the full year.
And for the full year operating income decreased $16 million or 1%.
Operating margins of 16.5%.
Lastly, our EPS increased 6% to $2 in 25 cents for the full year.
Turning to slide eight.
Our plumbing segment grew 3% in the quarter, excluding the impact of currency driven by strong growth in North America.
Foreign currency unfavorably impacted sales by approximately $9 million in the corner.
North American sales increased 5% in local currency is we experienced improved demand from our wholesale retail dealer and ecommerce customers.
This growth was against an 8% comp in the fourth quarter of 20 team.
Growth was led by Delta as they achieved another record sales quarter through increased volumes across their product categories.
Additionally, Watkins our spot business.
Continued to outperform I also achieving another record quarter, because its innovative new products and industry leading brands.
Our international sales in the fourth quarter decreased 1% in local currency.
It was over sales in Germany, and Hansgrohe faced a difficult comp sales growth of 7% in Germany, and the fourth quarter of 20 team.
This was partially offset by strong growth in China.
Operating profit in the quarter decreased $5 million due to higher variable costs, partially offset by incremental volume.
Turning to the full year 29 team sales increased 2% local currency.
The solid growth was driven by record years at Delta and Watkins.
North American sales grew 2% in local currency.
As a result of early an aggressive pricing actions taken to mitigate the impact of tariffs.
Offsetting lower volumes.
Our international plumbing sales matched prior year in local currency is hansgrohe, a solid growth in Germany in China was offset by softness in other regions.
Full year operating profit match prior year due to a favorable price cost relationship as we priced a head of feeling the impact of tariff costs in certain instances.
Partially offset by higher spending unfavorable currency translation and mix.
For 2020, we expect the plumbing segment sales growth to be the 2% to 4% range.
Excluding currency, principally due to our little growth expectations for the European plumbing, Oregon.
As a reminder, 35% of the plumbing segment sales are outside of North America.
We anticipate full year margins will be similar to 29 team.
As we experienced the full impact of the list Threed NAND list for tariffs in 2020.
We expect the tariff impacts will be the greatest the first half the year.
And we anticipate operating margins will be down roughly 100 basis points in the first half of 2020 before recovering in the second half the year.
Also given current exchange rates, we do not expect currency to materially impact our 2020 revenue.
Turning to slide nine the decorative architectural segment declined 3% in the fourth quarter.
This performance was driven by strong paint sales.
For more than offset by lower sales in our lighting business.
Due to the loss of a portion of a private label business in inventory rebalancing with the key customer which impacted volumes in the quarter by approximately $20 million.
Appears solid mid single digit growth in pro and low single digit growth, yeah, why products Ziad by approximately $20 million of hills pulled forward from Q1 2020.
Similar to the pull forward, we experienced in the fourth quarter of 2018.
Operating income declined due to lower volumes and lighting and an unfavorable price cost relationship driven by the impact of tariff costs and higher incentives.
Partially offset by lower spending.
Turning to the full year 2019.
Sales grew 3% driven by a pro printing initiative as we achieved high single digit growth continue to grow share with the pro.
Growth was also aided by the acquisition of Kitchener in March of 2018.
This performance was partially offset by lower volumes in our lighting in builders' hardware businesses is the result of our disciplined pricing actions in 2019.
Full year operating income decreased 1%, principally due to lower volumes and increased commodity costs, partially offset by selling price increases lower spending.
2020, we expect low single digit growth in DIY pain in mid single digit growth in propane.
We also expect revenue in this segment will be impacted by the loss of a portion of a private label program and inventory rebalancing at a kissler customer.
The revenue impact the visa.
James will be approximately $15 million each in Q1 in Q2 in approximately $5 million in Q3.
This volume loss in the fully impact of tariffs will depress operating segment <unk> segment operating margins by approximately 300 basis points in Q1.
Before recovering the balance of the year.
For full year 2020, we expect sales growth in the segment will be in the zero to 2% range with operating margins between 17 in 17.5%.
And turning to slide 10.
Our year end balance sheet was strong with net debt to EBITDA at 1.7 times.
And we ended the year with approximately $1.7 billion of balance sheet liquidity.
Working capital as a percent of sales finished the year at 15.7%.
An improvement of 10 basis points over prior year.
During 2019, we repurchased 7% of outstanding shares for approximately $900 million three increase their annual dividend by 13% to 54 cents per share.
