© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Welcome to Masco Corporation’s 2017 Fourth Quarter and Full Year Conference Call. My name is Lisa and I will be your conference operator for today’s call. As a reminder, today’s conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin your conference, sir.
Thank you, Lisa and good morning. Welcome to Masco Corporation’s 2017 fourth quarter and full year conference call. With me today are Keith Allman, President and CEO of Masco and John Sznewajs, Masco’s Vice President and Chief Financial Officer.
Our fourth quarter earnings release and the presentation slides we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analysts’ questions. Please limit yourself to one question with one follow-up. If we can’t take your question now, please call me directly at 313-792-5500.
Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We described these risks and uncertainties in our Risk Factors and Other Disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial measures. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconciled these adjusted measurements to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.
With that, I will now turn the call over to our President and Chief Executive Officer, Keith Allman.
Thank you, Dave. Good morning, everyone and thank you for joining us today. Please turn to Slide 4. In May of 2015, the new leadership team at Masco held our first Investor Day in over 7 years. We introduced the new team, outlined our strategies in detail and committed to more than doubling our earnings per share from $0.88 in 2014 to $1.80 in 2017. I am very proud to say that the Masco team exceeded that $1.80 target by earning $1.94 per share, a 3-year compounded growth rate of over 30%. I would like to thank our more than 26,000 employees worldwide for their hard work and dedication and for doing their part to help us accomplish this lofty goal.
Let’s discuss some of our key accomplishments in 2017 that contributed to the achievement of this goal. Our revenues for the year grew 4%, excluding the impact of currency and our operating profit increased 9% or $98 million as margins expanded 70 basis points to 15.3%, our highest margin in 15 years. This operating profit growth demonstrates our strong operating leverage, continued improvements in cost productivity and our ability to successfully implement price across segments to offset raw material and other inflation demonstrating the strength of our brands, innovation and the value that we bring to our customers.
Turning to our segments, our Plumbing segment delivered strong performance across our diverse global plumbing platform, with Delta, Hansgrohe and Watkins each achieving record sales and record profits for the year. Notably, Delta achieved record sales in the fourth quarter. When you consider that the fourth quarter is typically a slower quarter, this is a significant achievement. Delta delivered this growth with strong performance in trade retail and e-commerce due to the breadth of its product assortment, commitment to innovation and focus on serving the customer. Hansgrohe, our global plumbing company, drove strong growth in the fourth quarter in Germany, France, the Netherlands and China as it continued to execute on our strategic initiatives and gained share in its focus markets. During the fourth quarter we also completed the acquisition of Mercury Plastics, a plastics processor and manufacturer of water handling systems for appliance and faucet applications for $89 million. This acquisition enables us to continue to expand the development of the industry leading PEX waterway technology for faucet and appliance applications.
In our Decorative Architectural segment, we finished the year with strong momentum as fourth quarter sales grew an outstanding 12%, our propane initiative continued its double digit growth in the quarter and for the year. And I am pleased to say that this program is now over $400 million in revenue with significant market opportunity still ahead. To continue to capitalize on this opportunity, we have committed along with our partner the Home Depot two additional investments and are actively recruiting to expand our hub store footprint and our outside pro sales force. We expect to have these additional employees on-board in early 2018. While the DIY market has been soft for most of 2017, together with the Home Depot we continued to outperform the market by successfully driving mid single-digit DIY growth during the fourth quarter as our customer focused programs, industry leading quality, service and brand continue to produce results.
Liberty Hardware also achieved double digit top line growth in the quarter as it completed the load in for a new retail cabinet hardware program capping off double digit top line growth for the year. I am also pleased that we entered an agreement to acquire Kichler Lighting late in the fourth quarter. We expect this transaction to close in the first quarter and its results will be reported in our Decorative Architectural segment. Kichler is a strong fit with Masco with top brands in each of its product categories, a focus on design and innovation and outstanding customer service. As products are sold through channels where we have strong presence such as plumbing showrooms, home centers and online as well as other channels including lighting showrooms and electrical distributors. We are excited about the future of this business and with its annual sales of approximately $450 million and similar growth prospects to our other businesses. This will be an additional driver of growth for Masco.
Turning to cabinetry, we experienced some headwinds in this business throughout the year due to some unplanned losses of our builder business, increased tariffs and the affects of hurricanes in the third and fourth quarters of the year. Despite these headwinds our KraftMaid brand grew mid single-digits for the full year and we improved the overall segment operating margins by 310 basis points in the fourth quarter. I would like to share with you an exciting development in our cabinetry business. We recently won a significant program with Menards to be a supplier of special order and in stock cabinetry with our Cardell brand of cabinets. We have already begun setting displays in the Menards stores and this activity will continue throughout the first half of 2018. It will take some time to ramp up this program, but we believe this program will be approximately $80 million in annual revenue at maturity.
We achieved this win with an assortment of innovative products at attractive price points. Congratulations to the entire Masco cabinetry team for securing this exciting new account that will drive profitable growth. During the fourth quarter we also determined that the Moores Furniture Group, our small UK cabinet operation was no longer core to our long-term strategy and completed the divestiture of this business. Moving on to windows, we achieved a $54 million improvement in operating profit in this segment for the full year due to the improved performance at Milgard, our leading Western United States window business which achieved high single-digit growth for the full year.
