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Masco Corp  (NYSE:MAS)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter 2018 Conference Call. My name is Zithania 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.

John Sznewajs -- Chief Financial Officer, Vice President

Thank you, and good morning. Welcome to Masco Corporation's 2018 third 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 third 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 describe these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission.

Our statements will also include non-GAAP financial 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 now turn the call over to Keith.

Keith Allman -- President, Chief Executive Officer, Director

Thank you, Dave. Good morning, everyone, and thank you for joining us today. Please turn to slide four. In the third quarter, our top line increased 9%, excluding the impact of currency, driven by strong growth in our North American Plumbing operations, our Cabinet business and our acquisition of Kichler Lighting earlier this year. Excluding the impact of currency, acquisitions, and divestitures, sales grew 4%. Operating profit grew $10 million and we achieved 15.2% operating margin in the quarter due to higher volume, price and disciplined cost control. Our EPS increased 25% to $0.65 per share.

Turning to our segment performance, our Plumbing segment grew 4%, or 5% in local currency, driven by outstanding North American Plumbing growth of 9%. Delta had a record sales quarter, with strong growth across all channels and price points. Our upper price point Brizo products, our entry level Peerless products, bathing fixtures and toilets all experienced strong growth. Additionally, Watkins continued its strong performance due to model refreshes in its dealer channel and an expanded product offering in the retail channel.

While North American Plumbing was strong this quarter, international Plumbing declined 1% in local currency, primarily due to softness in Central Europe. This was partially offset by continued strength in China.

In our Decorative Architectural segment, sales grew 20%. Excluding our acquisition of Kichler Lighting, sales grew 1%, with high single-digit growth in pro paint and strong performance in decorative hardware, largely offset by a decline in DIY paint. While the DIY paint market was softer than expected, we believe our competitive advantage of having the highest quality, best value paint sold exclusively at The Home Depot positions us well.

Moving on to Cabinetry, our Cabinet segment delivered robust 11% growth excluding the divestiture of Moores. This growth was led by our repair and remodel business in both the retail and dealer channels. The roll out in initial months of the Menards program have gone well, and we are on plan to achieve an $80 million annual sales run rate during the fourth quarter. While we are pleased with our top line performance in Cabinetry, we experienced slightly unfavorable mix as we ramped up the Menards business and experienced an increase in logistics costs, both of which will likely continue into the fourth quarter.

Turning to Windows, sales were down 3%, mostly due to the difficult 12% comp in our US business and softness in the UK market.

Moving to capital allocation, we continued our share repurchase activity in the quarter by repurchasing 2.3 million shares for approximately $89 million, bringing our year-to-date share repurchase total to $354 million. Based on current market conditions and our liquidity, we now plan to allocate up to $300 million to share repurchases in the fourth quarter, bringing our expected 2018 share repurchase total to approximately $650 million. This share repurchase activity is in addition to the $550 million allocated to the Kichler acquisition and the $114 million allocated to debt reduction, demonstrating our strong free cash flow generation and balanced capital allocation strategy.

Lastly, we are updating our anticipated earnings per share for 2018 to be in the range of $2.39 to $2.44. This is largely due to the lower than expected volumes in our DIY coatings and international Plumbing businesses and modestly lower margin expectations for Cabinetry.

Now, I'd like to turn the call over to John, who will go over our operational and financial performance in detail, including the potential impact from tariffs. John?

John Sznewajs -- Chief Financial Officer, Vice President

Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance excluding the impact of rationalization charges, inventory step-up related to purchase accounting for the Kichler acquisition and other one-time items. Also, as a reminder, any prior period comparisons have been adjusted to reflect the adoption of the new revenue recognition and pension accounting rules.

Turning to slide six, we delivered solid top-line and earnings-per-share growth in the third quarter. On a reported basis, sales increased 8%, or 9% in local currency. Excluding acquisitions and divestiture, sales increased 3%, or 4% in local currency. Foreign currency translation negatively impacted our third quarter revenue by approximately $12 million.

In local currency, North American sales increased 12% in the quarter, or 5% excluding acquisitions. We believe the outlook for our repair and remodel demand remains healthy and we continue to experience solid demand for many of our industry-leading repair and remodeling products. As a reminder, repair and remodel activity represents approximately 84% of our total sales.

In local currencies, international sales decreased 6% in the quarter. Excluding the divestiture of Moores, international sales decreased 2%, driven by market softness in our international operations, particularly in the UK and Central Europe, partially offset by continued strong growth in China.

Gross margins were 32.7%, down 110 basis points, largely due to the acquisition of Kichler. Our SG&A as a percent of sales improved 40 basis points to 17.5%, as we continued to leverage our SG&A while making strategic investments to drive profitable growth. Our operating profit increased 3% to $320 million, with operating margins of 15.2%. As we discussed on last quarter's call, operating margins were impacted in the third quarter by ERP costs and continued inefficiencies in our Windows business. We also experienced strong growth from lower price point products in North American Plumbing and Cabinets, which resulted in unfavorable mix.

Our EPS was $0.65, a 25% improvement compared to the third quarter of 2017. As Keith mentioned, we are updating our estimated annual EPS range to $2.39 to $2.44. Principal items that affect this change are softness in the DIY paint and in international Plumbing markets that Keith described, as well as continued cost pressures in logistics and distribution, primarily in Cabinetry.

Turning to slide seven, our Plumbing segment sales increased 4%. Excluding the impact of currency and acquisitions, sales increased 5%. This performance was driven by a solid growth in our North American faucet, shower and spa businesses. Foreign currency translation unfavorably impacted this segment's sales by approximately $9 million in the quarter.