We took further action in 2019 to strengthen our balance sheet by reducing our debt by approximately $200 million.
And we initiated a plan to terminate in Annuitize, our U.S. qualified defined Ben benefit pension plans.
We should complete this plan by the end of 2021.
This will reduce our ongoing pension expense in contributions once completed.
Lastly, we expect the sale of our chemistry business to close in February.
And we expect net proceeds from the sale of approximately $645 million after taxes and expenses.
Going into 2020, our disciplined capital allocation strategy is unchanged.
We'll continue to prioritize investment in our businesses to drive organic growth.
We will balance acquisitions with the right strategic fit in returns with share repurchases.
And we will maintain an appropriate dividend.
Including the expected net proceeds from the sale of our chemistry business.
We expect to deploy up to $1.2 billion for share repurchases in 2020 subject to market conditions.
This activity would be or bring our expected 2020 average share count to between 265 and 270 million shares.
We generated $660 million a free cash flow in 2019, and we expect a 100% free cash flow conversion rate in 2020.
[noise] lastly for the full year 20 to 20, we expect annual revenue growth of 2% to 3% with operating margins of approximately 16%.
And as Keith mentioned earlier, our 2020 E. P. S estimate is 2035 cents to $2.55.
Which represents 9% EPS growth at the midpoint of that of the range.
With that I'll turn the call back over to Keith.
Thank you John.
2019 was that dynamic and transformational year for masco.
We mitigated significant tariff headwinds faced by our plumbing lighting and hardware businesses.
We continue to grow our plumbing segment with record sales at Delta Hansgrohe and Watkins.
We continue to gain share in pro and DIY pain, with our leading bear brand.
We simplified our portfolio with the divestitures of our Windows businesses and signed an agreement to sell our cabinet business.
And we continue to execute on our capital allocation strategy.
As we enter 2020.
The fundamentals of our business and our core repair and remodel market are healthy.
Consumers remain confident and wages are growing.
Home price appreciation is increasing.
Housing stock continues to age.
Existing home sales have improved.
And household formations have steadily increased.
With these favorable fundamentals.
And our continued focus on executing our strategy.
Coupled with our strong balance sheet and liquidity, we will continue to create shareholder value in 2020 and are well positioned to deliver on our 2021 EPS target of $2, an 80 cents to $3 that we put forth at our Investor Day last September.
With that well now open the call is up for Q1 day.
In order to ensure that everyone has a chance you participate we would likely be class that you limit yourself to asking one question and one follow up question. During the Q1 day session to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press the pound key our first question will come from the line of Stephen Kim with.
Evercore ISI.
Yeah. Thanks, very much guys I appreciate all the all the detail here I guess first question.
Really relates to the margin guidance, a that you've given I'm curious.
First of all when you look at the the kit sure business I guess within Duck arc.
Can you give a sense for what kind of a margin impact that you've seen the the these private label program.
Being discontinued at your retail partner, what that is representing and how much do you think or some of the or the margin guidance, you're looking for particularly here in the first quarter is being driven by other impacts to the margin.
Yes, Steve Good morning, it's John.
I think the margin impact from a loss of the private label business is relatively modest because it is indeed, a private label program.
I think the bigger impact on the margin in the segment due to us absorbing the full cost the tariffs here in the first part of the year.
Got it.
<unk>.
Thanks, and then [laughter] or I guess might as well stay on the <unk> on a on the duck arc segment, and particularly catch what I'm curious.
As you look at that business, obviously, there's a lot. That's happened you know the tariffs coming in a shortly after the acquisition was an unfortunate event and a there's continuing to be a issues.
In China due to the current as far as one can imagine affecting your supply chain I'm curious I guess number one you Didnt I don't believe you mentioned anything but the kind of like if you could maybe talk about how that might be factoring into your outlook. It at all and then too. If you believe that there is any adjustment or has there been any or just.
And in your.
Improvement plan it kitchenware in light of what's happened as you've watched things develop over the last three months since the last time, we spoke to you as if any change in your strategic thinking around how to approach a improve if the results in that business given the changing world.
Steven This is Keith I'll take that and we'll talk about.
The Corona virus first <unk> when you think about the revenue or that we have in China. It's about 3% of our revenues so want to keep that in perspective, obviously, China plays an important role in our supply chain. So.