Now turning back to our consolidated results, our strong operating performance in 2017 generated $564 million in free cash flow, strong cash flow was a hallmark of Masco enabling us to do drive shareholder value through reinvesting in the business, selectively pursuing acquisitions with the right fit and return and returning cash to shareholders through share repurchases and dividends. Consistent with our balanced capital allocation strategy, we returned $460 million to shareholders through share repurchases and dividends in 2017 and will invest a significant amount of capital upon the closing of the Kichler acquisition in early 2018. In addition to the acquisition of Kichler, we expect to deploy a minimum of $200 million to $300 million in share buybacks or acquisitions in 2018.
I will now turn the call over to John who will go over our operational and financial performance in greater detail. John?
Thank you, Keith and good morning everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact in rationalization and other one-time charges. Before I get into the details, I should make you aware that my script today will be a little bit longer than it has been historically as we will be sharing with you some significant detail for 2017 and 2018. So, hang in there with me for the next several minutes.
Turning to Slide 6, we delivered solid sales growth and operating margin expansion in 2017 driven by customer-focused innovation, new programs and productivity improvements. The fourth quarter was our 25th consecutive quarter of year-over-year sales and profit growth. We finished the year strong. Fourth quarter sales increased 5% and full year sales increased 4%, excluding the impact of currency translation. When accounting for the divestitures of Arrow and Moores, sales increased 6% in the fourth quarter and 5% in the full year in local currency. Currency translation favorably impacted our fourth quarter sales by approximately $30 million as the U.S. dollar weakened against most major currencies, including the euro and British pound.
Our full year sales were not impacted by currency translation. North American sales increased 5% in the fourth quarter and 4% in the full year in local currency. Excluding Arrow, sales increased 7% in the fourth quarter and 5% for the full year in local currency. Consumer-driven demand for our industry leading repair and remodeling products across all channels of distribution and across the price continuum drove this performance. International sales increased 3% in the quarter and 4% for the full year in local currency as our international plumbing businesses continue to drive growth and profitability. Excluding Moores, sales increased 5% in both the quarter and the full year in local currency.
Gross margins expanded 10 basis points to 32.9% in the quarter, expanded 60 basis points to 34.2% for the full year. We successfully put price into the market across all four segments in the fourth quarter to offset rising input costs demonstrating strength of our brands and innovation. Our SG&A as a percent of sales decreased 140 basis points to 18.8% in the fourth quarter and decreased 10 basis points to 18.9% for the full year as we continue to leverage our volume and control our costs while making strategic investments in profitable growth initiatives. We delivered solid bottom line performance in 2017 as operating income increased 20% in the quarter and margins expanded 150 basis points to 14.1%.
For the full year, operating income increased 9% and margins expanded 70 basis points to 15.3%, our highest full year operating margin in 15 years. For the fourth quarter, our EPS increased 33% to $0.44 and for the full year increased 28% to $1.94. These results exclude a loss of approximately $64 million that resulted from the sale of our UK cabinet business in the fourth quarter of 2017. Starting with the first quarter of 2018, our adjusted EPS calculation will assume a 26% tax rate, down from the 34% due to the recently enacted tax reform.
Turning to Slide 7, our Plumbing segment achieved another outstanding year. This segment once again delivered profitable growth and margin expansion. Segment sales in the quarter increased 6%, excluding the impact of currency driven by strong growth in our faucet, shower and spa businesses. Currency favorably impacted this segment’s sales by approximately $24 million in the quarter. North American sales increased 6% in local currency as we experienced strong demand with our wholesale, large retail, dealer and e-commerce customers. As Keith mentioned, the fourth quarter was an all-time sales record that quarter for Delta and was typically a seasonally slower quarter. Our European performance was also strong in the quarter as our international plumbing businesses grew sales by 7% in local currency as Hansgrohe’s focus on key markets continue to yield results with strong growth in both China and Germany. Operating profit in the quarter increased 11% due to incremental volume in a favorable price commodity relationship. These benefits were partially offset by approximately $8 million of increased strategic display investment with Delta’s plumbing wholesalers that we foreshadowed on our third quarter call.
Turning to the full year 2017, sales increased 6% in both U.S. dollars as well as local currency led again by record sales and operating profit at Delta, Hansgrohe and Watkins. North American sales grew 6% as we experienced strong growth in across all channels, including wholesalers, large retailers, dealers and e-commerce during 2017. In addition, Delta Faucet’s luxury brand, Brizo, grew double-digits and continued to experience strong consumer demand in showrooms for its innovative products. Delta also gained share in faucets and showers with new product introductions in both retail and trade. Our European businesses continued to outperform delivering 6% sales growth in both U.S. dollars and local currency as Hansgrohe’s performance continued to benefit from its investments in brand, design and innovation.
Full year operating profit grew 7% due to volume growth in a favorable price commodity relationship partially offset by strategic growth investments. Delta will continue its investments in showrooms by rolling out new displays for the plumbing wholesale customers. We are expecting this spend is incremental $4 million in the first half of 2018 split equally between the first and second quarters. Delta is also in the process of implementing a new ERP system, which we expect to incur approximately $10 million of incremental expenses in 2018 mainly in the second and third quarters. For 2018 at this time, we expect Plumbing segment sales growth to be in the 4% to 6% range, with margins similar to 2017.
