Good morning ladies and gentlemen. Welcome to Masco Corporation’s 2019 Second Quarter Conference Call. My name is Amy and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin.

Thank you, Amy, and good morning. Welcome to Masco Corporation's 2019 second quarter conference call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer. Our second quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one followup. 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've 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 reconcile these adjusted measurements to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I'll now turn the call over to Keith.

Thank you, Dave. Good morning, everyone and thank you for joining us today. Please turn to Slide 4. Excluding the impact of currency, our top line matched prior year. Growth in North American Plumbing and Decorative Architectural Products was offset by softer sales in International Plumbing, Cabinetry, and Windows. We delivered operating profit growth and margin expansion across all segments, resulting in 5% operating profit growth and 100 basis points of margin expansion despite the flat topline. Our profit growth and margin expansion were achieved through disciplined pricing actions to offset tariffs and other inflation and a continued focus on cost control. Our EPS increased 16% to $0.88 per share. As it relates to tariffs, our near-term mitigating action has largely been price. However, we continue to work with our suppliers and internal teams on cost reduction opportunities and have begun moving limited production out of China as a longer-term solution. While pricing may have had a temporary impact on volume in the first half of the year, the consumer is still very healthy with unemployment at 50-year lows, incomes continuing to grow, confidence remaining high, and home prices continuing to appreciate all key drivers of repair and remodel activity. Now moving back to this quarter's performance, let me give you some additional insights into the drivers behind each of our segment's performance beginning with Plumbing. North American Plumbing grew 3% in local currency with Delta and Watkins each achieving a record sales quarter. International Plumbing sales decreased 30% in local currency with growth in Germany offset by softer sales in a number of other markets. International Plumbing sales are expected to improve in the second half as comps get easier and many of the new products introduced by Hansgrohe earlier this year begin to hit the market, such as…

Thank you, Keith and good morning everyone. As Dave mentioned, most of my comments will focus on adjusted performance excluding the impact of rationalization and other one-time items. Turning to slide 6, sales decreased 1% on a reported basis, but matched prior year in local currency. Foreign currency translation unfavorably impacted our second quarter revenue by approximately $26 million. At local currency, North American sales increased 1% in the quarter. This performance was driven by disciplined pricing actions offsetting lower volumes. Currency international sales decreased 4% in the quarter with growth in Germany and Asia more than offset by softness in other regions. Gross margins were 34.5%, up 90 basis points. Our SG&A as a percent of sales decreased 20 basis points to 16.9% reflecting our continued focus on cost control. We delivered solid bottom line performance and operating income increased 5% to $399 million with operating margins expanding 100 basis points to 17.5%. Our EPS was $0.88 in the quarter, an increase of 16% compared to the second quarter of 2018, and we are updating our annual EPS estimate range to $2.62 to $2.72 per share. This change reflects the softer top line demand we experienced in the first half of the year and the full cost of the tariffs beginning in the middle of the third quarter as inventory flows through the system. This EPS estimate range also assumes the tariffs remain at the 25% level, which is an increase from our guidance on our first quarter call where we assumed 10% tariffs for 2019. Turning to Slide 7, Plumbing segment sales decreased 2% on a reported basis. Excluding the impact of currency, sales matched prior year. Foreign currency translation unfavorably impacted this segment's sales by approximately $24 million in the quarter. Our North American sales increased 3%…

Thank you, John. It's been a dynamic start to 2019 and I am proud of how our teams have responded to the market conditions and challenges to generate profit growth and margin expansion across all segments in the second quarter. As I mentioned earlier, the fundamentals of our industry remained strong. Demographics should drive household formation and housing for years to come as the large millennial generation has begun to form households. Home price appreciation, which has a strong correlation with repair and remodel spending, remains strong at nearly 4% year-over-year. Existing annual home turnover remains at a healthy overall level of 5.3 million units. Age of housing stock continues to increase as 65% of the U.S. housing stock is now 30 years old or older. And older homes have more repair and remodel spending per home than newer ones. Consumer confidence and real wage growth remain high as consumers benefit from a healthy economy and declining mortgage rates could spur additional mortgage refinancing, which will put more disposable income in consumers' pockets. Against these strong fundamentals, we will continue to deploy our strong cash flow with a disciplined and balanced approach to investing in our current businesses, dividends, share repurchases, and acquisitions with the right fit and return to create value for our shareholders. Lastly, I hope to see you all at our Investor Day on September 17, in New York City. With that, we'll open the call for Q&A.

