Masco (MAS) Q1 2020 Earnings Call Transcript

Masco (MAS -5.85%)
Q1 2020 Earnings Call
Apr 29, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Masco first-quarter 2020 earnings call. My name is Carmen, 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.

Sir, you may begin.

David Chaika -- Vice President, Treasurer, and Investor Relations

Thank you, Carmen, and good morning. Welcome to Masco Corporation's 2020 first-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 first-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. [Operator instructions] 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 risk and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We described these risk 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 metrics. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We reconciled these adjusted metrics 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.

Keith Allman -- President and Chief Executive Officer

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I hope everyone out there is safe, healthy and managing through this difficult time. I'll begin my comments by discussing the actions we are taking in response to the COVID-19 pandemic.

I'll then touch on our strong first-quarter results and conclude with how we're looking at our business through the remainder of the year and beyond. Please turn to Slide 4. Our top priority is the safety and well-being of our employees during this unprecedented time. In early March, we formed a cross-functional COVID-19 task force to coordinate our response across the organization.

We've employed best practices and have followed guidance from the World Health Organization and the Centers for Disease Control and Prevention, including working remotely, staggering shifts, modifying work areas to ensure proper social distancing, enhancing cleaning practices and taking measures to ensure that sick employees stay home. We've also been focused on community outreach. Supporting the communities in which we live and work has always been at the foundation of Masco's culture. Several Masco business units have assisted local charities and frontline healthcare professionals by purchasing and donating protective equipment such as masks and sanitizers and by making in-kind product donations.

In addition, we've committed $1 million to nonprofit organizations that are helping to meet the urgent needs of our communities near our business units. Other efforts include exploring the manufacture of face shields and coverings and certain valves and brass components for ventilators and producing and delivering, in a matter of days, washing units and examinations and closures to protect medical personnel treating COVID-19 patients for a 500-bed interim clinic in Germany. These are just a few of the many efforts and activities going on across our company. I am extremely proud of our employees.

They have worked very hard to keep each other safe and to serve our communities. Our second priority has been to ensure we are meeting the needs of our customers and in consumers during difficult time while maintaining the highest levels of employee safety. Our businesses continue to provide essential products, though certain facilities have been shut down for the month of April and will continue to be shut down to some extent in May. Additionally, limits on the number of customers and big-box retail stores, restrictions on the sale of certain categories in various states and closures of distribution outlets will reduce sales for our products in Q2 but had limited impact in Q1.

Let me briefly discuss our first-quarter results. Please turn to Slide 5. For the quarter, sales increased 5%, excluding the impact of currency. Operating profit increased $22 million principally due to strong volume leverage in North American plumbing and in our paint business.

And earnings per share grew 24% to $0.46 per share. Turning to our segments, excluding currency. Plumbing sales grew 3%, driven by Delta's record sales quarter as they drove strong volume across all channels of distribution. During the quarter, we also invested in our connected home strategy that we spoke about at our investor day with a small acquisition of a technology company that has developed an interconnected showering system that monitors and controls the temperature and flow of water.

This system is an adaptable solution for a wide range of showering products and is the featured technology in Hansgrohe's smart shower system that debuted at the ISH Show in Frankfurt last year. In our decorative architectural segment, strong paint volume drove both top- and bottom-line performance. As shelter-in-place orders were issued throughout March, we saw a significant acceleration in the sales of Behr paint as more and more do-it-yourselfers took advantage of the time at home to undertake painting projects. Recently, Behr's leading brand and quality position was reaffirmed by a third-party testing organization as we once again achieved the highest rating in two out of the top three spots with our BEHR MARQUEE and BEHR ULTRA paint brands.

Our leading paint quality and value, along with our partnership with The Home Depot, positions us well to continue to capitalize on this resurgence of DIY paint demand. We also completed the sale of our cabinetry business unit in the quarter, delivering on our portfolio transformation that we announced just over a year ago. We actively deployed the proceeds of that divestiture through open market share repurchases and an accelerated share repurchase transaction for a combined total of just over $600 million at an expected average price of between $39 and $40 per share, depending on how many incremental shares we receive at no additional cost to us when the ASR concludes. So let's now discuss how we're approaching the current environment and how it impacts our outlook.

Please turn to Slide 6. From a business standpoint, in addition to our commitment to safety of our employees, we are focused on two things: maintaining our strong liquidity and ensuring we are positioned to win in the recovery. Our liquidity remains strong at $1.8 million at the end of the first quarter. We are actively reducing our costs and conserving liquidity by cutting discretionary spending, implementing a hiring and wage freeze, delaying discretionary capital expenditures and suspending our share buyback activity indefinitely.

Our goal is to ensure we are able to support our customers in any scenario in the most cost-efficient way possible. While we are focused on short-term cost control during this pandemic, we remain committed to driving a long-term growth, and we'll continue to invest in brand, innovation and service to ensure we win in the recovery. We are in dynamic and uncertain times, and accurately predicting the depth and duration of the impact of this pandemic is difficult at best. However, I'd like to share with you how we are currently thinking about the second quarter, understanding that we have withdrawn our formal guidance for 2020 and 2021.

With the numerous shutdown in shelter-in-place orders, we anticipate second-quarter sales to be down in the range of 20% to 25%. This assumes that in the United States and Europe, our closed facilities begin reopening throughout the month of May and that there are no further restrictions enacted in additional states or geographies. With the sudden nature of the shutdowns and restrictions on distribution, our decremental margins will likely be in the 40% to 45% range in the second quarter and will improve throughout the year to a full-year decremental of roughly 35%. These decremental margins are a result of the inefficiencies of the rapid shutdown and operating in reconfigured plants due to safety precautions we have enacted.