Our North American sales grew 9% in local currency as we experienced strong demand for our industry-leading brands across our wholesale, retail, dealer and e-commerce channels. As Keith mentioned, Delta delivered a record sales quarter. Additionally, our spa business continued to outperform the competition as Watkins Wellness leveraged its strong dealer network, innovative new products and industry-leading brands to drive growth.

Our international Plumbing sales decreased 1% in local currency, as European markets were softer than expected. This was partially offset by strong growth in China. As a reminder, our international sales were up against a tough comp as we experienced strong double-digit growth in Germany and China in the third quarter of 2017.

Turning to segment profitability, operating margins were impacted by a lag in price/cost and the implementation of Delta's new ERP system. The lag in price/cost is principally due to lower volumes in Europe, resulting in less price realization than anticipated. Mix also impacted margins, largely due to our lower price point Peerless faucet program win at retail and increased sales of bathing products and toilets at retail. For the full year, given the recent softness in our international Plumbing markets, we expect operating margins for this segment to be down slightly as compared to 2017.

Turning to slide eight, the Decorative Architectural Products segment grew 20%. Excluding the acquisition of Kichler, sales grew 1%. Foreign currency translation unfavorably impacted this segment sales by approximately $3 million in the quarter. This sales performance was driven by a high single-digit growth in HEHR's pro paint business continued growth in retail and e-commerce channels at Liberty, our builders' hardware business. This growth was partially offset by a low single-digit decline in BEHR's DIY paint business.

We continue to be pleased with the progress we're making with the integration of Kichler and its annualized sales for 2018 are expected to be approximately $430 million. Compared to the third quarter of 2017, operating income increased 6%, while operating margins declined to 17.7%, largely due to the lower margin profile of Kichler, including the higher depreciation and amortization expense that resulted from the acquisition. For the full year, we expect margins in this segment to be in the upper-end of our 16.5% to 18.5% range. As a reminder, this segment faces a difficult comparison in the fourth quarter, as segment sales grew 12% in the fourth quarter of 2017.

Turning to slide nine, in the Cabinetry segment, sales increased 11% in the quarter excluding the impact of the Moores divestiture. The strong performance was driven by our industry-leading brands as we experienced double-digit growth in our repair and remodel business through increased volume and favorable price. Our existing home center and dealer business experienced solid growth in the quarter. In addition, our program at Menards continues to gain traction and we are pleased with this program's initial performance.

Segment profitability increased in the quarter by $3 million, principally due to increased volume, partially offset by increased logistics cost and product mix. For the full year, we continue to expect 5% to 7% sales growth excluding the Moores divestiture. However, we now expect the operating margins for the full year to decline approximately 150 basis points due to logistics cost pressures and mix that we experienced in Q3, and we expect to continue into the fourth quarter.

Turning to slide 10, our Windows segment sales decreased 3%. In the third quarter, we continued to experience market softness in the UK. In North America, Milgard's favorable pricing and a continued mix shift toward our premium window and door products was offset by lower volume and sales matched prior year despite facing a difficult 12% sales comp from the third quarter of last year.

Segment profitability decreased primarily due to approximately $5 million of incremental costs as we continued to address inefficiencies related to warranty and service in the US , as we discussed in the second quarter call. For the full year, we continue to expect this segment's sales growth to be 3% to 5% excluding currency and divestitures, with operating margins down approximately 100 basis points compared to 2017.

Turning to slide 11, we ended the quarter with approximately $600 million of balance sheet liquidity as well as full availability on our $750 million revolving credit facility. Working capital as a percent of sales increased 100 basis points versus prior year to 15.5%, largely due to the impact of the Kichler acquisition. For the full year, we expect working capital as a percent of sales to be approximately 15%.

Further, we are pleased with the overall strength of our balance sheet as our net debt to EBITDA now stands at 1.8 times. During the third quarter, we continued our focus on shareholder value creation by repurchasing 2.3 million shares valued at approximately $89 million, bringing our year-to-date total to $354 million. With our strong free cash flow and balanced approach to capital allocation, we expect to deploy approximately $300 million in share buybacks in the fourth quarter of 2018. This will bring our total expected capital deployment in 2018 to acquisitions, share repurchases, dividends and debt reduction to more than $1.4 billion.

Before turning the call back over to Keith, I want to help frame for you the potential financial impact of the tariffs as we head into 2019. Please turn to slide 12. As you can see on this slide, we import approximately $600 million of components and finished goods that fall under the tariffs. Please keep in mind, this is a rounded approximation subject to numerous variables such as volume, currency and mix.

To put this in perspective, if the 301 tariffs rise to 25%, as planned on January 1, this would amount to approximately $150 million of inflation, or roughly 2.7% of our annual cost of goods sold. This is less than the amount of raw material and other inflation that we effectively dealt with in 2018. We believe this amount of additional cost is manageable through a combination of price increases, supplier negotiations, supply chain repositioning and other internal productivity measures. We have initiated actions and plans on each of these elements already here in 2018, but recognize there may be a lag between tariff implementation and mitigation in 2019.

We expect little impact of these tariffs in the fourth quarter of 2018, due to the timing of the tariff implementation in our inventory positions on the products affected. You can see that our Plumbing segment is the most impacted by the tariffs. As a Plumbing industry leader, we have a broad product assortment, much more than faucets and showers, and have significant manufacturing facilities in Indiana, Tennessee, California, North Carolina and Texas. Many competitors such as private label, source nearly 100% of their products from China, so we would have a competitive advantage against these competitors.

With that, I'll now turn the call back over to Keith.