Thank you. [Operator Instructions] Your first question comes from line of Stephen Kim with Evercore ISI. Stephen, your line is open.

Yes, thanks very much guys. Good job in a tough environment. I wanted to ask a little bit about the Plumbing business, and just I want to make sure that I got a couple of pieces accurate. Last year, you had an impact from Delta's ERP, which if I remember created a pull forward effect, and I'm thinking that probably was a benefit in North America business, North America Plumbing of about 150 basis points this quarter and that was sort of in this 3% North America. I just want to make sure that that's the right way to think about it. And as you, more broadly as you are lowering the sales guide in Plumbing by a couple of hundred basis points, how much of that reduction would you say is attributable to North America versus the International?

You are right Stephen. We did have in 2008, a pull ahead of about $10 million from Q2 into Q1 due to the ERP launch at Delta. Despite that pull forward last year, Plumbing still had a great Q2 in 2018. I think the segment was up about 6% excluding FX. So, it was a pretty tough comp for us in the quarter. In terms of how we think about the volume going forward in Plumbing, I think there are a couple key drivers. Certainly, there is a little bit of softness in International. While we did have good growth in the core market of Germany, there were some other markets internationally that were soft. Italy was particularly soft. There was some softness in Turkey and a little bit of softness in Latin America. So that's a component of how we're thinking about the remainder of the year. And the other is price elasticity as it relates to some of our tariff pricing. We've been very effective in getting price out in the market in relationship to tariffs to equalize that cost impact as we talked about last quarter, and we have seen some elasticity as it relates to volume, particularly when we think about the lower price point which tends to be a little bit more sensitive, and we've also seen some elasticity around threshold prices for various products. So, when you think about the volume and going forward in Plumbing, I think international and pricing is a piece of that, but we're quite pleased with how we did this quarter against the tough comp.

Yes, and the only thing I would supplement Keith's comments with is, of the two international and pricing, I'd say international probably has a heavier weight to the impacts going forward than pricing.

And John, was that a general comment across the whole business or was that just in Plumbing? And I guess as a part of that question also, as you had mentioned, I believe in one of your segments I think it was Decorative Architectural that the elasticity effect was going to be greater in 4Q than 3Q. So, I guess my general question is, elasticity, what you just mentioned about that reducing your guidance versus the international weakness, how much is it for the company as a whole and is it - are you going to see more of that in 4Q than 3Q?

Yes, no. Stephen, my comment is specific to Plumbing, you know that said, you broadened out the question with your followup. And I would say that there's a dramatic impact, I think I guess my comment stands at face value that in Decorative Architectural there will be more of an impact in the fourth quarter as the tariffs and the rate of inventory starts to flow through our system.

Just to add a little bit of color Stephen, in terms of the European buyer, we are seeing a little bit of overall market softness in the UK that we talked about, and that will be in the Windows.

Yes, okay thank you very much guys.

Your next question comes from the line of Michael Rehaut with JPMorgan. Michael, your line is open.

Thanks, good morning everyone. First question, I just wanted to get a little more detail maybe on the Kichler acquisition and integration, and you kind of pointed to some good progress in terms of some, I believe from the cost side. I just wanted to get a sense also from the top line and I apologize if I missed this earlier, how you're thinking about their performance this quarter given some of the challenges around tariffs as you've highlighted before? How you are thinking about the top line performance for the year for Kichler? And on the bottom line, if there's any ability to kind of be a little more granular, if possible on what you're achieving from a cost saving standpoint from the cost synergy standpoint, and how you're thinking about the margins in that business going forward?