Additionally, we anticipate healthy demand upon reopening. Transitioning now to our supply chain. At the beginning of the quarter, the main concern about COVID-19 was its impact on our Asian supply chain. While our factory and third-party suppliers in China were shut down for the majority of the first quarter, our factory and nearly all of our third-party suppliers are now operating at or close to 100%, which we hope is a good sign for the rest of the world.

As we manage through the near-term, ever-changing environment, we are working closely with our leaders across the organization to assess the impact on 2021. And we are determining how to best position Masco to win as we move through the recovery. We believe our work over the past few years to refocus our portfolio on lower-ticket, less-cyclical, repair- and remodel-oriented products and our strong position in DIY-oriented products positions Masco particularly well to weather the storm and to outperform during the recovery. With that, I'll now turn the call over to John for additional detail on how our first quarter and the trends we are seeing so far in Q2.

John?

John Sznewajs -- Vice President and Chief Financial Officer

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 onetime items. Turning to Slide 8. We had solid first quarter, and sales increased 4% and grew 5% in local currency.

Foreign currency translation unfavorably impacted our first-quarter revenue by approximately $9 million. In local currency, North American sales increased 8% in the quarter. This performance was driven by strong volume growth in our paint and plumbing businesses. This was partially offset by lower volumes in our lighting and hardware businesses.

In local currency, international sales decreased 3% in the quarter, driven by lower volumes and unfavorable mix, partially offset by pricing actions. Gross margins were 34.8%, up 30 basis points. Our SG&A as a percent of sales decreased 50 basis points to 20.4%. We delivered solid bottom-line performance as operating income increased 11% to $228 million, with operating margins expanding 80 basis points to 14.4% despite the increased tariff costs that we discussed last quarter.

Our EPS was $0.46 in the quarter, an increase of 24% compared to the first quarter of 2019. Turning to the remainder of the year. As Keith mentioned, we have withdrawn our guidance for 2020 and 2021. However, to be as transparent as possible given these dynamic times, we provided our key assumptions such as our normalized tax rate, general corporate expense and share count, along with other items on Slide 22 of the earnings call deck posted on our website.

More importantly, to help you better understand the status of our business, I will provide additional color on the sales trends we are seeing in April as I walk through each segment and wrap up with more detail on our liquidity position before I turn the call back over to Keith. Turning to Slide 9. Plumbing sales increased 3%, excluding the impact of currency. Foreign currency translation unfavorably impacted this segment sales by approximately $9 million in the quarter.

North American sales increased 6% in local currency as we experienced strong demand across our wholesale, retail and e-commerce channels. As Keith mentioned, Delta delivered another record sales quarter with lower double-digit growth through increased volumes in their faucet, showering and bathing products. North American sales growth in the quarter was unfavorably impacted by approximately 2% as a result of facility closures in our spa business in California due to the state order. International plumbing sales decreased 3% in local currency.

Hansgrohe had mid-single-digit growth in its home market of Germany. This growth was more than offset by an approximately 20% decline in China and declines in other European markets, including the U.K., France, Spain and Austria as a result of the impact from COVID-19. Operating profit in the quarter increased 4%, driven by incremental volume and lower spend, partially offset by the full impact of tariffs. Let's turn to the trends we have recently seen in our plumbing markets.

While we typically do not discuss intra-quarter trends as results from only a few weeks in a quarter can be misleading due to short-term sales fluctuations, we feel that any data points in this unprecedented situation are helpful. In aggregate, our expectation is that plumbing segment sales in the second quarter, excluding currency, will be down between 30% and 35% over prior year. And segment sales in April will be down approximately 35%. This decline is being driven by closure orders affecting our spa business and lower demand in several other businesses in this segment.

We anticipate our spa sales will decline by approximately $100 million in the second quarter as Mexico and California, our principal spa manufacturing locations, issued shelter-in-place orders in late March and early April. These orders caused us to cease production. Our expectation is that we will begin limited production by the end of May and ramp up thereafter. Interestingly enough, demand for spas, both through our specialty dealer channel and through our online customers, remains robust.

Additionally, our international business is being impacted by shelter-in-place orders in many European countries, including the shutdown of our U.K. operation. In April, we are seeing high double-digit sales declines in the U.K., Italy and France, and approximately 20% declines in Germany, our largest market. China appear to be rebounding nicely from both the supply chain and demand perspective as their economy begins to reopen.

To illustrate this, China sales were down approximately 20% year over year in the first quarter, but we currently expect April to be flat to up slightly from last year. Due to shelter-in-place orders in many states in the U.S. and Canada, many plumbing wholesalers and plumbing showrooms remain closed, impacting our North American plumbing sales. Some of this demand has shifted to the e-commerce channel.

And based on what we are hearing from customers, we believe there will be additional pent-up demand as the economy reopens. Turning to Slide 10. Decorative architectural grew 9% in the first quarter. This performance was driven by high-teens percentage growth in our paint business with strong double-digit growth in DIY and mid-single-digit growth in PRO.

Our outstanding DIY paint results benefited from a resurgence in DIY painting as states issued shelter-in-place orders beginning in March. While it is too early to call this a trend, we are well-positioned with Behr's compelling quality and value proposition and a strong partner with The Home Depot to capitalize on any potential shifts in consumer behavior. In addition, we remain committed to our investments in the PRO and are pleased with the performance in the quarter. Strong paint sales were partially offset by lower sales in our lighting and builders' hardware businesses.