Turning to Slide 8, the Decorative Architectural Products segment grew an outstanding 12% in the fourth quarter as we continue to experience strong double-digit growth of our BEHR PRO initiative as well as mid single-digit growth in our core DIY products. We estimate sales in the quarter were aided by approximately $6 million of incremental sales to the hurricane-impacted regions of the United States. Liberty Hardware also contributed to the top line as they benefited from the $6 million load in of its new retail cabinetry hardware program in the quarter. Operating income increased 17% due to increased volume and an improvement in the price commodity relationship partially offset by approximately $7 million of reset costs related to Liberty’s retail program win that we previously discussed on our third quarter call.
Full year sales grew 5% driven by strong performance of our BEHR PRO initiative as we achieved double-digit growth and continued to grow share with the PRO. Our PRO sales were more than $400 million for 2017. This outstanding performance continues to demonstrate our commitment together with the Home Depot to invest in and capitalize on the significant opportunity. Due to the success of this PRO initiative, we will invest in additional hub store employees and outside sales reps in early 2018 to support future growth. We expect this incremental investment will be similar to our investment in 2017. The solid sales growth in 2017 was also attributable to Liberty Hardware’s continued share gains from successful new product introductions and program wins in the retail channel. Full year operating income increased 1% principally due to operating leverage on higher volume partially offset by an unfavorable price to commodity relationship and strategic growth investments.
Please turn to Slide 9, as we look into 2018, this segment will be impacted by two items I would like to provide further detail on, the new revenue recognition standard and the acquisition of Kichler. First, the new revenue recognition accounting standard will have minimal impact on the segment’s full year results, but will affect revenues and operating margins each quarter. This new standard will decrease segment revenue by approximately $10 million in each of Q1 and Q4 and will increase revenue by approximately $10 million in each of Q2 and Q3. This change will also impact segment operating margins decreasing segment operating margins by approximately 100 basis points in each of Q1 and Q4 and increasing segment operating margins by approximately 100 basis points in each of the second and third quarters. Our other segments will not be significantly impacted by the new revenue recognition standard.
Moving to the acquisition, as Keith mentioned, we expect to close on our acquisition of Kichler shortly, this results will be included in this segment. Including this acquisition and assuming on March 31 close, we expect segment sales growth will be between 21% and 23% with operating margins in the range of 16.5% to 18.5% in 2018. A portion of this margin reduction is due to the impact of purchase accounting for intangible assets and the related amortization expense. Additionally, we expect an approximate $35 million impact in the first 6 months following the closing of the transaction due to the step up of inventory as part of purchase accounting. We will exclude this inventory step up adjustment in our adjusted numbers. As we think about the existing business in this segment for 2018 excluding Kichler, we believe core sales should grow in the 4% to 6% range similar to what we guided at our Investor Day and existing margins may contract modestly from 2017 levels due to price commodity headwind and further investment in the hub store and Pro sales reps.
Turning to Slide 10, in the Cabinetry segment, sales declined 5% in the fourth quarter and 4% for the full year principally due to the exit of certain low margin builder business in the first half of 2017, the impact of Texas and Florida hurricanes and additional loss builder business resulting from a builder consolidation in the second half of 2017. In addition, we divested our UK cabinet business, the Moores Furniture Group in the fourth quarter. Excluding the impact of Moores, sales declined 1% in the fourth quarter and 3% for the full year. This activity masked a very successful year for KraftMaid. In the retail channel, KraftMaid experienced mid single-digit growth as well as year-over-year share gains in 2017. In the dealer channel, KraftMaid drove mid single-digit growth in 2017 through increased volume, favorable mix and price as its new products continue to resonate with kitchen designers and consumers. Segment profitability increased $6 million in the quarter and declined $9 million for the full year. The fourth quarter performance was driven by continued improvement in operating efficiencies and favorable pricing. The full year was impacted by a loss volume, expenses related to new product launches and the impact of antidumping duties and countervailing tariffs on imported Chinese plywood.
Turning to 2018, segment sales will be reduced by approximately $40 million due to the sale of Moores split roughly evenly between the first, second and third quarters, with some improvement to operating profit. In addition due to the recent retail win under the Cardell brand as Keith mentioned, we anticipate approximately $12 million of investment spend mainly in the first quarter as the new store displays are set. We believe annual sales from this program will be approximately $80 million at maturity and we expect to be at that run-rate by year end. We also believe this program will be accretive to the segment’s margins, excluding the investment spend. For 2018, we expect sales growth excluding the Moores divestiture in the range of 5% to 7% and expect continued margin expansion despite significant investment in the Menards’ program.
Turning to Slide 11, our Windows segment sales decreased 3% in the fourth quarter and matched the full year 2016. Excluding the sale of Arrow Fastener, sales increased 6% in the fourth quarter and 5% for the full year. This strong performance was driven by growth in Milgard, our leading Western U.S. window business, which was 7% in the fourth quarter and 8% for the full year. Milgard’s solid growth was due to favorable pricing, increased volume and the positive mix shift towards our premium window and door products.
Segment profitability in the quarter decreased $2 million, but increased $54 million for the full year. Fourth quarter was impacted by cost increases, the divestiture of Arrow, softness in our UK operations, partially offset by favorable pricing. The full year performance was primarily driven by the lapping of last year’s warranty expense, favorable pricing and cost savings initiatives. We are extremely pleased with the rapid turnaround in Milgard in 2017 and remain confident that the improved performance will continue in 2018. As a reminder due to the sale of Arrow Fastener, our first half sales and operating profit will be reduced by approximately $30 million and $6 million respectively, split roughly evenly between the first and second quarter. 2018, we expect sales growth for this segment to be 6% to 8% excluding the Arrow divestiture with margin expansion though not likely in our long-term range of 10% to 13% due to the ongoing rollout of ERP at Milgard.