Good morning, Michael. From a tariff perspective, I'm very pleased with how the team has performed. We set out to make sure that the cost increases from the tariffs were made up by either improvements in overall cost productivity and supply chain changes and of course in pricing, and we've done all of that. The majority of the lever without a doubt has been on the pricing side, and the team has done a very good job in getting that pricing into the market. In terms of our activities to drive margin improvements, we continue to work hard really across all fronts as it relates to business process improvements that we're working on with the Masco Operating System, certainly with productivity and sourcing improvements, and we have begun some initial, while not a big number at this point, but we have begun some initial movement of product out of China as a longer-term mitigant. With regard to growth in 2019, as I said last quarter, growth is going to be a challenge for us. We are off to a slow start. The team has been very disciplined around pricing and programs as we've talked about and that's going to affect the volume coming into 2019. Overall, when we look longer-term, we believe that Lighting is a good business and it should grow similar and consistent with the remodel market over the long term and we are working hard to get back to that pace.

I appreciate that, Keith, thank you. I guess second question maybe just to switch to Cabinets for a moment, and I apologize I have missed some of these details earlier in the call. But with the top-line decline in the quarter, if you could just kind of review some of the factors there and was that decline a surprise relative to your expectations and relative to the industry backdrop, and how should we think about growth in the back half of the year?

No, I think it's consistent with how we thought this business was going to perform. As I mentioned on the call, we are up against a 13% comp in the second quarter of last year when you exclude the divestitures of Moores, so that was a component. A lot of prices have been put in the markets to offset tariffs and we talked about that in past calls. So, it really is performing as we thought it would and we’re pleased with the margin performance in this segment given the environment.

Great, thanks so much.

Your next question comes from the line of Michael Wood with Nomura Instinet. Michael, your line is open.

Hi, good morning. I was hoping you can give some more color on the international weakness that you pointed out. To what extent is the acceleration that decline there due to destocking? And is price discipline holding in some of those European markets?

The price is holding, yes. Not a lot of destocking that we really saw. John, was there?

No, no, that was all in the first quarter, not in the second quarter.

I would say it’s, you know, generally speaking it’s more around some specific markets that are a little softer than we expected. Certainly we’re seeing some softness in the UK in our Window operation and as I mentioned on the call there are some markets over in Europe and Latin America that are a little softer than we had thought.

And it was nice to see the Pro Paint accelerate from, I think it was low single-digit in 1Q to high single-digits here in 2Q. Is that a more normal pace of growth that you’d expect going forward in that Pro business in terms of where it is now from a maturity standpoint or can you continue to accelerate that?

No that’s as expected. We’re pleased with our Pro growth. We can- we’re going to continue to expand our capabilities and we’re confident that we’re going to continue to grow above the market and we think we’re doing that.

Great, thank you.

Your next question comes from the line of John Lovallo with Bank of America. John, your line is open.

Hey guys, thank you for taking my questions. First one on Kichler, I guess, are you comfortable at this point the personal changes that you've gone through are pretty much behind you? And then along those same lines, if I recall correctly, Home Depot sells largely, private label lighting I think it’s their Hampton Bay. Is there an opportunity for you guys to get more Kichler products into Home Depot?

I'm very pleased with the team. We have a new leader in place down there that is a high performer that has been in a number of positions at Masco, with increasing responsibility in each stop along the way, whether it was from investor relations to the retail cabinet sales and a nice win that she put together with Menards, which as I mentioned in my prepared remarks that that program is performing well and as expected and that was very good win. She overall ran overall sales for Cabinetry and that - she did a great job there. And then, on her extended team, again very confident in that and we've made some significant changes and brought in professionals that I interact with on a regular basis and I couldn't be more happy with how that team has shaped up. In terms of opportunities across the broader lighting market, I think there are several across multiple channels, and we have importantly a brand that is one of the few brands in the industry that in fact is successful across multiple channels. It has an outstanding assortment across price points and as I just mentioned, across the channel. So we’re going after growth really across the board in Cabinetry, excuse me, in Lighting.