As we mentioned on our fourth-quarter earnings call, lighting sales were impacted by approximately $15 million due to the loss of a portion of a private label program and inventory rebalancing at a customer. Similar to our plumbing segment, we experienced strong increase in online orders in all three businesses in this segment as consumers shifted their purchasing habits. Operating profit in the quarter increased by 17%, driven by incremental volume, partially offset by the tariff impact on lighting and builders' hardware. We took steps to strengthen our lighting business during the quarter by closing an East Coast distribution center and consolidating that activity into our other facilities.

Turning to April trends, we expect segment sales in April will be down approximately 10% over prior year and anticipate segment sales in the second quarter will be down in the range of 5% to 10%. As a reminder, second-quarter lighting sales will also be negatively impacted by approximately $15 million due to the loss of a portion of a private label program and inventory rebalancing at a customer. And turning to Slide 11. Our balance sheet remains strong with net debt-to-EBITDA at 1.6 times.

And we ended the quarter with approximately $1.8 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Borrowing on our revolver is subject to two main covenants, both of which have plenty of cushion. The first covenant is a net debt leverage covenant of less than four times. And at the end of the quarter, we were at 1.6 times.

The second covenant is an interest coverage covenant of no less than 2.5 times. At the end of the quarter, we were at 8.5 times. Turning to our debt maturities. We are in good shape as our next maturity of $400 million is not due until April of 2021.

In the past month, both Moody's and Fitch reaffirmed their investment-grade ratings, with Fitch reaffirming its positive outlook on our improved -- due to our improved portfolio of businesses following the divestitures of our cabinetry and windows segments. We are pleased that we closed the cabinetry sale in February for $1 billion. As a reminder, we received $850 million of cash proceeds or approximately $630 million in net cash after taxes and expenses. We also received preferred stock of the buyer with a liquidation preference of $150 million.

Working capital as a percent of sales improved 130 basis points versus prior year to 17%. We now expect full-year working capital as a percent of sales will be in the range of 16% to 17%. Lastly, during the quarter, we continued our focus on shareholder value by deploying approximately $600 million to repurchase roughly 14.2 million shares. As Keith mentioned, we are suspending our share buyback activity indefinitely, and therefore, estimate our 2020 average diluted share count will be approximately 266 million shares.

And with that, I'll turn the call back over to Keith.

Keith Allman -- President and Chief Executive Officer

Thank you, John. The COVID-19 pandemic may have lasting effects on the economy, consumer behavior and homeownership, all of which we will continue to assess. There could be increased interest in single-family housing with more space in the house and more distance from neighbors. Increased remote working could lead to lower home turnover, but also increased remodeling spending.

Homeowners may take on more and do-it-yourself projects themselves, especially easy-to-do projects such as painting as opposed to having other people in their homes. And consumers could increase their preference for trusted brands, particularly in products such as ours that touch water. What we do know is that our actions over the past six years to create a less cyclical, more resilient portfolio, together with our strong brands and innovation pipeline positions Masco extremely well to outperform the competition, be outstanding partners to our customers and create shareholder value through a recovery. Our lower-ticket repair and remodel products performed well in a downturn and only declined 15% peak to trough in the 2008 to 2009 housing-led recession.

Many of our products are DIY-focused, particularly paint. And we have invested in and are well-positioned in all channels of distribution, including the rapidly growing e-commerce channel. We have strong liquidity and generate significant cash flow in good times and bad, allowing us to gain share by investing in new products and programs even in slower times. We have positioned our balance sheet to be a tool that will allow us to take advantage of opportunities that may arise, such as share buyback or attractive M&A.

With that, I'll now open the call up for questions. Carmen?

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question will come from the line of Stephen Kim with Evercore ISI. Please go ahead.

Stephen Kim -- Evercore ISI -- Analyst

Thanks very much guys, and yes, congratulations on doing extremely well in a tough environment. I hope you guys are all doing well. I wanted to ask a question regarding your outlook, particularly on the decremental margins. You had suggested that you're assuming a reopening in May, no resumption of second wave effects that might result in significant shutdowns.

And you suggested that the decremental margin would be 40% to 45% in 2Q and then improve, I think you said, to 35% for the full year. I just want to make sure I heard that right. And if you could give us a sense for how those decrementals may look between the two divisions, whether there's -- just to make sure that we're thinking about it clearly. And then also, when you eventually go to incremental margins when that happy day arise, can you give us a sense for where you think the incremental margins will be as a result of your comments with the decrementals in the near term?

Keith Allman -- President and Chief Executive Officer

Stephen, thanks for the question. I talked in my prepared remarks a little bit about the sudden nature of the shutdown and some efficiencies that we're experiencing operating our plants as we improve social distancing and take on -- and address our No. 1 priority, which is the safety of our employees. So there's some inefficiencies there that are affecting the decrementals.

We are holding on to some cost at this point to be able to be better prepared to serve our customers in the rebound, if you will. Keep in mind that prior to the pandemic, we were guiding toward low incremental margins, lower than we typically would in plumbing due to high tariff headwinds and even lower incrementals in Decorative Architecture due to tariff headwinds and some loss of the private label business in lighting that we called out last quarter as it relates to Q1, Q2 and Q3 volume losses. So our decrementals will be higher in Q2, and we do expect to improve them throughout the year. And you are right in terms of a full-year decrementals in that 35% range.