And turning to Slide 12, our year end balance sheet was strong at approximately $1.3 billion of liquidity. We continued to produce some of the best working capital results in the industry with working capital as a percent of sales was 13% at year end. This was slightly elevated from prior year principally due to higher inventory to support our growth and new program wins. We expect to improve our working capital metrics in 2018. During 2017, we repurchased more than 9 million shares valued at approximately $331 million. We also increased the dividend by $0.02 to $0.42 per common share. Since 2014 we have returned more than $1.6 billion to shareholders through share repurchases and dividends. We took further action in 2017 to strengthen our balance sheet by refinancing high coupon debt and thus reducing our interest expense by approximately $3 million per quarter.
Going into 2018, our disciplined capital allocation strategy is unchanged. We continue to prioritize investment in our businesses to drive organic growth. We will balance acquisitions with the right strategic fit and returns with share repurchases and we will maintain an appropriate dividend. We will utilize our strong liquidity in 2018 as we plan to fund our acquisition of Kichler with $550 million of cash on hand. In addition, we have $114 million debt maturity to come through in April which we plan to pay off. We also expect to use another $200 million to $300 million in share repurchases or acquisitions in 2018. We generated more than $560 million of free cash flow in 2017. We expect to generate more than $800 million of free cash flow in 2018 due to stronger earnings, the benefit of tax reform and disciplined working capital management. This amount does not include any free cash flow from Kichler. Our 2018 EPS estimate is $2.48 to $2.63. This range includes the change in the tax code and the expected results for the Kichler acquisition for the last three quarters of 2018.
Before I turn the call back over to Keith, let me highlight one other required accounting change. There is a new pension accounting rule, this new rule will move approximately $17 million of pension expense and operating expenses to the other income expense line on the income statement in 2018. The effects will be to increase operating income by $17 million in 2018. There will be no effect on either net income or EPS. As the majority of our pension expense recorded in general corporate expense each of our segments will have only a minimal benefit. 2018 general corporate expense is estimated to be $85 million which reflects the pension change and other anticipated cost reductions.
With that I will now turn the call back over to Keith.
Thank you, John. 2017 was a good year for Masco, as we successfully executed against our strategic initiatives. We continued to grow our Plumbing segment with our three largest plumbing businesses Delta, Hansgrohe, and Watkins each achieving record sales and record profits. We continue to gain share in the pro and DIY paint markets with our powerful Behr brand. In cabinetry, our KraftMaid brand gained share in its repair and remodel market as it continued to resonate with kitchen designers and consumers. And in windows, we significantly improved our operating performance at our Milgard windows business unit. In addition to our segment performance, we executed against our capital allocation strategy by investing in our business, committing significant capital to two acquisitions, repurchasing approximately $331 million of our shares and increasing our dividend for the fourth year in a row.
As we turn to 2018, the fundamentals of our business remains strong and consumer confidence continues to improve, due in part to the recently enacted tax reform. With our continued focus on executing our strategy, coupled with our strong balance sheet and liquidity position, we will capitalize on the strong industry dynamics by continuing to invest in our leading brands, innovation leadership and operational excellence. We believe, we will generate over $800 million in free cash flow in 2018 and earnings per share will be in the range of $2.48 to $2.63 per share.
With that, I will now open up the call for questions and answers.
Thank you. [Operator Instructions] Stephen East from Wells Fargo, your line is open.
Well, thank you and good morning guys. Thanks for all the great information that’s hugely helpful to us. Maybe I can start off with Keith, the Kichler acquisition, just maybe talk a little bit about if you would sort of what the thought process you went through to acquire this, I mean lighting is a different business obviously and as you went through this process what you thought your game plan would be over the next couple of years with this company and any other thoughts around costs and synergy opportunities there?
We approach our acquisition pipeline and where we targeted based on a market company value framework where we look at the overall market to determine attractiveness. We look at and determine shortlists for targeted companies. And then when we get in and look at those specific companies, we think about what kind of value we can bring. So that MCV format is what we do and have been doing for several years. We have been looking at the lighting industry for a couple of years now and we like it a lot, it’s a big industry about $6 billion in terms of revenue where we will play. It’s relatively fragmented with – which gives us the opportunity for a nice organic growth and share gain. And historically the growth profile on this industry has been in the mid single-digit range. It has similar products – excuse me has similar products and brands and is sold in a way that’s very similar to what we currently do, it’s sold through home centers, through showrooms, plumbing showrooms as well as new channels for us with electrical distributors, etcetera. And we have strong relationships with those – with those channels. Lighting is often specified by a designer who is coordinating an entire project and the showroom associate is key to that assisted sale and that is a very similar to what we do in many parts of our business currently at Masco. We know how to service that customer base and how to make it difference for them in terms of making their business more successful. So when we look at that all those factors in terms of the total industry, we like it a lot. With specific regards to Kichler and why that was on our target list and why we like Kichler so much, it really comes down to a couple of things. They have very strong brand and a very intense focus on design and innovation. They have extremely well established distribution and a focus on customer service and operational excellence. I have met some of their customers that are two, three, I even met a fourth generation customer. And I really like what I hear with regards how we are serving – servicing them and the longevity. In particular what’s attracted to me for Kichler as a company that is its culture. There is no doubt in my mind that they are product driven and customer service focus. And you can just sense and feel a permeation through the whole company that they respect individuals and individual contribution and people, so very consistent with the culture that we are driving here at Masco. So the market is very attractive to us. The company is very good company. And in terms of our value creation, we certainly see opportunities in operational excellence. We are very good at this at understanding the customer at designing and procuring from China. This will help us with logistics efficiencies. And we think we can help through the Masco operating system to improve Kichler. And quite frankly I think that through MOS, we are going to be able to take the good ideas from Kichler and apply them to Masco. So if we look across MCV market company value, this is a great acquisition for us.