Okay, thanks for that Keith. And then as a followup, can you guys give just a little bit more color on the merchandising investments that you mentioned in Decorative and Architectural?

Yes, so you know as I mentioned we’re enhancing some of the in-store displays, John, here in the back half of 2019. So, you know, yeah and mostly that will be in our - in the Paint category and so the Behr team is going to get those in place here in the third and fourth quarter.

Okay, thanks guys.

Your next question comes from the line of Keith Hughes with SunTrust. Keith, your line is open.

Thank you. Within Decorative and Architectural products, as you look at the second half of the year, will - to get to the guidance you’d establish, will the trends remain the same of your Pro up high single-digits, DIY low, and seemed down at Lighting and builders hardware, is there some sort of rate changes going to occur?

Yes, Keith, I think that’s certainly the general pattern that we expect to see in the back half of the year. The one thing I'd really ask you to remember is, in the fourth quarter of last year we have fairly significant pull forward of about $20 million related to our Paint business. And so that - you know we don’t expect that to reoccur. And so, that will be a little bit of a top line headwind going into Q4. So, Keith I kind of just want to make sure you recall that.

And also in Lighting here in Kichler, when do you think you will fully offset the impacts of the tariffs, is that currently where we are or is there still some things to be worked out?

I think in terms of our pricing actions and the costs, I think we've got it in place at this point, now the - in terms of the cost reductions that we’re executing again. So when you look across price and some of our productivity improvements, I think we've handled that. Now, in terms of the cost of the products coming in, I would expect that in the third quarter and the fourth quarter we will start to see those costs hit our P&L as it flows through our inventory.

Okay, thank you.

Your next question comes from the line of Truman Patterson with Wells Fargo. Truman, your line is open.

Hi, good morning guys, nice quarter and a pretty challenging environment. So first, I wanted to look at your EPS guidance. You guys walked down the midpoint just very modestly by a few cents. Could you walk us through the drivers of this? And were there any offsets to the upside and could you also give us what amount of share repurchase is included in guidance of the $600 million?

Yes, Truman, so you know a couple of questions in there. And as we look at the puts and takes in terms of the revised guidance, I’d say the first one was the trends that we have seen in the first part of the year and we laid out pretty clearly, I think, our sales expectations and margin expectations reach those segments. So that reflects, is reflected. The other piece to recall is, we did increase our view as to reach here [ph], so we're not – so in our last call, in the Q1 call, we though tariffs would be at 10% and now we think we’re going to be at 25%. So those are the two principal components in there. In terms of the share count, the share count really is reflective of where we've purchased through today, it doesn't take into account that, but we do have $600 million that we're anticipating, as Keith mentioned in his remarks for the full year.

Okay, okay, thanks for that. And then thinking about the China tariffs and some of your Plumbing competitor supply chains, couple of the larger guys and then some of the smaller competitors, do the majority of them source through China as well and do you think, the industry is kind of on an even playing field with China tariffs jump in the 25%?

Yes, you know, it really depends. There are different competitors that we have across different price points.

Sorry, I was meaning faucets.

So even with faucets there are some private label competitors that sometimes come up against us in the low end which would have more of an impact, but on balance we think we are in good competitive footing as it relates to our exposure to China tariffs.

So Truman, I just want to clarify a remark I made a minute ago, our guidance does include the impact of all $600 million of share repurchase.

Okay, thanks.

Your next question comes from the line of Matthew Bouley with Barclays. Matthew, your line is open.