When we anticipate how our cost take-outs will flow and the way we'll look at -- looking at our comps, we would expect to see strong incrementals -- or excuse me, strong improvement in our decrementals in Q4 to get to that full-year range of roughly 35%. Admittedly, there's a lot of variables in there. But that's some more color in terms of how we're thinking about the decrementals. In terms of the incrementals, John, do you want to...

John Sznewajs -- Vice President and Chief Financial Officer

Yes. In terms of incremental, Stephen, I wouldn't expect them to be materially different from our decrementals. I mean, I think as volume comes back, I would think that you would see them in that 30% to 35% range, which we've traditionally enjoyed on volume as we've grown our business over the years.

Operator

Our next question will be from Mike Wood with Nomura Instinet. Please go ahead with your question.

Mike Wood -- Nomura Instinet -- Analyst

Hi, good morning. Thanks for all the data that you have provided. You gave the impact of the spa shutdown on sales in 2Q. Are you able to give us any information in terms of the profit impact that that will have?

Keith Allman -- President and Chief Executive Officer

I think if you think about those, our typical decrementals, I think that's a good way to look at it.

John Sznewajs -- Vice President and Chief Financial Officer

Yes. And to Keith's point, because those plants are shut down, we are carrying some extra costs. So it's probably -- that's one of the reasons we're driving higher decrementals in the second quarter, because we do view the short term -- the shutdown is short term in nature, and so we have kept a fair number of employees around. So we are able to produce when that plant comes back -- those plants come back up online.

Mike Wood -- Nomura Instinet -- Analyst

And in terms of the...

Keith Allman -- President and Chief Executive Officer

Go ahead.

Mike Wood -- Nomura Instinet -- Analyst

I'm sorry. Go ahead.

Keith Allman -- President and Chief Executive Officer

I was just going to highlight a comment we made, which is really a testament to the strength of that business and what we're seeing in our demand patterns for our spa business, and this is definitely in the e-commerce channel and most definitely in our specialty retail channel, is a continued demand -- strong demand for our products and that the issues that we're facing in this particular part of our business relate to shut down of our manufacturing capabilities and our plants because of shutdown orders in Mexico and California. I think that's an important nuance to point out, more than a nuance. I think it's an important fact that this is more of a supply related, short-term issue that we're addressing and will come out off as these state orders and, in the case of Mexico, a country order lift.

Mike Wood -- Nomura Instinet -- Analyst

Understood. Thank you. And in terms of the 2Q guidance that you provided, I understand how you tried to incorporate when facilities may reopen and that no additional shelter-in-place orders could go into effect. How are you thinking about the impact that this has in terms of paint gallon sales? In terms of -- you called out consumers increasingly painting because they're at home and they're pulling forward maybe some of those honey-to-do-list projects.

Are you expecting that that continues? If you can just talk about what you might think is temporary or permanent in terms of consumer behavioral trends related to this. Thank you.

Keith Allman -- President and Chief Executive Officer

When we think about the impact of COVID-19 on buying patterns, on psyche of our consumers, it's difficult to say what will be a structural change and what will stay and what maybe is a change that is more fleeting. For sure, we're seeing a move to online, and we're seeing that even in our rough plumbing business where pros buy. How much of that sticks remains to be seen. With respect to our paint business, while we've worked really hard from a mix perspective to more or less neutralize the mix impact of pro to DIY, there's a little bit, but we've worked hard and we're leveraging the volume on our pro business so that -- those are both good businesses for us.

But we are definitely -- we had about 75% mix skewed toward DIY, and there's no question that we are seeing a resurgence of DIY demand for those reasons that we all know and that I talked about in my comments. So do we anticipate that to stick? Yes. I think that's going to stick through Q2. If that is a longer-term structural change, I think realistically, that remains to be seen.

But we like our positioning definitely with our strong partner and our strong brands and our quality and DIY. And we also like our positioning and how we've been able to manage the profitability of the business on the pro. So not sure if this trend toward DIY will stick indefinitely, but the way I see it, it's going to stick through Q2.

Operator

Your next question is from the line of Matthew Bouley with Barclays. Please go ahead.

Matthew Bouley -- Barclays -- Analyst

Hey, good morning. Thanks for taking the question and hope everyone is doing well. I wanted to ask back on the 2Q revenue guide as sort of what you're seeing out of end consumer demand. It sounded like you're seeing something perhaps better there relative to the discrete impact of the shutdowns, which you attributed as somewhat severe, particularly in the spa business.

Are you able to sort of quantify or ballpark where the end demand feels like it's tracking relative to the discrete impact of those shutdowns across the business? Thank you.

Keith Allman -- President and Chief Executive Officer

When you say end demand, Matthew, what do you -- can you help me understand your question a little bit better?

Matthew Bouley -- Barclays -- Analyst

Certainly. So where consumer demand is relative to your sell-in demand with the customers. And then I'm speaking really specifically about the plants that were shut down, which is a little bit different than what the consumer demand is, of course.

Keith Allman -- President and Chief Executive Officer

So in terms of how our demand from the consumer relates to, let's say, change in inventory position in our channel, we're definitely seeing -- this is consumer demand. Due to some of the issues as it relates to some of the intermittent shutdowns of our facilities for employee safety and some of the longer shutdowns due to state orders, we have seen a little bit of our inventory. And I think in the channel, it's safe to say there's a little bit of an inventory reduction in the channel. So this is POS.