Alright, that is great. Thank you. I appreciate it. And then the second question I had is you all laid out in ‘17 your – that you thought you would spend $1.5 billion through ‘19 on M&A and repurchase, you are already – you are two-thirds of the way there, you outlined more for ‘18, any thoughts about pushing that number up or how do you think about it now that you are pretty far down the road versus your target?
Our capital allocation strategy really hasn’t changed. We are focused on investing in our business and returning cash to the shareholders looking at M&A and share repurchases and maintaining our [indiscernible] as we have talked about. We have also talked about it and I mentioned it from the stage in the investor conference that we have the option to do more if we need to. We have a very solid and strong balance sheet and there is an opportunity for us to do more, but fundamentally the way I look at it that we really haven’t changed our capital allocation approach. And I think that minimum $200 million to $300 million more in acquisitions and share repurchase is a good way to think about it.
Yes. Steven, the one thing I would supplement Keith’s comments and I completely agree with what he said is that due to tax reform we will probably have an incremental $200 million of cash to spend. And so could we allocate that $200 million to one of the legs of our capital allocation strategy over the course of the next 2 years, absolutely that could be the case because that took the form of either incremental acquisitions or incremental share repurchases. Definitely that’s a potential that’s out there for us.
Alright. Thanks a lot. That’s helpful.
Our next question comes from the line of Keith Hughes from SunTrust. Your line is open.
Thank you. I also have some questions on the acquisition, Slide 9 show the dilution of margins in the segment, does those estimates include or exclude that $35 million step up in amortization from purchase accounting?
They exclude, Keith.
Exclude and I believe in your guidance range you exclude that as well, is that correct?
That’s correct.
Okay. If you do some interpolation that would imply a good to lower margin that we will receive from a lot of your businesses in Kichler, is that correct and what kind of manufacturing center do you use, what things do you do – can you do in the future to get that up?
Yes. So Keith, there is a couple of things, right. Inherently, this is a little bit lower margin than either the pain of our hardware business that we have. It’s by a low double-digit margin business. It is being impacted by as I mentioned some amortization expense, due to intangible amortization. Roughly for the first 3 years of acquisition will keep the margins suppressed in that segment and then we will start to see them some growth as we – as that kind of rolls off. So we should see some margin expansion over time. And as Keith mentioned we do see some opportunities to improve the operational efficiency of Kichler through our Masco operating system and the discipline that, that applies. And we also see some things that we can translate from Kichler back into Masco. So other things like sourcing synergies and procurement savings and logistic savings, we can realize, yes, we think there are some and we will call those out as those get more crystallized. Quite honestly, we haven’t closed on the transaction yet. So we are still working our way through some of those details.
Okay. Just to clarify the low double-digit number you talked about that does already exclude the step-up, is that correct?
That’s correct.
Okay, alright. So, that’s not going to – that does not going to change several years out on an adjusted basis, it’s not going to change several years out.
No, what will change with the intangible amortization, which will be about a 3-year period.
Okay, thank you.
Our next question comes from the line of Scott Rednor from Zelman & Associates. Your line is open.
Hi, good morning.
Good morning, Scott.
I wanted to just go back to cabinet real quick and congratulations on the retail win. But if I look back at your slides from the Investor Day, Cardell was an even a brand mentioned. So, I know you acquired it a few years ago. So, maybe Keith, can you just talk to how it fits in the wheelhouse of KraftMaid and Merillat?
Fundamentally, where we see Cardell is right in that same bandwidth if you will with regards to Merillat, maybe in spots, it can go a little lower in terms of price points, but when you talk about the build-to-order more of the semi-custom aspect of it, it can go a little bit higher as you well know depending on the content of the different types of the content that you put in the box, the price continuum can be pretty broad. Cardell is a well-established brand. It’s been around for a while, while it’s been quiet for the last couple of years. It does resonate. I would encourage you to go take a look at the displays in Menards’, if you get an opportunity they look fabulous. It’s a good brand for us to have in our stable as it relates to giving us the opportunity to go into other customers and other channels and address some of the issues and conflicts that sometimes can arise with that. So, it fits very nicely and played, I would say, a strong role in our ability to get this business together with the broad offering that we can offer and putting to use the structural competitive advantage that we have in our cabinet business to come in at a very attractive price point.