Hi, good morning. Thank you for taking my questions. I wanted to ask back on the margin strength in Cabinet, specifically I think John, you mentioned some strong cost control there and you guys highlighted the pricing actions as well, so just some more color on that. Which channels are you taking price, to what degree did price relative to cost control drive that margin? And anything you're seeing on the promotional side with the customers as well would be helpful? Thank you.

Sure, you know on the promotional side, we've not seen - we’ve seen pretty consistent promotional activity across the various channels in the second quarter. So not a significant increase or decrease in any of the promotional activity. You know, in terms of price versus cost, in one of the two I'd say price was probably a little bit of a heavier weight than the cost side, but both has a pretty good impact on the quarter because a lot of what's - that were coming, they come in offshore face the tariffs, so we saw pricing across the industry put in place.

Perfect, that's helpful. And then just secondly, I wanted to ask what you guys are seeing on inventory levels at your customers in North America? You had previously talked of seeing some restocking back in April, how did that progress through the quarter and into July, do you see any room for any further restocking? Thank you.

Matthew, we really didn't see much in the way of inventory fluctuations in the second quarter. I'd call it normal. There was some, as you mentioned some destocking in Plumbing in Q1, but that seems to have normalized and orders to us were more in line with their sales out to the consumer. So we are anticipating some inventory adjustments in the back half of 2019 I would say as is somewhat normal and those adjustments are contemplated in our guidance.

All right, thank you very much.

Your next question comes from line of Megan McGrath with Buckingham Research. Megan your line is open.

Good morning, thanks for taking my question. A couple of questions just on the overall markets. In terms of Paint, some of our channel checks we heard from sales folks that all sorts of different retailers that they were seeing a little bit of mixing down maybe to more a mid-price point versus higher price point. I'm curious to see if you saw that as well at all in your, either your DIY or Pro business?

Overall, I’d say the market was a bit challenged in Q2. There was some tough weather. So I think that affected us. I think when you look at the market and how we performed with our Pro business up high single-digits in DIY or low single-digits, we think we held our own to possibly maybe gaining a little. Admittedly it's hard to pinpoint with precision the size of the market in a particular quarter. We didn't see a whole lot of mix fluctuations in Paint, and I think if you broaden that, your question out, if I may, into broader Masco as it relates to mix, we don't really see mix as being material one way or another as you know, either favorable or unfavorable as we look forward to the remainder of the year.

Okay, great. And then, just like a quick followup on your comments around sourcing and moving things out of China, do you feel like you are finished with that process or is there more to come assuming the tariffs stay where they, is there more to come on that front?

I think, if we think about it from a perspective of tariffs staying where they are and staying with some sort of permanency, I would say that there's more to come, more taking, we’re being very careful as we move products out and resource to other low-cost countries, careful in that we want to make sure that we’re ensuring our delivery excellence and our quality excellence, and there is some variability in fact to whether or not that 25% will indeed stick for some extended period of time. So we're being cautious and we have moved some doubt. But I think long term, when you look at the impact of these tariffs in - with some of the pricing that we've put into the market that long term this will be absorbed by the consumer and we still believe in a very healthy R&R market.

Great, thanks.

Your next question comes from the line of Justin Speer with Zelman & Associates. Justin, your line is open.

Thanks guys, good morning. I wanted to spend a little bit of time on your guidance and keeping in mind that the tariff situation is incremental headwind, then the net balance against raw materials that are favorable, so I wanted to see if we could, maybe you could help us unpack what the incremental headwind from the tariff is discretely if you can walk through the discrete costs to the business from the tariff step up and to counter balance that against the raw materials? Because when you look at the range, just the back half margin range to the high and low-end of your guidance, is it implies a fairly wide range of outcome for margins, so just try and give us some context on how you get to that guidance in view of all those moving parts?