Keith Allman -- President, Chief Executive Officer, Director

Thank you, John. 2018 has been a dynamic year and we expect to grow our earnings per share approximately 25%, in spite of raw material and logistics inflation and tariff challenges. We're executing to address these cost challenges and remain focused on leveraging our industry-leading brands, innovation pipelines and channel expertise, and we are driving top and bottom line growth. We believe that the fundamentals of the repair and remodel market are supportive of solid, long-term growth. Demographics should drive household formations for housing for years to come, as the large millennial generation has started forming households.

Home price appreciation, which has a strong correlation with repair and remodel spending remained strong at nearly 6% year-over-year. The average age of the housing stock continues to increase as 65% of the US housing stock is now over 30 years old and older homes have more repair and remodel spending per home than newer homes. GDP growth rate is at a four-year high. Unemployment is at a 50-year low and consumer confidence remains at a 15-year high.

We continue to see strong growth in many of our product categories and believe that a strong economy has the greatest correlation with sales of our repair and remodel products. We will continue to execute our strategies against these favorable market fundamentals and we'll deploy our strong cash flow in a disciplined and balanced approach between acquisitions, with the right fit and return, share repurchases and dividends to create value for our shareholders.

With that, we'll now open the call for Q&A.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Stephen Kim of Evercore ISI.

Stephen Kim -- Evercore ISI -- Analyst

Thanks very much, guys, and thanks for all the information. It was very helpful. The outlook seems reasonable. I guess I just wanted to ask a question to start off about the US business generally. You talked about the fact -- the factors that would drive continued strength in R&R and certainly the economy is what matters most. However, one of the things that's recently been impacting our whole space is the rising rates, and an aspect of that has been some concerns that you would see a slowdown in mobility, effectively that folks who have a low mortgage rate on their home, on their mortgage product are choosing not to move, because they don't want to give that low rate up.

And I was curious if you could talk a little bit about how you see this issue affecting your Company, the demand for R&R in general and your Company specifically over the next few years? Do you think this is much to do about nothing, do you think that there are reasons to believe that people who stay will spend more on remodeling than when they look to move, or other dynamics like that? If you could just talk about the issue.

Keith Allman -- President, Chief Executive Officer, Director

Stephen, we think that our R&R concentration, which as we talked, is about 85% of our revenue, puts us in a place, where we can take advantage of these trends. When we -- without a doubt, the rising rates and increase in home price appreciation is putting a bit of a pinch on affordability. However, when you look at the dynamic of what happens when people choose to stay in their home, be it because of overall affordability, the need to move to another house at a higher mortgage rate, et cetera, oftentimes, what they see and it's somewhat of a counter-cyclical trend between R&R and new construction, is that, when they stay in their home, they'll now pull the trigger on a major remodel. So, much like home price appreciation, where home price appreciation can tend to dampen a little bit on the movement in a new construction, home price appreciation is very tightly correlated -- one of the best correlations that we see to R&R spend. So as home prices increase, people feel better about pulling the ticket on an R&R project. As people tend to stay in their house longer, they feel better about an R&R spend. So overall, when we look at the repair and remodeling market, we think it's strong, because fundamentally it's consumer-driven and the consumer is strong.

Stephen Kim -- Evercore ISI -- Analyst

Got it. And with respect to that, a follow-up was, I was curious as to how you felt like some of the different segments that you operate in might be -- might experience this dynamic differently, would it be more beneficial to Cabinets, let's say, relative to Decorative Architecture. And wrapped up around that in Dec Arch, you talked about paint being softer this quarter. I was curious as to how much weather may have impacted the sales this quarter. Was it -- did you see primarily a slowdown in outdoor paint because I know it's been unbelievably wet here in the Northeast at least, probably would have been very difficult to do a lot of outdoor painting jobs?

Keith Allman -- President, Chief Executive Officer, Director

In terms of the segment impact as it relates to people staying in their homes longer, really, we don't see a material change segment to segment. Really it's a question of big ticket versus small ticket. And when you are committed to staying in your home longer, that generally bodes well for pulling the trigger on a bigger ticket item, but when we look at the data and we look at our expectations, its really not a material difference as it relates to segment impact. We think the DIY market is strong. We're strong in DIY across all segments, and therefore, it's pretty consistent.

With regard to weather, yeah, we didn't call it out specifically, tend not to do that, but yeah, when we look at August, September and we look at the heat map, if you will, around the country, the West was OK, but boy, the East Coast was really wet and it was very hot as well. So, that probably had a little bit of an impact.

Stephen Kim -- Evercore ISI -- Analyst

Okay. Thank you.

Operator

Your next question comes from Doug Clark of Goldman Sachs.

Douglas Clark -- Goldman Sachs -- Analyst

Hey. Thanks for taking my question, and good morning. My first question is on tariffs and thanks for all the detail that you provided there. I'm curious in terms of how long you would expect the time lag to be between the imposition of a 25% tariff to the extent that it takes place and how quickly you can right size that in terms of the pricing and cost and/or the other actions that you mentioned?

John Sznewajs -- Chief Financial Officer, Vice President

Hey, Doug. Good morning. It's John. With regard to the tariffs, we think that there might be a quarter or two lag in getting full realization of our pricing actions. So we think we can do it fairly promptly. As I mentioned in my prepared remarks, we've already begun some of those conversations here in the fourth quarter. So, we feel pretty good about how those conversations have begun, though there is -- there might be a little bit of a lag between, like I said, implementation and realization.

Douglas Clark -- Goldman Sachs -- Analyst

Okay. Thanks. And then, I know you mentioned or talked a little bit about Plumbing and your manufacturing footprint in the US. I'm curious on the lighting side, so with Kichler in particular, which I assume is a majority of the Dec Arch exposure there, any differences in terms of ability to get pricing or just the globalized supply chain?