And then I will just ask a quick one on Plumbing, John, I think you mentioned a favorable price commodity relationship for all of ‘18 or all of ‘17 excuse me and when you guide to similar margins next year, can you maybe talk about kind of push points in there, you have significant amount of expense rolling off, I would think from the Hansgrohe facility that you are lapping, but you are investing back in the business. Can you maybe kind of parse out the positives and negatives there, please?
Yes, sure. So, as we go into 2018, Scott, yes, there were a couple of things that we are lapping. Indeed, there were kind of headwinds in 2017. That said this ERP expense at Delta of about $10 million and the $4 million of displays as well as a little bit of commodity headwind as we head into the first part of 2018 we are feeling, if you think over the last 6 months, zinc is up pretty significantly as is copper. And so we are looking at maybe needing to put price back into the market again in 2018 potentially. And so there maybe a little bit of lag in getting price and so that weighs into our thinking on segment margins in 2018.
Thank you.
Yes.
Our next question comes from the line of Tim Wojs from Baird. Your line is open.
Hey, guys. Good morning.
Good morning.
Good morning, Tim.
Maybe back on that last question, John, I guess maybe for the whole business as you kind of think about price costs, is the right way to think about it for a team that you margins are a little bit more negatively impacted in the first half and wind up recovering more of that in the second half or just what’s the right way to think about the cadence of price cost for the business over the course of ‘18?
Yes, generally, speaking, Tim I think you are on the right track. The way we are seeing commodities right now has been a little bit more inflation here in the first part talent of 2017 going into the first part of 2018. So, I think your analysis is right that as we think about the business over the course of the year, we are likely to see a little bit more headwind in the first half of the year and a little bit less pressure in the back half of the year as we are starting to put price into the market.
Okay. And then as I look at kind of the segment growth ranges that you gave for the year, it kind of adds up to maybe five, maybe a little bit higher in terms of organic growth for ‘18, is there a way that you could parse out volume and price or I guess would you be willing up to parse out that volume and price might be as a component to that?
Yes. The way we look at Tim is if you split those two apart volume will be the heavy majority of that with a little bit of price. This is the way we are thinking about it right now.
Okay, great. Good luck on ‘18. Thanks.
Thanks.
Our next question comes from the line of Michael Eisen from RBC Capital Markets. Your line is open.
Good morning, just wanted to follow-up on some of the Kichler questions, if I am looking at your guidance for next year, it seems like it implies a high single-digit to low double-digit growth rate for this business, you talked about some of the operating benefits that you get through the Masco operating system, but can you maybe talk about where you guys have strength that is going to help accelerate top line growth over the mid single-digit levels do you guys talk to for the lighting industry?
So Michael, good morning, as we think about growth for this business, we do think it’s in that mid single-digit range. So perhaps we can work with you offline on getting some better clarity on that. But as we look at this business, it’s a nice solid growth and very much in line with the core of our other businesses.
And I would say that as we look at that Kichler and lighting, it has demonstrated historically the ability to get price somewhat I would say commensurate with commodity changes, so we like that part of it. So there is a little bit of an attribute there in terms of the growth. We have nice overlap and understand significant number of their challenges or their channels. We think we can bring value as it relates to plumbing showrooms and matching finishes and coordinated suites and those sorts of things that can help the top line as well, but fundamentally looking at a mid single-digit growth rate.
Got it. Very helpful. And then just following up quick question on pain as you guys are continuing to spend more on growing the pro channel and you guys are having great success here, can you talk to may be about what the price margin differential is and how we should think about long-term incremental margins from the paint business?
Really – we really don’t as you know get into specifics as it relates to pricing as so much of our business is tied to one partner. I would tell you that in terms of the top line growth rate, taking out the effective Kichler, we are looking at very close to what we talked about at the Investor Day that 4% to 6% growth range for 2018 with maybe some modest amount of erosion to the core business, a little bit of price commodity headwinds. We are anticipating of course we have talked about that additional investment. And then that headwind if you will is offset by the strong incrementals we have on the growth rates. So all-in, from a core perspective leaving Kichler out for a minute, we are looking at modest erosions of the core, I would say less erosion that we saw last year.
Our next question comes from the line of Nishu Sood from Deutsche Bank. Your line is open.
Hi, this is [indiscernible] for Nishu. Can you talk a little bit about project delays and any labor issues you are seeing in the cabinet business?
There is – in parts of the country we are seeing some issues with finding installers that would tell you that principally where the labor concerns are more on the new construction side that when you look at the strength of our R&R business, how we are doing in big box retail, the fact that we are achieving some significant growth and nice growth with our KraftMaid, which is repair and remodeling. I would say that that’s hasn’t been a significant issue for us.
Okay, thank you. And also do you anticipate any pushback from the big box retailers and builders comes to price increases from inflation and I am asking that given the jumping profits that you got with the recent tax cuts, do you anticipate any pushback?
For us, it’s really about bringing value to each one of our distribution and customer partners and that value is different based on some of the different channels that we serve, but fundamentally it comes down to brand, innovation and customer service and that plays across trade, retail and online and that’s where we are focused. And when you look over the long-term, our relationship to price commodity has remained flush, now there is some leads and some lags as commodity cycle up and cycle down, but fundamentally, we have demonstrated that our brand innovation and service proposition enables us to make up, if you will, for commodity fluctuations.
Alright. Thank you.
Thank you.
Our next question comes from the line of Michael Wood from Nomura Instinet. Your line is open.