I'll talk a little bit, Justin, this is Keith, to the commodities. I think some of the commodities in our basket have indeed moderated year-over-year. Copper and zinc and Plumbing started to moderate in the back half of 2018 and remained below what I would say the peak prices we saw in the first half of 2018. So, that will be a little bit of a benefit for us in the second half. TiO2 and resins, both still are up year-over-year, probably have peaked here in Q2, should be flat sequentially in the second half, but still up year-over-year. So, not expecting significant inflation or deflation in paint ROS as we sit today. In cabinets, plywood remains elevated, but distribution and logistics have come down a little bit, still up year-over-year. So obviously, we're continuing to work with our suppliers and our cost productivity and all those types of improvement opportunities, but when we look at the commodity inputs, we're really not seeing a material benefit or a headwind as we think about 2019.

And Justin, maybe I'll take the tariff component of that is, - as we've articulated before, the tariffs are based on what we know today, yes, are roughly impact $600 million of our cost of goods sold or roughly $150 million impact. You know, obviously the way we're pursuing, Keith mentioned earlier, that we're pursuing price to offset tariffs, obviously we're getting price recovery from that. So that action in and of itself limits margin expansion as a matter of fact, oftentimes that has slightly dilutive effect on margins and so maybe that weighs in on your calculation.

And then, just thinking about thinking about these moving pieces, you mentioned the $600 million of COGS today that were sourced from China, if we were to fast-forward 6 months to 12 months from now, what do you think your footprint looks like?

Not anticipating a significant change in that over that over that time period. As I mentioned, we're moving some, products out. We've in-sourced some back to the United States. We've taken some to the other low-cost countries, but it's going to take some time for us to ramp that up. Our focus really is on keeping our delivery and quality excellence up with our consumer and our customers.

So just pulling this altogether, as you think about the back half and the set up, clearly, the revenue trend, softer margin trends, maybe a little bit better, but if you could give us some context on what, how you're thinking about that downside, I guess elements to - I guess risk elements to get to the downside versus maybe upside of your range, where you see the most risk and maybe the opportunity?

I think from a top line risk there is a lot of volatility that's out there with the consumer as it relates to what's going on and geopolitically what could potentially happen with trade and everything that we're all quite aware of. So I would say, if something happens from a consumer perspective or from a broader confidence, I think that could be an issue that could take it to the downside. Having said that, as I went through it a couple of times on this call and prior calls, we think the consumer is in pretty good shape, so we're not anticipating that.

Thank you, guys.

Your next question comes from the line of Mike Dahl with RBC Capital Markets. Mike, your line is open.

Thanks for taking my questions. I wanted to ask first, just I guess Keith, going back to the Paint comments you just made around price costs and not necessarily expecting significant deflation, but if I kind of parse out the commentary between Kichler headwinds and then the overall margin performance, it seems like the core coatings margins have been quite strong. So I guess what do you attribute that to? Is it really just pricing actions and volume? And then if you look at your full year guide, embedded in that guide is there an expectation that coatings margins are up year-on-year? Thanks.

When we think about the margins in Q2 we're very pleased with the cost productivity improvements we're making. I called out Kichler. They continue to do a very good job, both from a variable cost perspective, as well as on the sourcing side. The second half impact of tariffs in lighting and hardware are going to be - are going to start to flow through midway into the third quarter. So that's a factor that, I ask you to think about as well. But fundamentally, our productivity in our movements are reflected in that margin range that we have in that 17% to 18% range.

Yes, I guess, Mike, if you think about it, we've had pretty good strong performance in our Pro businesses, as well as our DIY business for the full year. So yeah, I know, I think we've had good margins, but we're not going to break them out for the full year.

Okay, understood. Second question, I think Keith, you've kind of mentioned the different potential initiatives around shifting supply chain over time. I think in the past you've talked specifically around the relative low cost of shifting some assembly in Plumbing state side, where that can be one solution that's relatively low CapEx for you. Is that an initiative that you've begun to pursue at that point or is that still in the bucket of kind of wait and see how this all plays out?