This is good demand, particularly as we see it in paint. John, I don't know...

John Sznewajs -- Vice President and Chief Financial Officer

Yes. The other thing I'd point to is just, Matthew, is Keith's comments on the demand we're experiencing in spas, right? It's a high-ticket item, and the fact that -- the fact that demand for spas in both online channel and our specialty dealer channel remains very healthy. And we take that as a good sign that the higher-end consumer is out there shopping and looking to continue to improve their home. So I think in both paints, as Keith just mentioned, and spa is pretty good indicative sign of where the consumer is.

Operator

Your next question is from the line of Ken Zener with KeyBanc. Please go ahead.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Good morning, gentlemen. Thank you. Appreciate your comments on the quarter. Can you, perhaps, discuss the -- obviously, the spa, you called that out specifically as it's related to a supply issue.

But can you maybe talk about how different markets are responding in terms of demand? So obviously, plumbing is down a lot, but there's big variances within America. Northern California, where I am, is very severe in terms of being shut down. But other places like Denver or Dallas, could you give us a feel for how state home orders is affecting kind of what you're seeing in both plumbing, which is less, I guess, DIY, perhaps, than paint? If you could just explain some of that, the differences that you're seeing, that would be very much appreciated, thank you, in terms of demand.

Keith Allman -- President and Chief Executive Officer

Sure, Ken. Thanks for the question. I'll talk to demand as it relates to a couple parameters, geographical and then maybe talk a little bit about channel, which may be helpful for you. Let's just start east to west here.

In China, we talked about that a little bit. The demand appears to be rebounding quite nicely. We were down, as we mentioned, about 21% in Q1. And we think in Q2, we should be flat to maybe even up a little bit.

In Germany, down in that 20% range in April, but we are seeing that starting to improve. Staying in Europe, we do see significant sales decline in U.K., Italy, Spain and France. Those are due mainly to shelter-in-place and temporary closures of some of our distribution outlets, our customers' outlets for plumbing. Obviously, in the U.S.

and Canada, we've been impacted by shelter-in-place across many states. I don't really have a lot there to offer beyond what we all know of that. In Florida, it's been -- in Texas, it's been hit a little bit less. And up in New England and the Northeast, it's been hit a little bit harder.

In terms of channels, many large retailers remain open, and sales is only off modestly in those stores. Retail tends to skew a little bit toward DIY, as we've said. And that's helping it out a little bit. Paint sales, as I talked about, retail have been very nicely positive year over year.

Plumbing wholesale, continuing here with the channels. By and large, plumbing wholesalers have closed their showrooms but kept their counter -- their back end open. Sales are impacted a little bit more since many homeowners are reluctant to have someone in their house, and sometimes, that tends to be more of a pro install. And we do see some construction being limited like states here in Michigan.

And then from a channel perspective, the e-commerce category is performing quite well and is up year over year, really, across the board. So I think our diversification both in terms of geographies and channels is helping the situation out. And we're positioned to win really as these channels change.

John Sznewajs -- Vice President and Chief Financial Officer

Ken, what I would add to Keith's comments, yes, we do think consumer demand is good. But the question that we're very closely watching is how long does this last. As you are well aware, stimulus checks hit a lot of consumers kind of mid-April, and that could temporarily boost things. And that's why we are kind of reluctant to get too far out there with how strong demand is until we really get a good sense of it in a longer term and short term over a couple of weeks how demand is and consumers are going to react to things.

So I just want to keep that in the back of your mind as well.

Operator

Your next question comes from the line of John Lovallo with Bank of America. Please go ahead with your questions.

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

Hey, guys. Thank you for taking my question. The question is on capex. I think you mentioned that maintenance is about $75 million.

So it seems like there's about $40 million or $45 million of sort of nonessential spend in your outlook. Can you just help us understand what that nonessential spend relates to and how quickly you could pull back on that if needed?

John Sznewajs -- Vice President and Chief Financial Officer

Sure, John. As Keith mentioned, one of the things that we intend to continue to invest in even through the recession is innovation. And a lot of it -- that non-maintenance capex goes to tooling for new products, so jigs and fixtures and things for new plumbing products, new shower products, some new things that we're delivering in the paint area. So that's generally where that capital is going because we think it's important to continue to drive the consumer to our retail partners, our showroom partners, even though times may be tougher.

Having new products out there continue to give us good shelf space with our partners and draw consumer footsteps into their locations. And so whether they're online locations or whether that's on their physical locations, we think it's important to continue to drive innovation across the entire portfolio.

Keith Allman -- President and Chief Executive Officer

John, in terms of some of those projects that we would look at cutting, sometimes, there's information technology upgrades and those sorts of things that we can delay a little bit, so those sorts of things. Some are related to equipment that we can delay a little bit. That's really what we're talking about.

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

Thanks, guys.

Operator

Your next question is from the line of Mike Dahl with RBC Capital Markets. Please go ahead with your question.

Mike Dahl -- RBC Capital Markets -- Analyst

Good morning. Thanks for taking my question, and helpful information so far. It's good to get so much of this detail out there. I had one follow-up on the plumbing business.

And you've given some of the components and channel commentary. When I think about the impact of the spa business in particular, it looks like that -- to a prior question, it looks like that impact alone is a 10% year-on-year delta in plumbing sales. And you've highlighted some fairly severe declines in Europe. So I guess if I'm -- I guess the question is really, can you break out then your core U.S.

business expectations for plumbing ex the spa business? Because it seems like they assumed 30% to 35% for the segment with some of those other components would imply that core U.S. bumming may only be down something in the teens or so.