Hi, good morning. At the time of the Kichler announcement, you have mentioned the fragmented nature of that market. I am just curious how you are running this business internally and how are you thinking about the opportunity to consolidate that market?
We are not running the business internally yet. We have to close on it. So, that will come. It is, I would say, more fragmented than our base business when you think about the top five competitors making up less than 50% of their market that we are addressing and going after. So, we think that bodes well in terms of our thoughts process on consolidation that certainly could be an opportunity for us in the future, but we are going to be focused on integrating Kichler and helping them become part of the Masco portfolio as effectively as possible helping to drive our top and bottom line synergies and working very hard to learn from them. They have got a great system down there. So we are looking forward to running this business and helping this business be all it could be in terms of what could happen down the road, we will see.
Mike, while we are on Kichler I just want to clarify some prior comments that were made around Kichler and just so everyone is clear, the $35 million inventory step-up impacts us in the first 6 months following the transaction. I think there is – it sounded as if there might be some confusion on that and I just want to make certain that, that’s clear to everyone as to how that hits us. I should also say in the fourth quarter, we incurred about $3 million to $4 million of transaction-related expenses in the Decorative Architectural segment related to the Kichler transaction.
Got it. And just shifting gears on the DIY gallon growth looked relatively strong in the fourth quarter, specifically better than many of your peers reported in that segment. What are you attributing that outperformance to, is it channel specific and is that something you think that could continue into 2018?
I think it’s a combination of the work, great job that the Home Depot is doing and a combination of the great work that we are doing with regards to the brand and what we call winning with engagement. We know the formula that it takes to convert foot traffic into paint sales and that focus together with our strong brand and price point coverage and innovation and all those things that BEHR stands for has really been driving it. I am not ready to call that there has been a huge shift in the DIY market at this point, I think there will be some good low to mid single-digit growth in DIY next year and we are happy and thrilled that we have been able to take share in this market and we anticipate continuing to do that both on the DIY front as well as the PRO area, which is going very well for us.
Mike, just one further clarification, I just misspoke a second ago $3 million to $4 million of transaction expenses sold through general corporate expense not the segment.
Okay. Thank you, guys.
Our next question comes from the line of John Lovallo from Bank of America. Your line is open.
Hey, guys. Thanks for taking my questions. The first one I guess would be on the additional pro paint investment at Home Depot. Can you help us understand is this largely employee-related, is it existing stores, is it new stores and what’s your anticipation of the level of revenue that this could support maybe in 2018 and 2019?
Yes, it is people. It’s a similar addition and similar thought process to what we did last year both in terms of rationale, how we are doing it and the size of it. It will be a combination of some incremental hub stores as well as some additional staffing in existing hub store areas with regards to outside pro rep. So by and large I think of it very similar to what we did last year and they will be their employees. In terms of the impact and what we expect to see from this we are planning on continued strong growth in pro planning on share gains and this is all factored into what we have talked about in that 4% to 6% growth rate in the core business.
Okay, that’s helpful. And then moving on in terms of your UK businesses, if I am not mistaken the only business that’s what there is the UK windows business, is this something that you would consider strategic alternatives for?
So John just to clarify, we do have two businesses in the UK at this time. We got Bristan, which is actually the leading shower and faucet business in the UK and really UK window business as well. And I think as we do have portfolio review on a very regular basis. And at this point in time there are no further divestitures planned, so at this point it is core of the portfolio.
Okay. Thanks guys.
Our next question comes from the line of Samuel Eisner from Goldman Sachs. Your line is open.
Yes. Good morning guys. Thanks for taking me on. The – just going back to your 2018 guidance, you are basically guiding to $0.60 of EPS growth, about $0.40 of that $0.60, two-thirds is coming from tax and buyback and the remainder from organic growth in Kichler, so I want to better understand how much is Kichler on an EPS basis adding to 2018 and also any details you can provide on what you paid multiple dollar amount for Kichler would be great?
So Samuel, I can’t think about it, maybe a little bit differently than the way you are thinking about it is if I apply the new 26% tax rate to our 2017 performance that would equate to roughly $2.20 a share, up from the $1.94 and so if you think about the midpoint of our guidance roughly $2.57, $2.58 that implies a roughly 16%, 17% EPS growth. So Kichler will not be a dramatic impact to that. In terms of second part of your question in terms of price paid, multiple paid, etcetera, we are not disclosing that information at this time other than that obviously we have disclosed the $550 million of price, but multiples, I can tell you is below the company multiple that we are paying.
Got it. So said in another way, your EPS estimate or guidance for next year does not include much in the way of Kichler at the moment?
Yes. Just we are on the company. We don’t know exactly when we are closing. We gave you and it assumes that we are operating the business for the last nine months of the year.
Got it. And then given the fact that you guys are out there with this $2.50 number that was given back in the 2017 Analyst Day, since we are talking about future expectations, I am wondering if you want to attack that number and kind of give any update to it?
Yes. I think the best way to look at that one, Sam, I am willing to doing it on a tax adjusted basis without the impact to Kichler, because we hadn’t really gone through the – we haven’t had the opportunity to go through a planning cycle with the Kichler team. So on a tax adjusted basis alone that $2.50 goes to $2.83.
Helpful. Thanks so much.
Our next question comes from the line of Michael Rehaut from JPMorgan. Your line is open.