Keith Allman -- President, Chief Executive Officer, Director

You're right, Doug. The majority of the tariff impact in Dec Arch is Kichler. We design and manage assortments and source from the Far East, like basically the entire industry. So from a competitive standpoint, we think we're right in there with everybody else, so that really should not affect our ability to get price.

John Sznewajs -- Chief Financial Officer, Vice President

And Doug, I would just add to Keith's comment. In Dec Arch, we also have Liberty Hardware, which is builders' hardware business, largely a source and sell, and that industry is structured similarly to the lighting industry, so there's a lot of import there and same dynamics that Keith mentioned with lighting will apply here.

Douglas Clark -- Goldman Sachs -- Analyst

All right. Great. Thanks a lot.

Operator

Your next question comes from the line of Nishu Sood of Deutsche Bank.

Nishu Sood -- Deutsche Bank -- Analyst

Thank you. On the tariffs, you folks have shown good ability to pass on price in terms of the rising input costs this year (Technical Difficulty) 25% is a pretty large number. As you look across where the tariffs are going to raise prices ultimately, if areas where it's unavoidable, how do you think -- where are you concerned that it might slow demand?

Keith Allman -- President, Chief Executive Officer, Director

Well, I think that's the million-dollar question and that remains to be seen. This is a unique situation that we're in to say the least and that the majority of our elasticity data and data analytics is around a stable market. And what we're seeing here, Nishu, is the entire -- in many cases the entire competitive space like in lighting or hardware, like we just talked about, is going to go up. Some of the issues or some of the correlation would be around overall ticket size and the overall impact as it relates to say a light or something more significant. So it remains to be seen. We're going to watch the price elasticity and adjust accordingly. But now our focus is on managing our supply chain, working with our suppliers to drive productivity, making supply chain moves and we're focusing on margin and getting price.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. Okay. And then, my follow-up question was on Plumbing. A lot of the metals complex prices have begun to come down. There was some lag this quarter in price versus cost, I think you mentioned John because of lower volumes in Europe. When should we expect the benefits of the lower metals prices to come through in Plumbing?

John Sznewajs -- Chief Financial Officer, Vice President

Nishu, if you think about how the base metals flow through and impact our Plumbing segment, it's generally about on a two-quarter lag that we feel it through the P&L, on our financial statements. And so, given the pricing trends in both copper and zinc, which are the two that primarily impact our cost of sales, I would have guessed that you would start -- we would start to feel the impact of the lower prices here late in the fourth quarter and in the beginning in the first quarter of 2019.

Nishu Sood -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

Your next question comes from John Lovallo of Bank of America.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking my questions as well. First question is, you guys are clearly still pretty bullish on the R&R cycle in the US, which is encouraging. What do you think is going on in DIY? I mean is this -- in DIY paint specifically, is this just the shift more toward do it for me or is there something more structural going on here?

Keith Allman -- President, Chief Executive Officer, Director

Well, I think paint's always -- DIY paint is inherently a bit choppy quarter-to-quarter and it's difficult to call with precision exactly where the market is, particularly on a quarter to quarter basis. There are some dynamics there. Certainly, the overall quality of the paint is improving. We've had a paint and primer in one that has had an effect over the past years. There has been an increase of renters versus buyers if you look at over the past several years and renters tend to paint a little bit less. But fundamentally, we think as millennials are moving into the household formations and when you look at the average age of that cohort and the inevitable arrival of children and that move toward household formations, we think that bodes well for the underlying demand as it relates to DIY.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful. And then, maybe just touching on the international businesses. I mean recognizing that there was a tough comp, I think you guys did call out a little bit of softening in the market. Is there anything that you could attribute that to and what are you guys thinking about going forward there?

John Sznewajs -- Chief Financial Officer, Vice President

I think in the UK, John, part of that has to do with the fact that I think we see just the economy pulling back a little bit as they are starting to contend with the Brexit issues and the unknowns that would go along with that. And in Central Europe, I think, it was just a bit of a pause. I mean, we've seen very good strength in our European businesses and in China over the course of the last multiple quarters. And because of the tough comp, we don't attribute any significant softening to the overall market. We just think it might have been a bit of a pause.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks guys.

Operator

Your next question comes from Michael Wood of Nomura Instinet.

Mason Marion -- Nomura Instinet -- Analyst

Hi. This is Mason Marion for Mike. What are the trends in the pro gallon growth in paint? Are you seeing more of a competitive response anywhere previously and will you need to discount more in the future?

Keith Allman -- President, Chief Executive Officer, Director

We continue to do very well in that segment. We think we've got a very good value proposition to the targeted painters that we're going after, who are shopping at the home depot and that's a big, call it, a $4 billion market. And it's a better solution to not have to make a better -- or an additional trip to get your paint. And we have the best quality and our service is improving and the service is very good and we've got these outstanding points of sale in The Home Depot. So we like our performance in paint. We're going to continue to drive that.

In terms of competition, yeah, it's tough competition. There is no question about it. We're up against some very, very good competitors that I respect very much and we're competing. But as I said, when you have the quality of the paint, the quality of the brand, the quality of the service and a great partner like we do, we like our chances of continuing to gain share.

Mason Marion -- Nomura Instinet -- Analyst

All right. Great. Thank you. And then on your impressive growth in the Cabinets segment, was the strength broad based or there were particular segments that were stronger than others?