John Sznewajs -- Vice President and Chief Financial Officer

Yes. Mike, it's John. In terms of the math you've done, most of that, that's right. I'd say as we look at North American plumbing, we're probably down a little bit better -- higher than that.

We're probably down closer to that 20% range or so would be the way I would characterize how we're currently viewing North American plumbing.

Mike Dahl -- RBC Capital Markets -- Analyst

OK, got it. Thank you.

Operator

Your next question is from the line of Michael Rehaut with JP Morgan. Please go ahead with your question.

Michael Rehaut -- J.P. Morgan -- Analyst

Thanks. Good morning, everyone, and I also just want to extend my wishes. I hope everyone's healthy and safe out there across your organization. First question, I just wanted to circle to an earlier question around decrementals and very much appreciate the commentary there.

And obviously, in the initial stages, makes complete sense that you would have a higher than normal decremental. As you look toward the full year, that would then certainly point to something better than that by the time you get to the fourth quarter. Initially or over time, we had thought of decrementals in a kind of a normalized basis, perhaps of 30% to 35% of the business where decorative was a little bit lower, plumbing was a little bit higher within that range. Just wanted to kind of circle back on those assumptions and if given the full-year trend, is it correct to assume certainly that you'd be at a better position in that 35% or so by the end of the year and that Decorative would be a little bit lower than plumbing?

John Sznewajs -- Vice President and Chief Financial Officer

First, just to make sure we're clear, I think decrementals by segment or incrementals by segment, however you want to look at it, they're approximately the same. I don't think there's a material difference between how you look at the incrementals or decrementals between plumbing and decorative architectural. They're both in that 30% to 35% range. The one thing that I would mention and because of the nature of the circumstances we're finding ourselves through, it's not always a straight line quarter to quarter, right? And so what Keith was -- and I were trying to point out is, obviously, we've got high decrementals here in the first part of things.

But as things begin to normalize, then they tend to revert back to our more typical incremental-sized decremental margins. And so that's how we're seeing it for the full year. So if you think about the way that we see the progression through the year, I think that should help. [Audio gap] think through how that should work.

Michael Rehaut -- J.P. Morgan -- Analyst

OK. I appreciate that. I guess secondly, I just wanted to circle back a little bit on paint. And there's been obviously a decent amount of press and coverage around room-by-room DIY projects as you've alluded to in the shelter-in-place backdrop, and we all saw the strong U.S.

census retail sales out of home improvement for March. I was hoping to get a sense, if possible, around how the monthly trends occurred for the paint business in the U.S.? It's an overall 9% segment growth for the quarter. I'm assuming that there was a perhaps a particularly strong March, and then you're expecting a 10% decline in April. But any sense of how strong March was and if there was any -- if you have any type of sense from a triangulation standpoint around, perhaps, what might have been pulled forward or a certain jump in activity around those proceeding week or two as people lined up projects before shelter-in-place?

Keith Allman -- President and Chief Executive Officer

Yes. Mike, you're exactly right on the inside-the-quarter monthly trends. That's what we saw. We saw a nice, call it, a single-digit pickup in January.

And then we got right up near that 20% range in March. So that is where we saw it come in. In terms of if that's a pull-ahead volume or if there's more volume, if that's consistent, that's tough to say, really don't know at this point. I think the key for us and the team that John and I are trying to communicate across this broad geographies, broad channels with a lot of uncertainty is that we certainly are thinking about our estimation of where this overall market will land as we move through this pandemic.

But what's more important for us isn't so much the precision of our forecast. What's important for us is flexibility and having the capacity and the appropriate cost to get through this as effectively as we can while being ready to win and position to win at recovery. And that includes capacity. It includes investment in technology and R&D and brands.

So that's the way we're thinking about it. But specifically to that, inside the quarter, you hit it in what we saw in...

Michael Rehaut -- J.P. Morgan -- Analyst

Great. Thank you so much.

Operator

Your next question is from the line of Phil Ng with Jefferies. Please go ahead with your question.

Philip Ng -- Jefferies -- Analyst

Hey, guys. I guess one more question on the decremental margin. Just curious, how much of that -- does that account for any raw mat deflation particularly in your paint business with oil down pretty dramatically? And any potential lift from any cost takeout initiatives that you might be pursuing down the road?

John Sznewajs -- Vice President and Chief Financial Officer

Yes, Phil. I mean, the decremental margins are all inclusive of what we see and what we anticipate in our business across the board. So in terms of raw materials, let me just -- I think you touched on it. Let me just give you a sense of how we're looking at raw materials now across the portfolio.

So copper and zinc are down more than 20% year over year and most of that decline took place here in the first quarter. But that will probably help offset some of the tariff impact that we've been feeling particularly in the second half of the year. To your point, oil prices have declined here recently. Clearly, that will help our freight costs out.

But as I think you're pretty well aware, freight is a relatively small piece of our overall cost structure. In terms of the commodity basket for paint, the TiO2 producers have announced price increases. And obviously, in this environment, you'll see how that plays out. Though there has been strong demand across the paint industry, so those could stay in place.

And oil prices do impact the raw material basket in paint. Specifically, resin prices follow oil to some extent. But to date, we have not yet seen a material movement in our resin costs or other costs as a result of the decline in oil prices. Propylene is a -- fairly downstream from crude, and it's held up pretty well so far, and so oil and resins are definitely not a one-for-one relationship by any means.