Thanks. Good morning everyone. Thanks also for fitting me in. First, just wanted to go back to the windows business for a moment and obviously a huge turnaround there throughout the year, but in the fourth quarter maybe a slight step back due to some of the challenges that you mentioned, you are still expecting margin improvement in 2018, but maybe fallen short of the 10 to 13, which I think most people would not have expected that to be reached in ‘18, but I was hoping to get a little bit better understanding of how you are thinking about the improvement of that business throughout the year, do you expect some of the challenges that you saw in 4Q to persist in the first couple of quarters and for following that for it to be a ramp or any thoughts around the cadence there just given the pullback in margin in 4Q?
Well, Michael, the fourth quarter profit was impacted by the Arrow divestiture and the increased variable expenses that we had primarily around higher bonuses and that sort of thing. We had some softness in the UK operations that we have talked about. So, that’s kind of a thumbnail sketch of some of the headwinds in the fourth quarter. What I really was impressed with through this turnaround is that we were able to maintain very solid growth during a turnaround. My experience is that typically that doesn’t happen, you focus on the margin and you get the business right, then you start to grow. So I feel good about our growth prospects and that’s why you we are looking at sales for ‘18 in that range of 6% to 8%. So, we expect the sales to continue to grow. We will have good dropdown on that volume, but we are also continuing as we have highlighted in past couple of calls, ERP investments into this segment. Those ERP investments are going very well. We have just launched our largest plant last quarter and it went fabulously. So that’s another good sign for this business. So, I like our prospects for ‘18 and we are off to a good start.
Great. Thank you for that, Keith. And I guess just also apologies to maybe beat a dead horse here, but I just want to make sure I am thinking about it right on Kichler with the accretion. John, in the press release obviously, you said that the EPS guidance range includes some accretion from that acquisition and kind of just running the numbers roughly we are getting – working off of the low double-digit margins that you had alluded to earlier or mentioned earlier John, kind of implies like a 10%, 12% – $0.10 to $0.12 per share accretive impact for 2018, if you just run in the like three quarters of sales against that type of margin and tax effect that are we thinking about that right, because I think there is a little bit of confusion around what Kichler is contributing to the bottom line?
Yes, I think Mike here that the math that you just outlined pretty much holds. The one thing that may not be as clear as that intangible amortization that hits us the first couple of years may suppress that low double-digit margin just a little bit. So, that might be the offset that you are not picking up.
Okay. Maybe we can follow-up offline on that. I would appreciate it.
Sure. Why don’t we do that, Mike.
Thanks.
Our final question for today comes from the line of Stephen Kim from Evercore ISI. Your line is open.
Yes, thanks very much guys and thanks for all the detail. I just wanted to clarify one thing here if I could. I think you had mentioned hurricanes last quarter as being something that impacted all three of your major businesses. I caught that I think you said that there was a $6 million benefit in your coatings business. Could you maybe indicate – did you see any other effects in either plumbing or cabinets and is there anything other than the push-out from 3Q that you feel you recognized in 4Q, we have gotten to the point where you have actually seen any kind of incremental benefit as a result of the actual damage leading to incremental work?
So, Stephen, as we think about it, I think you had the $6 million in paint, in cabinetry, we had a little bit of a headwind to the top line to the tune of maybe about $5 million in the fourth quarter.
Okay.
We expect to see the benefit in cabinetry really play out in the first half of 2018, because as we consider the build cycle and as homes get repaired, cabinets is one of the last things that gets set in those projects as if to do a lot more work first. So, that’s why we think about cabinet. Plumbing there may have been a very modest benefit, but in the fourth quarter, but again we expect that to play out in the first part of 2018, but it’s only a couple of million dollars, but not a significant impact in the Plumbing segment.
Got it. Okay, that’s helpful. And then if I could I think you mentioned for the Kichler business that the lighting category overall is very fragmented I think for the top 5 at less than 10% share. I mean, this seems to suggest that the industry hasn’t really discovered what the core competency is that leads to meaningful competitive advantage in the industry? And so I guess I am wondering in your view, do you think Kichler has now arrived at the answer to what’s going to drive that kind of advantage in the industry or is it your intention to bring that to the industry and to Kichler?
I would tell you, Stephen, at the top 5, there’s about 50%, not 10% that would be hyper-fragmentation, so it’s top 5 at 50 versus what we made just typically see is a top 5 more in that 70 to 80 range. So it’s not that there aren’t big players, what we like about Kichler is that it is one of the big players in the industry. It’s clearly one of the players that has the strongest brand and the strongest customer relationships. They play over a broad swath of what I would call the middle-market. If you think about Stephen, Delta Faucet company and that positioning that’s kind of the meet of where Kichler is, Kichler reminds me a lot in a lot of ways of Delta. In terms of the secret sauce to really making this home, do they know what I think they do, because they are focused on product-centric customer service and our goal of what we will do is bring value through them through the Masco operating system and what we know about the channels and I fully expect them to bring value to us. It’s a good company with a good culture and we are lucky to have them.
Excellent. Thanks very much guys.
I will now turn the call back to the presenters for closing remarks.
Well, thank you everyone for your time. I know the dialogue upfront was longer than we like to have. We like to allow more times for questions and answers. So year end, there is a lot of moving parts here and I look forward to one-on-one conversation, so we can make sure that we are absolutely clear and transparent about our expectations and where we expect those to come from. Thanks a lot. Have a great day.
This concludes today’s conference call. You may now disconnect.