John Sznewajs -- Chief Financial Officer, Vice President

I would say that this has to do with, our semi-custom business was actually quite strong, both on our -- the two big box retailers that we have traditionally served along with the new program at Menards. And then also our dealer channel saw a very strong growth in the semi-custom offering. So it was that our KraftMaid brand does really well, resonates great with designers and so they are great advocates for us, as consumers walk into, whether it's a big box store, or whether it's our local dealer, we feel really good about how KraftMaid has performed here in the third quarter of the year.

Mason Marion -- Nomura Instinet -- Analyst

Thank you.

Operator

Your next question comes from Susan Maklari of Credit Suisse.

Susan Maklari -- Credit Suisse -- Analyst

Thank you. Good morning. My first question is just around the tariffs as well. Are you seeing any pull forward of demand or any sort of shifts in terms of some of your overseas suppliers that could cause some disruptions, especially as maybe we look to the first of next year?

Keith Allman -- President, Chief Executive Officer, Director

Not really, Susan, I mean not in a material way.

Susan Maklari -- Credit Suisse -- Analyst

Okay. And then, on the tariffs as well, you mentioned that obviously price is the first step in dealing with the situation. But as we look out, you also did mention some changes to your supply chain. How should we think about that as part of the strategy? What would you need to see in order to pursue that and maybe how would it come together across the different segments?

Keith Allman -- President, Chief Executive Officer, Director

It certainly is a component. We're looking at supplier negotiations, we're looking at productivity improvements in our own shops, and certainly, we're looking at repositioning the supply chain. It could involve moving to some of our assembly here. I'll remind you that, we have a significant footprint in the United States across all of our segments, particularly in Plumbing and in Cabinet. So moving all our parts of the process onshore, working with our suppliers to set up manufacturing in other locations is another option and we've initiated these options already and it's going well.

We have experience in doing this. You may recall back, sometime in our Plumbing business, where we had the no-lead legislation that came at us like a freight train, in terms of AB1953, and we had to go from leaded brass to non-leaded brass and that represented about a 30% increase. So in terms of how to drive price, how to effectively move supply chains and importantly, how to manage it. I mean this is very manageable, but we're paying attention to it. We have a tariff task force that we've set up. John, myself and all of our Group Presidents meet every week. The team is responding very well. I mean, we're taking it seriously, but we're going to work through it and we have experience to do it and we're pulling a number of levers to get it done.

Susan Maklari -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

Your next question comes from Matthew Bouley of Barclays.

Matthew Bouley -- Barclays Capital -- Analyst

Hi. Thank you for taking my questions. So you've called out mix pressures in I guess both Cabinetry and Plumbing. So, Keith, I'd just love to hear your thoughts on whether this customer trade-down effect is something that you're really anticipating through the cycle here, and accordingly, how should we think about the profitability of your products at different price points and assuming that lower price points seems to be the area where there is greater demand at this point? Thank you.

Keith Allman -- President, Chief Executive Officer, Director

Matthew, I'd start by saying that it's really -- we're not seeing a customer trade down. What we're seeing is good wins in that lower-margin product. So through good assortment win -- work and good commercial sales force, we went out, and we won a nice program in Peerless, that's the opening price point which does have a little bit less margin. We're seeing growth in our bathing products, which is due to a reset that we had in the big box aisle. So happy about that. And our toilet program, which again is a tweak to the assortment, where we're seeing good growth.

So when you think about our global Plumbing platform, we have a continuum of margin from -- on the lower side, say our bathing and our toilet products and then up through accessories and then up into the high margin faucets and shower systems. So we're seeing good growth based on our targeted assortment and sales initiatives. But we're also seeing good growth up at the high-end. Our spas in our Plumbing business, high-end, very discretionary, high-end tickets, are selling very well as we talked about with Watkins Wellness. Our AXOR product line, which is the high-end product line for Hansgrohe, is doing well. Our Brizo product line, which we talked about in the prepared remarks, is continuing to do well. we're seeing bi-modal growth, it's not a shift. So we like that.

In terms of Cabinetry, as planned the stock cabinetry at Menards will sell faster during the initial resets, because it requires significantly less training. But as we're training the associates and as we get this business rolling, that will improve. So I'm not troubled by the mix shift. I think that's a sign of of good sales work and good assortment work.

Matthew Bouley -- Barclays Capital -- Analyst

All right. That's helpful color. Thank you. Second question just on Plumbing, specifically the guidance for the full year for -- I guess you termed it a slight decline year-over-year in operating margins, would still suggest a rather large step-up in the fourth quarter sequentially, which is unusual for that segment seasonally. So are there any finer points you can give us on how to think about the Plumbing margins specifically as we look to the fourth quarter? Thank you.

John Sznewajs -- Chief Financial Officer, Vice President

Yeah. Matthew, just to refresh everyone's memory, in the fourth quarter of last year, we had some significant spend as it relates to some of the displays that we're putting in at Delta, which was in the amount of roughly $8 million. And so, we don't think we'll be incurring -- we won't be incurring that spend in the fourth quarter of that year. So that should contribute to a pretty significant margin improvement sequentially from Q3 to Q4.

Matthew Bouley -- Barclays Capital -- Analyst

All right. Thank you very much.

Operator

Your next question comes from Michael Rehaut of JPMorgan.

Michael Rehaut -- JPMorgan -- Analyst

Thanks. Good morning, everyone. First question and I apologize if I missed this earlier, in terms of the guidance reduction, I believe you cited two key drivers -- two or three key drivers being, a little bit softer DIY, a little bit weaker international, as well as the higher commodity and logistics costs. I was hoping if you could give by degree of magnitude what each of those drivers represented as part of the -- in terms of the degree of magnitude of influence on the guidance reduction?