If oil stays at these levels for a sustained period of time, our guess is that we would anticipate some easing on resin prices, particularly in the back half of the year.

Philip Ng -- Jefferies -- Analyst

Perfect. And then just one more for me. Keith and John, you guys have seen a few cycles. Can you kind of give us a sense how you're thinking about the depth and perhaps the duration of this downturn, how you're positioned coming out of it? It seems like it's more of a shock rather than anything real long term.

You seem to be pretty upbeat about the outlook, but just kind of walk us through how you're thinking about this cycle versus the last. Thank you.

Keith Allman -- President and Chief Executive Officer

Yes. I think it's a little bit of a reprise of a prior comment I made, and that is that the depth and duration of the impact of this pandemic is unknowable. And that while we certainly are working hard to understand and to look at both trailing and leading indices and metrics to give us the best color that we can, most importantly, we're talking to our customers and our consumers try to understand how they feel about the nature of demand, but it's unknowable. So our focus is on flexibility and being able to win in any shape of recovery and any length of duration.

And that goes back to managing our cost structure in the short term. And then when we move into the recovery period to focus on winning and taking market share through our leading brands and continued investment in those brands and innovation and having the capacity to support it, and that's exactly what we're going to do.

Philip Ng -- Jefferies -- Analyst

OK, thanks.

Operator

Your next question is from the line of Susan Maklari with Goldman Sachs. Please go ahead.

Susan Maklari -- Goldman Sachs -- Analyst

Thank you. Good morning. I just wanted to follow up on the capital allocation side of things. Recognizing that the uncertainty has called you -- caused you to pull back on your repurchase activity, but given the liquidity position and your cash balances and things, what would you need to see to start getting back in the market again? And any updates that you can give us along with that on the M&A pipeline and any changes there?

Keith Allman -- President and Chief Executive Officer

Yes. Sure, Susan. As we said in our prepared remarks, we're watching the situation closely. But fundamentally, our long-term capital allocation objectives have not changed, right? We want to be disciplined and balanced in how we approach it.

And as we discussed, we're going to be conservative on our liquidity here in the near term. We have suspended our share repurchase activity, and we'll continue to evaluate our liquidity and market conditions before we resume that. So we have to have some sense that things are starting to get a little better. With respect to M&A, the situation may produce some attractive opportunities in the near term.

Don't know as oftentimes -- it takes sellers sometimes to readjust their expectations to market conditions, and so you might not see as many. But we continue to evaluate M&A, that we'll be highly selective. It's got to be the right strategic fit, right return. And then we're committed to our dividend.

We do view our current payout as reasonable considering our level of liquidity and our cash generation. So given our strong cash flow, we'll be conservative in the near term and continue to evaluate market conditions and continually reevaluate how we want to proceed.

Operator

Next question will come from the line of Justin Speer with Zelman & Associates. Please go ahead.

Justin Speer -- Zelman and Associates -- Analyst

Hi, good morning, guys. Thank you for hosting this call. I know it's not an easy time, but just a few more questions. What is the typical incremental volume or incremental margins on volumes for your business in a normal type of environment?

John Sznewajs -- Vice President and Chief Financial Officer

Typically, it'd be 30% to 35%, Justin.

Justin Speer -- Zelman and Associates -- Analyst

So most of the disruption associated with like distancing efforts and supply chain disruptions are the things that explain, I guess, the delta there.

John Sznewajs -- Vice President and Chief Financial Officer

Correct. Yes. Here in the near term, yes.

Justin Speer -- Zelman and Associates -- Analyst

OK. And then in terms of the -- you know that the raw material basket, in general, has been favorable. I know that you mentioned some -- maybe some partial offsets to the negative. But in terms of price dynamics across your portfolio, including your coatings business or your paint business, as well as your plumbing business across your portfolio, how do you expect price trends to hold up in this kind of this air pocket kind of environment where you do have raw material tailwind but recognizing also volume hit?

John Sznewajs -- Vice President and Chief Financial Officer

I think pricing dynamics across the portfolio will vary. Our European business is different, and they generally have put price in earlier this year maybe different by channel here. From time to time, we may put some price bonus in the trade or wholesale channel. With respect to paint, just given the nature of our relationship with one customer, we don't discuss our pricing conversations with that individual customer.

Justin Speer -- Zelman and Associates -- Analyst

OK. And then last question for me is just the cash conversion of the model. Just thinking of maybe the way we can kind of think about it as -- look at the free cash flow as a percentage. How do you think that holds up in these types of -- type of environment as you sensitize your model?

John Sznewajs -- Vice President and Chief Financial Officer

Yes. I think it holds up reasonably well, Justin. I mean, we were -- at the beginning of the year, before any of this really emerged, we are talking about 100% free cash flow conversion on net income. And given the way our capex comes down, our working capital can come in -- we believe we can maintain that 100% free cash flow conversion on net income through this period of time.

Justin Speer -- Zelman and Associates -- Analyst

Excellent. Thank you, guys.

Operator

Your next question is from the line of Garik Shmois with Loop Capital. Please go ahead.

Garik Shmois -- Loop Capital Markets -- Analyst

Hi, thanks. Thanks for scooping me in. Just wanted to follow up on the spa business. Your commentary just on the demand is pretty encouraging.

I'm just wondering if you look back on how that business performed in past recessions, how did that hold up given the more and fluent nature of the target market? I'm just trying to get a sense of how sustainable some of that pent-up demand could be right now or if there's any lag-affected downturn.