It's important to us and it had and it represents about 3% of our revenue as of now and it is a fluid situation without a doubt we're not expecting a material impact on our performance from the Corona virus and is it is a a fluid situation as I mentioned.
When you think about Oh, well first of all in terms of our factories, and where where we stand I guess, most importantly, none of our employees as we know it's sitting here. This morning have been a infected by the virus and were very thankful for that we've instituted a significant precautions travel.
A restriction hide hygiene guidelines, so we'd be eliminated gathering in meetings, we have a small manufacturing force that started about 15% of the of our biggest factory that started yesterday and will be wrapping that up throughout the week. So that represents about a one week.
Delay from what we had anticipated due to the lunar new year, so not a significant delay, but definitely a <unk> a slower ramp up than we anticipated.
From a supply chain perspective.
Very similar story with our biggest suppliers, where they are wrapping up they are bringing people back from the countryside, where they were out.
Chinese new year, and they're coming back and there was a planful a ramp up so right now.
As I've talked to our biggest suppliers into our own factories. We we are cautiously optimistic but it is a it is a fluid situation.
In terms of the demand over there in China again, that's 3% of or volume, but as you may know a lot of the building products are sold through our retail malls and small dealers.
Most of those are still closed and they will start to open up over the course of the next 10 days.
Our sales teams are all working from home we're reviewing.
The revenue in the and the orders as they come in.
We've reserved.
Spots in terms of premium freight to help us maintain or delivery performance as we shipped some of our products back.
To a large degree back to Germany.
So my point is we're taking precautions, we're thankful that none of our employees have a have contracted the virus. It's a serious situation. We're taking it seriously we have contingency plans developed and at this point, where we stand.
We don't expect.
A material impact.
On our business.
With regards to catch LER.
No question about it kits that has been growth challenges in 2019, I mean, the overall lighting industry was significantly impacted by the tariffs and we were from on our pricing and we were aggressive one of the first out in the industry.
Building products in terms of pricing for these tariffs and we did suffer a loss of a portion of our private label business and as John mentioned there is a.
In inventory rebalancing at.
One of our large customers that we expect to take place and we've outlined the impact across the quarters. So certainly the tariffs were not expected. When we made that made this acquisition in terms of your direct question.
Regarding if we've changed our.
Improvement approach, we really haven't.
Certainly there was a change as it relates to pricing for tariffs, but I've already discussed that but fundamentally we had oh a work plan to drive what we thought would be improvements in our cost structure and our total cost productivity. We've done that we're ahead of that plan or we're going to continue to drive that we expect to continue to outperform our plan as it relates to pro.
Activity and costs with regards to the topline, it's really about having the right products on the right commercial programs and relationship.
In the industry and the Kitchencare vans brand is very strong and we have in some cases, two and three generations of customers that we continue to serve and if we're focused on new products and Weve reinvested invigorated or new product development process. We just executed at launch in January Ics receiving very.
Positive feedback on that we've looked at and we've tweaked our our dealer programs to simplify and incentivize our dealers and our kids are team is very focused on executing this plan. So without a doubt there was some volume challenges in 2019, they're going to continue through the first.
The two quarters, and then a little bit into the third quarter and then as we exit 2020, we're going to be on solid footing to return in this business to growth.
Great. Thanks very much.
Your next question comes from the line of Matthew Bouley with Barclays.
Hi, Good morning. Thank you for taking my questions I wanted to follow up on the decorative side just around that Q1 guidance for the 300 basis point decline it sounded like you're saying that that's largely reflective of the terrorists flowing through and obviously your full year guidance suggests that the margins will recover through the back.
Alan So the year. So I guess my question is more cadence wise are you expecting kind of a steady improvement sequentially through the year or is that margin improvement kind of more weighted to the ended the year as as you anniversary those terrorists. Thank you.
Sure a Stephen <unk> or Matthew let me give you a a little bit a of color here. So if you're thinking about how the terrorists has impacted us starting in 2019.
And how they phase through our PNM through the course of the tail end of 2019 and going into 2020 worried about $60 million of incremental tariff costs than 20 impact PNM on 2019, we expect another incremental $90 million to impact the piano in 2020.
Most of that 90 million should be in the first half theory, Andy if you. If you consider that $60 million started to flow through our PNM kind of the middle of the third quarter and really hit us a the full effect hit us in the fourth quarter 2020.