John Sznewajs -- Chief Financial Officer, Vice President

Yeah. Sure. Mike. It's John. In terms of is the way we look at it, if you think about the various components that we mentioned, if you think about the softness in the DIY paint and in international Plumbing markets, that kind of aggregated probably 80%, the balance 20% was related to some of the continued cost pressures in logistics and distribution.

Michael Rehaut -- JPMorgan -- Analyst

Great. And then, just more broadly, as you think about the sales trends during the quarter, obviously, a lot of your peers have cited some softening that occurred during the quarter, maybe particularly, I guess in August and even more so in September, just wanted to get your thoughts by segment. If that's something you witnessed across the board, where there any segments that you saw that more prominently than others? Obviously, paint might come to mind there, but anything in terms of how it trended during the quarter, and by segment, if any product lines or channels, for that matter, witnessed more of that type of deceleration than others?

Keith Allman -- President, Chief Executive Officer, Director

Broadly speaking, there wasn't a significant difference as we look across the segments, with maybe the exception of paint in August, September time frame, when it was quite wet and there was some heat. We obviously with -- when the hurricanes are coming through, we're not going to be selling a whole a lot of products, but I didn't see a particular -- we didn't see a particular channel specific hit or a segment specific hit.

John Sznewajs -- Chief Financial Officer, Vice President

And Mike as you consider, through the quarter, we had pretty good consistency through the quarter as well. There wasn't either peaks or valleys within the quarter either.

Michael Rehaut -- JPMorgan -- Analyst

Can I just squeeze one more in. As you're looking at the full year for 2018, I was curious if you could give us a sense overall what you think you've been able to achieve from a pricing standpoint versus other offsets that you've put into place to combat the raw material inflation?

Keith Allman -- President, Chief Executive Officer, Director

Yeah. Mike, so as we think about how things developed through the course of the year, obviously, we've seen fairly significant inflation in the input costs in a variety of our products, including copper and zinc, which we touched on a previous question. But we've also seen some of that significant inflation impact our Plumbing -- our paint business I should say. Both TiO2 and engineered resins have increased fairly significantly through the course of the year. We're seeing TiO2 continue to be up, but not perhaps at the same rate that it was up earlier in the year.

And thinking about our Cabinet Products, we did experience some inflation on some of the hardwoods that go into Cabinet Products earlier in the year and that's continuing a little bit here. And then toward the middle part of the year, we saw a little bit of increase in distribution and logistics costs. All that inflation has hit us. As we look into across the year, we absorbed a little bit of that inflation in the first half. As we look at the second half though, we still think we're going to be price/cost neutral for the second half of the year. So we feel like we've gotten on top of this and we're in really good position as we enter 2019.

Michael Rehaut -- JPMorgan -- Analyst

Great. Thank you.

Operator

Your next question comes from Mike Dahl of RBC Capital Markets.

Mike Dahl -- RBC Capital Markets -- Analyst

Good morning. Thanks for taking my questions. My first question goes back to the comments early on about the Menards business and how you're experiencing some logistical challenges around that. And so, I was curious if you could provide a little more detail about what exactly those challenges are? You said they are persisting through year-end. Just give us a sense of, is it just that training aspect you mentioned or how should we think about the magnitude of the challenges and your ability to fix it over the next couple of quarters?

Keith Allman -- President, Chief Executive Officer, Director

Mike, I apologize if we communicated a link between Menards and logistics, that wasn't the intention. They are separate. So it's a Cabinet logistics cost and transportation cost escalation not tied to Menards. And that's driven by what we've talked about before in prior calls with regards to the base fuel escalation, as well as driver availability. We have less impact on our dedicated routes and so it's less of a hit when we look at our -- the big chunk of our businesses like paint, where we have more steady routes and certainly with some bigger customers in Plumbing, where we have more steady routes.

In Cabinets, where it's milk runs, it's less than truckload, it's oftentimes job site delivery, that tends to receive a little bit more pressure. So it's broad based Cabinet logistics pressure, its not tied to Menards. Menards program is going well.

Mike Dahl -- RBC Capital Markets -- Analyst

Okay. Thanks, Keith. And yeah, you're right. I may have misunderstood that, but that's helpful color. The second question going back to the tariffs discussion and again back to Plumbing, one of the options highlighted was working with manufacturer partners to shift production to other low-cost countries. I was just -- could you provide a little more detail on where that is on your list of priorities and if that's the strategy going forward, how long does it take to effectively make that switch?

Keith Allman -- President, Chief Executive Officer, Director

It's probably down in number three priority as I sit here today, just roughly speaking. Our focus is on price and is on working with our suppliers in terms of negotiation and coming up with more competitive pricing, but certainly then the supply chain is an option. I talked about in-sourcing, say assembly into the United States. And then, specifically to your question as it relates to suppliers, many of our suppliers already have capacity set up in other, let's call it, Southeast Asia, Vietnam, there's a couple of other places we have a large supply chain. And so, it's a matter of standing up capacity in those existing facilities and doing some different things there. So that's the nature of it. I'd hope that color helps a little bit.

Mike Dahl -- RBC Capital Markets -- Analyst

Okay. Yes, it does. Thank you.

Operator

Your next question comes from Stephen East of Wells Fargo.

Stephen East -- Wells Fargo -- Analyst

Thank you and good morning. If you look first at the paint, just looking at the promo environment you've got, a retailer that sort of changed strategy, et cetera, are you seeing any change in the promo environment, whether on the DIY or on the pro level and then just could you give us an update on the hub stores effort?