John Sznewajs -- Vice President and Chief Financial Officer

Yes. In past cycles, Garik, as you might expect, and particularly, in the last cycle because of the housing-led recession, this unit saw some pretty significant volume declines in the '08, '09 recession. And so I wouldn't certainly -- this is an apples-to-apples comparison today versus what we experienced last time. We would expect there to be some softening just given the impact to the broader economy.

But we feel pretty good about how this company is positioned, because you may recall in the last recession, a fair number of their competition fell by the wayside when we went bankrupt. And so they picked up a fair amount of share now that -- them as the market leader, we expect them to maintain that position even through the cycle. And I think an important piece to note there, Garik, is this company never lost money even in the worst of the '08, '09 recession.

Keith Allman -- President and Chief Executive Officer

Yes. We like the fundamentals of this space as well. When you think about wellness and health benefits of spas, it's pretty incredible. I'm a new spa owner, relatively new, about a year.

And I can count on one hand the times when I've been home and haven't taken the spa. It's great for the social aspect of the family. It's great for health, particularly for aging people. It helps you sleep better.

It is a great product that's positioned well for the demographics of the United States. And it's our most international -- or second most international business, so I think that geographic dispersion is real strong. And we have 1,000-plus of the best dealers out there. And we have a leadership team that is very strong at developing those leaders.

So all in all, we like this business very much.

Operator

Your next question is from the line of Seldon Clarke with Deutsche Bank. Please go ahead.

Seldon Clarke -- Deutsche Bank -- Analyst

Hey, thanks for the question. Appreciate the color on quarter-to-date trends and sales guidance, but could you just give us a sense of what this assumes as it relates to volume growth and price/mix and whether the current environment has changed your pricing strategy at all just given the impact of tariffs on the second quarter?

John Sznewajs -- Vice President and Chief Financial Officer

So Seldon, you may remember that we put most of our pricing related to the tariffs in early 2019. And so we really cover that and feel -- we are covered off on that last year. The balance of the pricing dynamic, yes, we're really not going to talk about future pricing actions on this call.

Operator

Our next question will be from Truman Patterson with Wells Fargo. Please go ahead.

Truman Patterson -- Wells Fargo -- Analyst

Hi, good morning guys and thanks for taking my question. Glad to hear all of you guys are safe. So big picture, you have $1.8 billion in liquidity. You have defensively positioned businesses that drive a lot of cash flow.

Could you just discuss your thoughts on maybe pulling forward some of the investments in your hub stores for the Behr contract or maybe go out, get a little bit more offensive, try and gain more share in that channel during this downturn?

Keith Allman -- President and Chief Executive Officer

We're committed to the growth in the pro. It's a segment, as I talked about, that with the leverage we're getting has improved in profitability over the years, so it's a good business for us. And we have a good sales pitch, if you will. We have a good value proposition for the pro there, particularly the pro that's already shopping at The Home Depot.

So we like that business. We're going to continue to invest in it. We're going to continue to invest in both people, technology, hub stores. We're going to continue to work and understand where the best investment is to make at any given time.

In terms of the specifics, we're not going to talk about that. But in a more general sense, we're going to continue to invest in that. And we think we have a very good reason to do that, both in terms of value and ability to win.

Truman Patterson -- Wells Fargo -- Analyst

OK. Thank you.

Operator

Your next question will be from Steven Ramsey with Thompson Research. Please go ahead with your questions.

Steven Ramsey -- Thompson Research -- Analyst

Good morning. I just want to discuss Kichler for a minute. Can you maybe discuss how the current impact, the adjustments you have to make in the near-term impacts, the longer-term cost structure reductions and changes you're making to that unit?

Keith Allman -- President and Chief Executive Officer

We're continuing to work as we are across our entire portfolio to optimize our cost structure, understanding that there is a short-term hit that we're taking as we're in what I would call the crisis. But we want to have our capacity and product development capabilities, etc., in place for when we have the recovery. So we're looking individually across our portfolio at what that means, and we're continuing to evaluate it. And I think we're going to learn a lot over the next quarter or two as we really see what happens as states open up.

So we're looking across the business at our cost footprint at all of our business units.

David Chaika -- Vice President, Treasurer, and Investor Relations

OK. I think we're going to conclude the call. We tried to make this a little bit of a different call given the fact that this is a different situation to delve into as much detail and with as much transparency as we can as it relates to how we're thinking about this business. I want to encourage everyone to stay safe and be healthy, and I hope that you and your families are getting along as well as you can in this crisis.

Thank you very much for giving us your time. Bye-bye.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

David Chaika -- Vice President, Treasurer, and Investor Relations

Keith Allman -- President and Chief Executive Officer

John Sznewajs -- Vice President and Chief Financial Officer

Stephen Kim -- Evercore ISI -- Analyst

Mike Wood -- Nomura Instinet -- Analyst

Matthew Bouley -- Barclays -- Analyst

Ken Zener -- KeyBanc Capital Markets -- Analyst

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

Mike Dahl -- RBC Capital Markets -- Analyst

Michael Rehaut -- J.P. Morgan -- Analyst

Philip Ng -- Jefferies -- Analyst

Susan Maklari -- Goldman Sachs -- Analyst

Justin Speer -- Zelman and Associates -- Analyst

Garik Shmois -- Loop Capital Markets -- Analyst

Seldon Clarke -- Deutsche Bank -- Analyst

Truman Patterson -- Wells Fargo -- Analyst

Steven Ramsey -- Thompson Research -- Analyst

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