So we should experience the full impact in the first two quarters of the year and then it continue a little bit into third quarter, and then should dissipate as we get into the fourth quarter last this year.
We've implemented a the pricing tool to mitigate the $450 million.
Tariffs, but we're also.
Continuing to work on margin recovery efforts through cost that opportunities supplier negotiations.
And looking at other you sourcing opportunities and we may have.
One thing that I should point out as we might face a little bit of margin compression because what we are experiencing is cost recovery on these tariffs. So we don't have necessarily margin.
Dropping to the bottom line.
That said, we should expect us to resume some margin expansion in the back half the year. Once these tariffs work their way through the piano.
So I hopefully hopefully that's helpful to you.
It is thank thank you for that and then secondly, just kind of bigger picture around Kissler. You know just hoping you can elaborate a bit around kind of the longer term growth plans. I mean, you know kind of how you envision this business positioned from a channel perspective, or what I guess needs to change that.
That you think would allow this business to kind of returned to growth. After you've you've moved past some of these near term losses. Thank you.
I think the similar answer to how answered Stephen's question I think the there there was specific events that occurred in this business as it relates to tariffs and some losses, some private label business and the inventory.
Rebalancing by a significant customer as those things, particularly that the tariffs begin to or the last of the private label rather begins to flow out through the year. This business will be on solid footing to return to growth in terms of the specific strategies, it's really about leveraging the strong brand and the.
Channel relationships that we have in Kitchener, I know that kitzmiller is one of the few.
Businesses in this industry that have a broad presence across all channels. So it is a multichannel.
Strategy for us and fundamentally at the root of that strategy as good products and great service and we're working through different programs as I highlighted earlier in terms of new product launches in commercial programs to drive incentives into like not I'm not unlike what we did as we revamped several years ago. When we were down at Delta and went through this process.
Yes.
To revamp our product development shore up our assortment and make sure that our incentives were aligned to the specific needs of the channel a little bit unique here in in lighting is the movement to do the E Commerce channel and we have a put in a leadership team actually the.
Several players from Delta Faucet company that were instrumental in driving our share leadership and E business down to catch there we have a great team down there and we're focused across all channels E business landscape retail and showroom. So it really is a multipronged approach.
But at the core of it it's it's commercial programs. It go it I've said, it but I'll say it again.
Everything we do here Ed Masco is focused on productivity and cost productivity and that will continue as kids there as well that's a a component of the plan that we're outperforming and we intend to continue that so as I mentioned that in my earlier answer no significant change to the strategy there were some define events that happen.
On to this business and we're going to get through it and ended the year, we're gonna be on solid footing <unk> going to continue to grow.
Okay. Appreciate the detail. Thank you.
Your next question comes from the line, it's Michael Wood with Nomura Instinet.
Hi, good morning.
Wanted to see if you can elaborate a bit more on the incentives that you called out impacting paint profitability in the presentation.
And what are you seeing in terms of a consumer reaction to these incentives and if you could just talk about you know maybe whats change in the industry in terms of.
How how competitors are behaving with pricing incentives and pain.
Mike Me I think that might be on site misinterpretation its incentive is between.
Ourselves in our retail partners, it's not necessarily consumer based incentives.
I understand so just to clarify that you're saying that the actual price and incentives offered at the store have not necessarily changed. This is between that's correct large huh.
Largely due to volume rebates, we have a with our major customers.
Great and in terms of the the market share gains that we should expect going forward for the business overall, if I do just rough back the envelope math for the end market assumptions overlay to your business I guess I get a roughly 2% growth rate and you're calling for 2% to 3%.
Is that the typical share gain that you'd expect or you know is there something kind of impacting that that's preventing it from being larger.
No I mean, a it's a it's Michigan's who we would expect issue recall, we've got no a pro paint business. That's now have dollarsten. So you know it's harder you know as when you get to the law of large numbers and it's harder to gain share off of that that base at the same rate this you're gaining share.
Currently there was a much smaller business, but you know we continue to invest behind that business. Our channel partner home depot continues to invest behind that business. We think we've established a very successful in winning model to to attract the procontractor into their stores into by paint you know, it's it's and focus them on.
One of the highest ranked quality brands in the industry. So you know between ourselves and between ourselves and home depot, We think we've established a terrific business model here.