John Sznewajs -- Chief Financial Officer, Vice President

Sure, Steve and good morning. In terms of paint promotions, it's been extremely consistent over the last multiple years, as we promote in conjunction with our channel partner, The Home Depot, very consistently four times a year. So we're on the Spring Black Friday, on Memorial Day, we're 4th of July and we're Labor Day. And that promotional cadence has not changed, I can't tell you. To Keith points, it's got to be six, eight years we have been now on that run and it doesn't look like we're going to change it at all going forward.

In terms of the promotional environment in -- on the pro side, again it's been -- that's been very consistent. There was not a lot of promotional activity for the pro either. The one thing I would point out though is, we do fund a pro or rebate, so the higher volume that a pro painter achieves within the Home Depot, the bigger discount that they can get on their paint offering, or their paint consumption. So -- but that has been extremely consistent as well over the years that we've been working on the pro paint program with The Home Depot. So not a lot of change in the promotional environment on the paint side.

Stephen East -- Wells Fargo -- Analyst

Okay. Got you. And then, sort of a combo question. First, could you talk a little bit about the demand that you're seeing in R&R versus new construction and what you expect moving forward? And then John, could you give us what your investment spend was in 3Q and what you think it will be in 4Q?

Keith Allman -- President, Chief Executive Officer, Director

Sure. In terms of the demand in R&R and new construction, as I've talked about last call and then in the prepared remarks here, it continues to be strong for us. We're seeing that in terms of ticket, we're seeing that in terms of demand across the continuum of price, meaning, entry level and high-end, continue to see good traffic. So feel really good about it.

I think we saw a little bit of softening on the new construction side. That's 15% of our business. As we look forward to next year, we're thinking that and we're not the only ones that are thinking this, whether it's John Burns or Harvard Center for Joint Studies, we're thinking that continued strong, call it, mid-single digit R&R growth is in the cards for us in '19. And with our brands and our innovation pipeline and our channel work, I think we're positioned to take advantage of it.

John Sznewajs -- Chief Financial Officer, Vice President

And Stephen on your investment spend question, hopefully -- I am not sure I've got the right question, but let me answer this and if it's not, let me know. So on the investment side, we have about $5 million in ERP spend at Delta in the third quarter and a little bit of investment in the hub stores as we have increased the number of folks that are employed by us to participate in that.

Going into Q4, obviously, we talked a little bit about -- earlier about the decline in investment spend because we had $8 million in the Plumbing segment. We'll tie a little bit of -- a very minor amount of ERP spend at Delta in Q4 and a little bit of continued hub store investment in Q4 as well because we are sort of hiring people in the first part of this year, so that will just maybe the anniversarying of that. But -- so we'll be up slightly year-over-year, but that's about it. Is that the question you were asking?

Stephen East -- Wells Fargo -- Analyst

That is, yeah. That's what I was looking for, what you had going forward, so thanks.

Operator

Your next question comes from Justin Speer of Zelman Associates.

Justin Speer -- Zelman Associates -- Analyst

Hi. Good morning. On the cost side, with cost continuing to move high, you have tariff inspired inflation coming, sizable amount of inflation you have to deal with, just particularly thinking about the Plumbing business, thinking about the margin integrity of your overall business, but particularly your Plumbing Products business, as we look back to 2014, we saw commodities collapse after that and really its not probably a coincident that your margins really moved up post that event. Now, the market seems to be concerned that we're going to retrace back to those levels at least. Maybe help us understand your view on the margin integrity and your world view and how you're responding to tariffs and cost inflation and mix down effect?

Keith Allman -- President, Chief Executive Officer, Director

As I said earlier, Justin, I think it remains to be seen of how the consumer is going to react to this inflation, call it, a tax on the consumer, if you will. In terms of margin, in the short term here, we are lapping some significant growth investment that we had in Q4. So we're expecting our Plumbing margins to be down slightly from where they were last year. We really haven't changed our outlook on that much. Certainly innovation and new parts of -- or new products coming through our pipeline that helps us continue to drive margin integrity, but long-term for this business we feel good about our margins and more specifically, for '19, we'll give more detailed outlook at our next call as we normally do.

Justin Speer -- Zelman Associates -- Analyst

You indicated that what you're about the deal with the incremental inflation, I'm guessing that's a net effect of tariffs and raw materials may be rolling over on brass costs and things like that, but the net impact of what you're about to see across your businesses will be less than what you've already had to digest in 2018. Can you maybe help us understand what you've digested in '18 and what you're thinking about '19 as you snap a line today?

Keith Allman -- President, Chief Executive Officer, Director

Yeah. If you think about the tariffs at somewhere around -- would that be 2.7% of our cost of goods sold and you think about -- in that range of 3% of inflation that we've had to deal with, then you look at some of the favorable tailwinds that we can potentially experience when we look at Plumbing and some of potentially the easing of the copper and zinc cost and then you look at still continued pressure in resins, in particular TiO2 appears to have kind of stabilized a little bit, so when you look at those net-net it's right around that 3% range.

Justin Speer -- Zelman Associates -- Analyst

So we shouldn't be surprised to see at least stable to maybe even improved operating margins next year based on what you're saying and what you have expressed in terms of pricing and things, but the big question is mix. And I guess from my standpoint: A, is that right; and B, on the mix side, what -- if you looked at good, better, best, can you define or think through, particularly in Plumbing, how mix on the low versus high end, how much differential margin there is? I don't know if you can say that publicly, but help us understand --

Keith Allman -- President, Chief Executive Officer, Director

Yeah. We haven't really walked through a specificity, the margin and the different points of the assortment as it relates to price, but generally speaking, we do tend to earn lower margin on the lower priced goods. That's still good business. It's a good return on our invested capital in those businesses, but it does tend to be a little bit lower margin as you know. In terms of 2019, we think it's potentially shaping up OK. We've got some relief in some commodities. We're certainly focused on getting price here in the tariffs, but in terms of the detail of how we're going to look at '19, we'll talk more about that in next call.