We have in-sourced some assembly back, but just a little bit at this point. Again, this is a very dynamic environment, and what's included and not included, moving forward, I think is still in play. So, this is a game of where we're moving slowly and carefully and as I said we're driving cost out and in some cases cost sharing with some of our suppliers. We're driving value engineering and productivity improvements, and of course we're getting price. And we're going to be very careful that we protect the customer as we move through this, and that's our focus.

Okay, thank you.

Your next question comes from the line of Phil Ng with Jefferies. Your line is open.

Hey guys. You should be getting a pretty decent amount of proceeds from the divestitures. I'm curious how quickly will you use the buybacks potentially for buybacks and at this point of the cycle, how do you think about M&A and are there any pockets that really stand out or do you need a third leg to kind of continue to drive the growth story in your business going forward?

Yes. Phil. In terms of procedure, right, we do expect some significant proceeds. But as Keith mentioned in his prepared remarks, while we anticipate at this time using this year the proceeds from the divestitures for share repurchases, it's going to be facts and circumstances dependent upon what's happening at the time that we actually receive the proceeds. So, it's hard to give you a great deal of specificity as to how quickly we may redeploy those proceeds to share repurchases. . The second part of your question again was…?

I think there was – if I could jump in here John, and with regards to how we're looking at our M&A funnel and whether not we need, I think, Phil it was your words, they…

Would you like to add…?

A certain way if you will to, yes, to keep the growth story going, we don’t believe we do know and we're looking at all options in the building products case - building product space in our funnel, but clearly, our focus is closer to the core. We think we have very strong businesses in Paint and Plumbing and that's where our focus is. And I would suspect M&A activity to be more along those areas, not saying no to other opportunities, but clearly, our focus is closer to the core.

Got it. Given the margin expansion you saw in 2Q you're guiding to flat margins for the full year. Assuming part of that is just the tariffs kicking in more fully, I'm just wondering have you implemented all the price increases you need at this juncture for the full 25% and is there any risk that margins in the fourth quarter would be flattish or potentially down just given the full impact? Thanks a lot.

You're right Phil, the impact of tariff costs as it rolls through our inventory will be more strongly felt in the second half. With regards to pricing, we do think we've got our pricing in place and where it needs to be.

Yes Phil, with respect to margins, recall again, I mentioned this earlier in response to I think Keith's question, that we had some pull forward of sales out of Q1 of this year into Q4 of last year, which created a bit of a stronger margin and you know which we typically see seasonally in the fourth quarter of 2018. And so, the margins could be flat to slightly down in Q4 given that dynamic that we experienced last year.

Got it, thanks a lot.

Your next question comes from the line of Ken Zener with KeyBanc. Ken, your line is open.

Good morning, gentlemen.

Good morning, Ken.

Good morning, Ken.

I was just checking. Keith, you had mentioned in Plumbing in regards, well it was useful, in Plumbing, in regards to the entry price point which set in the U.S., so separate from the international, you mentioned that the entry price point was actually somewhat weaker category because of the pricing. And you mentioned this term threshold pricing, are you suggesting that you asked this, the delta, let's say big box is actually will deter demand if you take $45 or $50 faucet up to $58, is that where you're seeing the largest impact of pricing which - is that what you're saying?

Yes, Ken a couple of, things with regard to pricing and elasticity. As I mentioned last call, this is a challenge and it's relatively new territory and that typical data analytics around elasticity involve a static environment where you move a price on SKU and you say if it goes up, you raise price a percent the volume goes down 3% or something of that sort. So the data and the analytics is really in a more static environment. This is anything but static. We have a significant amount of price changes that's gone into the - cost changes that I've gone into the market and we have variable responses in the competitive aisle, if you will, around how much of that gets put by retailers into the market. So, it's not static. So, we are seeing a more elastic demand curve for opening price point products and that certainly stands to reason as you think about sensitivity and the total cost and what people are willing to spend at the low end versus the high end. Conversely, we're not seeing a significant - as significant, nearly a significant amount of elasticity on some of our higher end products. We mentioned a record quarter in our Spa business for example, that's not a low-end product and it's discretionary. So, the elasticity is hitting us a little bit more on the opening price point. What I mean by threshold pricing is pricing that's around a certain number where it makes a more of a material difference in volume and customer perception than say is necessarily warranted by the flat out percent of the price increase. So, when certain products, 100 at 99.99 is the threshold price.