Okay. Thank you.
Your next question comes from the line as Mike Dahl with RBC capital markets.
Good morning, Thanks for taking my questions.
John just to pick up on that last question. If if we think about the paint business I think that pull forward into Q4 looks like it was.
Probably a couple of cents and maybe yeah. That's borrowing from 2020 by the same amount and a point of topline in that segment I think so if you think about paying specifically yeah. When you have DIY as market flat pro low single to mid single flat, you've got that one point headwind.
Steve do you expect to perform.
In line.
And with the with the broader paint market, even with that comp headwind or do you still think you can outperform that.
Those overall numbers.
Yeah, Yeah, Mike. So you know to react here, you're kind of see I want I think your math is really is largely right on the pull forward and the the bottom line impact is we think about the growth in both DIY and pro.
We do think we can outpace the market in both instances, we still even though we're at a half billion dollar business now we're still <unk>.
You know have relatively light market share and we still think there's further share to be gained in the pro in as we look at our performance on the DIY portion of the business again because of our alignment with the Keach ARQ <unk>, our channel partner, the home depot and the growth rates that they're experiencing and the folks that they draw to their stores we.
Increasing outpace.
The DIY market growth as well and here in 2020.
Okay. That's helpful. Second second question also following up on another question.
Earlier about the kind of price tariff margin impacts I think you were answering the question in aggregate, including plumbing and lighting I'm talking about that piece of margin and kind of the recovery on on terrorists, but just to clarify is that also specifically true for plumbing and it looks like.
Within plumbing, yes second part of this is yes, your second half margins have to be up.
Year on year to get to that flat full year, if you're down 100, and so is that is that incremental actions around price supply chain.
Raw materials.
Benefiting you or is that just pure volume leverage to get to you to to that.
Yeah, Mike. So again you write my prior comments were about the into enterprise wide and not specifically with respect to any single segment.
As you break down the plumbing segment I'm, you're right those are the the margin expansion in there too we expect the second half year.
Is required given that margin headwinds in the first half the year due to the impact of the tariffs.
Well, we expect the back half the year, that's largely volume driven do we don't expect any further pricing actions or anything else incremental.
Outside of volume to drive that margin expansion in the back half here.
Got it okay. Thank you.
Your next question comes from the line of Seldon Clarke with Deutsche Bank.
Hey, Thanks for the question just continuing to last question, how should we think about volume and price within your revenue guidance for plumbing and decorative.
So as you think about.
Consider more to be Voluma is a you know we indicated earlier you know with the the impact of the tariffs flowing through.
So we kind of laid out our topline estimates I would expect a modest pricing a very low impact at all on pricing because of the pricing we put through on the tariffs back in 2019 early in 2019 I should say.
And so most of that is all or most of the growth that we have outlined for you today, both with the decorative architectural segment as well as the plumbing segment and therefore the company in total is volume driven.
Okay, and then just kind of continuing on the 2021, you know you reiterated the expectation for $283 of earnings.
And I think you guided to something like a 16.8% underlying margin, which obviously it was another 80 basis points improvement on top of this year, what's like the right bridge to think about as.
Oh on how to get there is that still gonna be volume driven or are there. Some cost actions that you can you see down the line or pricing actions that you see down the line a little bit longer term.
It's a couple of things that it would be driving our 2021 performance. Firstly, we anticipate that the tariff headwinds are behind us.
In terms of the overall market when we think about on ours, we mentioned.
In the earlier remarks, we expect an acceleration through 2020, and we believe that will hold into 2021 based on improving fundamentals increase in in our supply on the strong consumer so with with the tariffs behind us the market improving and continued growth as we've talked about in terms of market share gain.
And pro DIY paint and plumbing business with that drop down together with our plan to repurchase share repurchases in 2021, that's what gives us confidence in that $283 range for 2021.
Okay. So it is 16 point, it's still kind of the right number to think about roughly.
Yeah I sound.
Okay I appreciate the time thanks.
Your next question comes from the line if Michael we have with JP Morgan.
[noise] Ah thanks, good morning, everyone.
So first question I just had I just wanted to break down the.
The Paris impaired and you know it gets a Johnny said earlier that you.
Me too is about a 60 million impact in 2019 incremental 90 in 2020 I'm just trying to get a said since for you you know the offsetting actions to those to those headwinds you know through you know price.