Justin Speer -- Zelman Associates -- Analyst

Thank you, guys.

Operator

Your next question comes from Keith Hughes of SunTrust.

Keith Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thanks. Back to the tariff, how much of the -- dollars that you've outlined in the slides, give us a feel of how much of that is finished goods that you're importing or how much is it components?

Keith Allman -- President, Chief Executive Officer, Director

We really -- we don't have that level of detail broke down Keith.

Keith Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. Well, let me ask in another way. In terms of the ways to mitigate this, with this pricing changing your supply chain to another foreign source, changing it domestically, is either one of those easier to deal with that versus the other and again source components versus finished goods?

Keith Allman -- President, Chief Executive Officer, Director

Well, I think it's something that as I talked about, we're not taking lightly by any means and we're organized to execute it and there's different challenges there. There is always challenge with price for the obvious reasons and we need to be very careful when we move our supply around. We're doing it in a way where we're trying to leverage our existing suppliers as much as possible and we're also doing negotiations with those suppliers. So I don't know that any one is particularly easier per se, it's just different.

And as I mentioned, we've got experience and there's certainly -- we know how to get price and that's something that we've been able to keep in terms of price commodity flush over the long haul through the cycles. We've demonstrated where we've had these episodes of very quick change in our cost structure, i.e., going to an no-lead brass, that we've been able to do that. And that was the same thing, it involved changing suppliers, changing materials, getting price, the combination of these things. So it's a mixed bag and different in terms of difficulty.

Keith Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. Just final question on this. I assume as you start this process, you're assuming that 25% is going to come January 1st, is that the stance you've taken as you begin to --

Keith Allman -- President, Chief Executive Officer, Director

Correct. That's our assumption and that's what our plans are based on.

Keith Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. Thank you.

Operator

Your next question comes from Phil Ng of Jefferies.

Phil Ng -- Jefferies -- Analyst

Hey, guys. How are you guys prioritizing capital deployment going forward just given your outlook on R&R still (inaudible) as it relates to M&A and buybacks, given where valuation of your stock is at this point?

Keith Allman -- President, Chief Executive Officer, Director

Yeah. Phil, as always, the biggest priority for us is investing back in the business. So CapEx and investing in the growth of the business is paramount for us and so that's number one on our priority list. After that, you're right, it comes down to M&A and share repurchases and as we signaled on our prepared remarks, we're thinking about $300 million of share repurchases in the fourth quarter of this year. So that has inched up the capital deployment priority list a little bit here and just given the pullback in the share price.

That said, I would tell you, we continue to be very active on the M&A side. Our team is out there looking at transactions on a very regular basis. And so, we will continue to devote time and energy to that as well. So it's a balance and at this point in the fourth quarter, share repurchase is going be a little bit higher than M&A, but we're not downgrading M&A in terms of a priority by any means.

Phil Ng -- Jefferies -- Analyst

Got it. It's helpful. One of your competitors called out increased promotional activity in cabinets, just curious, what are you seeing in the marketplace. And any color on how to think about your ability to get pricing given some of these logistic transportation costs that you called out, is that an opportunity early next year? Thanks.

Keith Allman -- President, Chief Executive Officer, Director

Yeah. So Phil we have not seen a lot of increase in promotional activity in Cabinetry. It's been pretty consistent for the last several quarters now. And are we able to get price based on logistics? Yes, absolutely. We're working on that here in the fourth quarter to put price into the marketplace to offset that inflation. So we feel confident that we can do so.

Phil Ng -- Jefferies -- Analyst

Okay. Thanks a lot.

Operator

And your final question comes from the line of Alex Rygiel of B. Riley FBR.

Alex Rygiel -- B. Riley FBR -- Analyst

Thank you. And I apologize for coming back to the tariffs, but we've been talking a lot about the cost risk and pricing and moving manufacturing around. Could you touch upon the opportunity that you see of gaining market share out there from competitors that are in a much deeper hole as it relates to tariffs than you are across all of your products?

Keith Allman -- President, Chief Executive Officer, Director

Sure. It varies by segment, but if you take Cabinets for example, Chinese -- direct Chinese import which is a 100% import, has been building strength competitively, so I think that is helpful to us. When you look at, let's call it, private label or house brands, which are 100% imported on the Plumbing side, we can have some advantage there as we can have the opportunity to utilize North American manufacturing. So I think when you look at those two opportunities there, that's probably the ones I'd call out.

Alex Rygiel -- B. Riley FBR -- Analyst

Very helpful. Thank you.

David Chaika -- Vice President, Treasurer and Investor Relations

I'd like to thank all of you for joining us on the call this morning and for your continued interest in Masco. As always, please feel free to contact me at 313-792-5500, if you have any further questions. Thank you.

Operator

This concludes today's call. You may now disconnect.

Duration: 61 minutes

Call participants:

John Sznewajs -- Chief Financial Officer, Vice President

Keith Allman -- President, Chief Executive Officer, Director

Stephen Kim -- Evercore ISI -- Analyst

Douglas Clark -- Goldman Sachs -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Mason Marion -- Nomura Instinet -- Analyst

Susan Maklari -- Credit Suisse -- Analyst

Matthew Bouley -- Barclays Capital -- Analyst

Michael Rehaut -- JPMorgan -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

Stephen East -- Wells Fargo -- Analyst

Justin Speer -- Zelman Associates -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Phil Ng -- Jefferies -- Analyst

Alex Rygiel -- B. Riley FBR -- Analyst

David Chaika -- Vice President, Treasurer and Investor Relations

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