Got it.

So if there is an increase over that threshold of 2% that's going to impact you more than if it was an increase of 2% say going from $80 up. So that's what I meant by threshold pricing hope that helps.

For the variable - variability of the market were you referring to the variability of how retailers we're accepting your price or was it the variability of how your competitors were responding to tariffs? Thank you.

Just the variability of what we're seeing the channel and the consumer pricing in the market.

Thank you.

Your next question comes from the line of Steven Ramsey with Thompson Research. Steven, your line is open.

Good morning. Just to start with the guidance to make sure I understand, what gives you the confidence to raise the low end slightly while lowering the top end a bit more, is the high-end volume-related and the low-end better margins or maybe unpack that and if it's a certain segment that is coming in with better margins maybe than expected?

Yes, I would tell you, I think you - yes that's the answer to the question. It is better volumes and slightly lower volumes and margins and kind of though, how we got there. As you may recall, as you break it down by segment, we did raise the margin expectation for a couple for the Cabinet segment and so that has definitely an impact on it, but you're reading actually was the answer to the question.

Great, and then thinking on capital allocation, couple of questions there, why not raise the dividend at a more modest pace when the buyback is more accretive to EPS growth per share? And then, can you maybe talk to what CapEx might look like once the sales are completed?

Yes sure. With respect to the dividend and I think one of the things that we mentioned on our prepared remarks is, part of our capital allocation policy is to keep our dividend payout ratio at roughly 20% maybe slightly lower or slightly higher, but in that 20% zip code. And so, the reason we raised it to $0.54 this time around was to make certain that we keep that payout ratio of nearly 20% intact. And so that's kind of the thought behind that. In terms of the CapEx post divestitures I think we're probably in that 2.5% of sales range, so not significantly different from where we're at today.

Excellent, thank you.

Gentlemen, your final question comes from the line of Eric Bosshard with Cleveland Research. Eric, your line is open.

I'm curious as we think about 2020 and Kichler, what you're excited about and what the upside scenario might be for that business as we think about 2020 and beyond?

I think new products is really, you've got me Jazzed and the team that we talked about before, which goes across not only new products, but also our human resource function, our supply chain function, et cetera. So we've got a very good team and we've got a nice focus on new products introductions. And as I mentioned, we have the luxury of having one of the few brands that competes across all of the channels. So we have opportunities with the new team and with our product assortment across the online channel and across retail and across our dealers. And certainly continuing to apply our Masco Operating System and getting that more ingrained in that business will yield improvements without a doubt.

And then secondly, just clarity within the guidance, is there anything different in the sales outlook in the back half, is that regional or by business that you would call out where you feel different than you did 90 or 180 days ago?

Well, I guess, Eric, there are a couple of areas where we adjusted our sales expectations, but international is probably the one area that is coming in softer than we had expected, and so that has an impact on what we put out for our Plumbing guidance in a way. So, I think that's the one area that would probably be the one difference versus where we were at the end of the first quarter.

I would say that while certainly a little bit softer in international. I do like the trends that I'm seeing in our Decorative segment and North American plumbing coming out of Q2. Strong backlog in our Spa business points to a healthy consumer. On the high end, we think that's a nice barometer for consumer spending. And then, just in general, as I'm kicking around in the markets we're getting good reports from customers across our product category. So I'd like the trends that we saw in Q2.

Great, thank you.

This concludes today's conference call. On behalf of Masco Corporation thank you for today's participation. You may now disconnect.