Cost.
Specifically you know productivity I think is you know if you want to throw that in there. If you feel that that was you know their supply chain or other things that you did specifically to offset but just trying to get a sense of you know the offsetting you actually there to get to like a net.
You, a net headwind or or such how you see that float how how how did you see that flow through in 2019, and how do you expect that 2020 to shake out when you think of those offsetting an action.
In round numbers, Mike I, I'd say, it let's call it 90% of our mitigation actions were through price. So that was the biggest lever that we pulled in 2019, so that leaves about 10%.
In terms of the cost of the tariffs mitigated through supply chain, resourcing negotiation with suppliers and that sort of thing.
We'll continue to do that the majority of our movement out of China.
As our existing.
Suppliers that have established production another little cost countries and will be ramping that up we'll be moving some to two and in some limited case into some new suppliers, but that's a longer term play for us and it's going to take a while to do that so fundamentally when you think about the the mid.
Again, it was mostly price and we put that through aggressively and early in 2019 enhance now with the combination of the timing of the tariff them when they hit and more importantly, the flow of inventory through our system into the piano. That's why we have that overhang and and that 90 million dollar headwind heading into 2020.
Food, but Mike is I guess as we you know maybe supplement keys comments here and as we exit 2020, we don't think theres going to be a net headwind. We think we've got between the pricing actions in the supply chains actions that Keith mentioned, we think we've got the impacts of the tears fully covered.
Okay. That's helpful. Thank you.
Yes, definitely I just wanted to.
Circle back to a kitchen for a moment in apologies.
Entered a bunch of question, but I'm just trying to make sure I have some of the numbers right and how to think about the business. As it is you know by the end of this a year. John I think you said that private label in inventory rebalancing will each be $15 million or in.
In the first couple of quarters going to five in the third quarter was that right [noise].
Maybe just to be clear collectively the private label and inventory rebalancing will be $15 million in each of Q1 and Q2. So total impact in the year, Mike up 35 from both of those actions.
Okay. So I was just trying to get a sense of you know as the business has and I assume you had maybe a 15 million hit in for Q.
So you're talking somewhere on the range of 50 to 150 to.
Maybe 75, depending on how things traversed in 29 team.
You know I mean hit to revenue from the original purchase.
Yeah, you've also talked a lot about the different types of cost actions that you've done to improve the business.
Just trying to get a sense of.
You know with all the moving pieces you know how you would characterize the margins today or by the end of 2020, rather it is more importantly.
For that business relative to where you purchased it are you kind of you know in line, you know still little bit behind or or even ahead, given some of the company specific actions and how do you think about you know any potential further improvement in 21.
Yeah, Mike So you know with respect to two you know the margins.
We don't break out margins by individual company.
Yeah I can appreciate the question Keith mentioned in his comments a couple of minutes ago. You know, we continue to work and successfully work on the supply unit cost out initiatives, it kitchen or a close the volumes going a little bit more of a headwind than we head into would have anticipated when we bought the company.
But that's about as much as we can say on that topic.
Okay. Thank you.
Your next question comes from the line of John Lovallo with Bank of America.
Hey, guys on thank you for taking my questions as well.
Just sticking with lighting here and I'm, hoping to be a debt beat a dead horse here, but just from a broader industry perspective, I'm just curious because there's been a number of headwinds obviously and you guys have handle them fairly well. Other question is too or is there any concern that there's something structurally changing in the lighting industry is similar to maybe what we're seeing cabinets and.
Flooring as it pertains to consumer preference that is that is creating a headwind here.
No we don't view it as a structural change if there was anything that would be approaching a structural change it would be the the shift ecommerce, but that's really where we're seeing that honestly pretty broadly across a number of our.
Product categories. So no it's not a oh, we don't view it as a structural head. It was definitely a significant change when you talk about an industry that's by and large imported from China. We had the kind of tariffs that we had come into there. So it that's that's more of a a onetime event is as it relates to that changed versus a structure.
You know there's a it's a significant component of the remodel process and it continues to be that it's certainly as a design Q. It's very designed for word.
The what it takes to win in this industry as it relates to.
Consumer intimacy and understanding design trends and having a product a new product introductions process that solid those things haven't changed so we know how to compete in this industry.
And the change really has been that that tariffs that came in and we're going to put that behind us.
Throughout the course of 2020 on that we're gonna returned to a growth footing.
Okay. Thanks, Keith and then John just on the S. You need front of 310 million in the quarter that was up.
Fairly meaningfully dollar basis and also as a percentage of sales can you just help us understand maybe some of the key drivers under that please.
Yeah sure John Let me know as you May recall last fourth quarter is actually one of the lightest quarter is we had an SGN eight in a long time. So it was maybe is more of a.
And low S. unique content, we're up against the one thing that you may recall that we called out in the fourth quarter call last years, we didn't have a $4 million a gain on the sale of a building, which do not occur which would be a you know would it be headwind against that comp, but I think there's more just extremely tight or low SGN a last year.
Sure I know kind of a one off basis as opposed to anything else.
Okay. Thanks, guys.
Your next question comes from the line of Justin fear with Zelman and associates.
Hi, Good morning, guys appreciate it.
I just wanted to unpack some of your more margin forecast you mentioned, the 300 basis point headwind in the first quarter being more oh, the decorative architectural segment being more tariff affected but but now I'm trying to reconcile that with the fact that you.
Pain price.
Are you just saying that its volume de leverage or something else is there a lag in your pricing relative to the coffee rolling through help me understand that.
And then and then also on top of that just the any tailwind from lower raw material costs across your business low and using transport costs or any any other factors that are offsets that we need to be aware of.
Yes, so just wondering a couple of questions in there let me that's trying to address though so in terms of the margin degradation from you know the the fourth quarter. Two Q1. There is there's a couple of things going on there one is lower volumes right. A you know we referenced the fact that we've we lost a portion of private label.
Program.
Also with the pull forward in pain that 20 million dollar obviously comes out with that should indicate we have lower volumes in Q1, we're anticipating lower volumes I guess I should say.
In Q1 in a decorative architectural segment that that would help drive that operating profit margin lower.
In terms of raw material costs I in the third thing I should I guess I shouldn't impact assays.
On the margin side is the tariffs because its cost recovery that will drive margins lower as well Oh on the offsets side, you obviously movie always work on cost productivity.
In terms of commodity costs specifically.
You know it the input costs it to paint have moderated a here in the since a year ago, but.
But recall the way things, mark with particularly with our paint business.
Is that you know there you know we tend to be price cost neutral overtime.
So that may have an in you know that would impact margins over there's really.
As prices moderate.
Input cost monitoring to me there, maybe some impact on pricing as well so I think that that puts it all together I hit all your questions.
Well I guess I'm, just trying to understand it because I know, there's a lot of unevenness with the paint because last year.
During the first quarter of 22019, your your comps were down 7% I know some of that was kitchenware, but that was because you had pull forward the prior year.
Oh the father, those would have kind of evened out specialty you wouldn't have as much of an impact there from the coating side and obviously of the catch their business.
But I'm just trying to reconcile your comment that it's mostly tariffs that are hitting you with it it's not the tariff costs that you're trying to get price and you've lost share as a result of that are losing business and that's affecting your margin profile.
The decorative architectural segment.
No I I don't know a few maybe I didn't communicate right, but I think if you go into Q1.
Well I'd say, there who they're gonna be lost volume, we talked about the loss programs and so that's going to be the main contributor to the margin degradation.
Followed by the a the tariff impacts the other two volume is much greater impact and the tariffs on on the margins and keep.
That makes up and then lastly from me just who are you, who you're losing share to and in the lighting businesses or perhaps they had another player that doesn't sourced from China and its advantaged post tariff because like I was wondering freshman everyone's kind of in the same sandbox. So to speak in terms of supply chain is or is it something else.
Well I think the industry is down I think the [laughter] the impact of the tariffs industrywide has been in effect.
We're not really we haven't really identified any.
Single, a competitor, that's particularly taking more share than than another one.
Across the board.
Okay. Thank you guys.
Your next question will come from the line of key piece with Suntrust.
Yes. Thank you can you give us and 29 to see what was north American plumbing growth.
North American plumbing.
Was 2% due for the full year cash.
That all volume was or pricing in there.
There was a little bit of pricing or in there.
Oh, Yeah, I mean, if you consider the tariffs actually a fair amount of pricing in there.
Because we put in pricing to offset the tariff impact keep probably in Q1 in Q2 as of last year.
And so.
You're not expecting and other you said this earlier, you're not expecting any price and that's plumbing guys. That's given us for Oh.
I guess.
Because thats why in North America, you don't expect any price coming into 2020 <unk>.
Not much keep there might be a little bit did that we put in but not a ton no.
Okay. That's all thank you.
Your next question comes from the line to fill in with Jefferies.
Hey, guys can you give us a sense, how we should think about the pace at the buybacks as you layer that in in 2020, and then or any update on the M&A pipeline.
Yeah in terms of I think the is the share repurchase question, Phil and all that Keith talked about the M&A pipeline.
You know in terms of the way we're thinking about it is I think we mentioned.
I do a.
A large portion maybe a good chunk of the proceeds that we get from a the chemistry transaction. Shortly there shortly after the proceeds I received so and then through the balance of the year, we looked at appointed the balance of the five to 600 million that we discussed.
And but we'll be down probably more opportunistic depending on how the market plays out.
No one can use terms of M&A pipeline piece once you take that.
Phil our pipeline remained solid we continue to drive it overall I would say that the M&A activity.
Oh, it was a little bit slower in 19 than I expected with the global trade uncertainty and some of that business valuations being in flux because of that but it seems to pick up have picked up lately, we'd like some of the things that we're looking at most of them are fairly small I would say that seller expectations still remain high.
So we're going to be patient, but solid pipeline.
Got it and just one last one from me on the lighting stuff I mean, obviously, there's some tariff dynamic in share loss as we think about 2021. When you work through some of these issues and you got to Keith mentioned, you expect to return to growth.
Should we expect margins in that segment decorative.
Kind of get back to that 18% to 19% range.
Well, we're going to continue with that growth we have a good dropped out on that incremental volume and we'll continue to drive that so I would expect that margins would be improving as we compare 20 to 21.
Yeah. So you may recall, we laid out a 17 and 18% margins in that segment for at our Investor Day in September and Yeah. We you know our thought process around that has not changed since the September.
Got it thanks a lot.
Our final question about what happened to line up Truman Patterson with Wells Fargo.
Hi, Good morning, guys. Thanks for taking my question first wanted to touch on the Corona virus again, you know could you dig into that a little bit more you know what portion of plumbing products have you know a computer a component piece sourced from China and Keith I believe you mentioned can team.
Contingency plans as well I'm, just trying to understand what's going on there and you know it does seem like its intensifying could you discuss you know your current inventory balances and maybe an update.
Of a your supply chain if plants actually remains shot for you know another week or two will that actually impact you know the product that you can get on shelves.
Our our factories are coming up to speed really that represents about a week of delay over what would normally be have been a delay related to the Chinese new year. So there are coming up they're coming up a little bit slower than.
What they would normally we have about 15% of our workforce at our biggest plant for example, and that's gonna be coming in through.
The course of the next week, we can a half as I said earlier from a volume perspective, a lot of the retail home improvement malls and dealers remain close and there will be opening anticipated again, there's a lot in flux here.
But there will be opening over the course of the next week or two or so with China, representing 3% of our revenue.
That said on an earlier answer on the Q on a session here, we're not anticipating it to have them it material impact on us.
In terms of contingencies as I said, we're we're looking at premium freight to help us with some of the delivery. So that we can maintain our outstanding fill rate and lead time proposition to the customers.
And we're continuing to keep an eye on it we're most keenly I'm paying attention to the health of our employees and we've got.
Different procedures and policies to make sure that we're we're paying attention to that first and foremost it's a it's a a fluid situation. We're watching it closely and as I said, we're not anticipating a tablet material impact on our results at this time.
Okay. Okay. Thanks for that and then on the on our side you know pretty pretty slow in 2019 on it looks like your guidance has arent art picking up a little bit here are you actually seeing activity start to recover early in 2020 and if so do you think you know whether has had any impact on that I'm just trying to understand.
How sustainable you know any kind of near term out of green shoots our or.
Yeah, I think the you know the weather has been pretty good all things considered in and what it what it could have bad we're calling our and our at that 3% to 4% growth range and we see at accelerating towards the back half it when we're looking at the numbers and the economic indicators that we look at generally there's a lag.
From those numbers start our so well, we feel comps confident that 3% to 4% arent all with acceleration in the back half.
Ladies and gentlemen that will conclude today's conference call. Thank you all for joining and you may now disconnect.
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