Good morning, ladies and gentlemen, and welcome to Masco Corporation's Fourth Quarter and Full Year Results Conference Call. My name is Shannon, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin.

Thank you, Shannon, and good morning. Welcome to Masco Corporation's 2016 Fourth Quarter and Full Year Earnings Conference Call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer. Our fourth quarter and full year earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one 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, earnings per share, or cash flow will be as adjusted unless otherwise noted. We reconcile these adjusted measurements to GAAP in our earnings release and presentation slides which are available on our website under Investor Relations. With that, I'll now turn the call over to our President and Chief Executive Officer, Keith Allman.

Thank you, Dave, and good morning, everyone, and thank you for joining us today. I hope all of you in the northeast are staying warm and safe as the storm rolls in. Let's turn to slide 4. I'm very pleased with our 2016 results and the progress we have made. We continue to execute the strategy laid out two years ago to realize the full potential of our businesses, to leverage opportunities across our businesses, and to actively manage our portfolio. This strategy delivered strong results in 2016. We gained share in our Plumbing and Decorative Architectural segments, and our powerful KraftMaid brand continued to gain share in our Cabinetry segment. And we invested in new products and new programs, positioning us for growth in the coming years. Our revenues for the year grew 4%, excluding the impact of currency, and our operating profit increased by $148 million as margins expanded 160 basis points to 14.6%. This performance demonstrates our strong operating leverage and our continued improvements in cost productivity. We also strengthened our balance sheet by retiring $400 million in debt while maintaining $1.2 billion in liquidity. Our net debt to EBITDA now stands at 1.5 times, providing us a potent tool to create shareholder value. Now let's discuss some of our key accomplishments in 2016. In our Plumbing segment, we delivered strong performance across our diverse global plumbing platform. With our four largest businesses Delta, Hansgrohe, Watkins and BrassCraft, each achieving record sales and record profits for the year. Our Delta Faucet Company had another great year with its growth outpacing the segment, both in its trade and retail channels. Additionally, Delta's luxury brand, Brizo, drove strong double-digit growth for the year. Hansgrohe continued to gain share in its core European markets and passed the €1 billion revenue…

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 charges. Turning to slide 6, our 2016 performance was characterized by solid sales growth and strong operating margin expansion, driven by customer-focused innovation, new programs, operating leverage, productivity improvements, and a continued focus on cost control. The fourth quarter was our 21st consecutive quarter of year-over-year sales and operating profit growth. We finished the year strong with both our fourth quarter and full-year sales increasing 4%, excluding the impact of currency translation. Currency translation negatively impacted our sales in the fourth quarter by approximately $25 million and the full year by approximately $68 million as the U.S. dollar strengthened against most major currencies including the euro, British pound, and Canadian dollar. Based on year-end exchange rates, we estimate that currency will negatively impact our 2017 sales by approximately $100 million. North American sales increased 3% for both the fourth quarter and the full year due to strong demand for our repair and remodeling products across all channels of distribution and across the price continuum as consumers are trading up to our better and best product offerings. As a reminder, repair/remodel activity represents approximately 83% of our total sales. International sales increased 8% in local currency in the quarter and increased 6% in local currency for the full year as our international plumbing businesses continued to drive growth and profitability. Gross margins expanded approximately 150 basis points to 32.8% in the quarter, expanded approximately 200 basis points to 33.6% for the full year. Our SG&A as a percent of sales increased 170 basis points to 20.2% of sales for the fourth quarter. This was primarily due to increased medical insurance costs of $10 million,…

Thank you, John. 2016 was a great year for Masco, and we have tremendous opportunities in front of us. The fundamentals driving our business are strong. Demographics, namely the large millennial group, are increasingly favorable and should drive household formations and housing for years to come. Home prices are appreciating, boosting consumer confidence to invest in their homes. Housing turnover, a leading indicator for our business, increased approximately 4% in 2016 to 5.4 million units. And U.S. residential housing stock is aging, a key driver of repair and remodel spend with 50 million homes in the United States now over 40 years old, an increase of over 6 million units over the past 10 years. Given our leading positions, strong channel relationships, robust innovation pipelines, and the ability to drive growth and productivity through our Masco operating system, we are well positioned to capitalize on these strong fundamentals. Combined with our strong balance sheet and robust cash flow, we will drive shareholder value through reinvesting in the business, selectively pursuing acquisitions with the right fit and return, and returning cash to shareholders through share repurchases and dividends. We are confident that we will exceed our 2017 earnings per share target of $1.80 that we set in 2015. We hope to see many of you at our Investor Day on May 16 in New York City when we will update you on our progress towards this goal and our longer-term strategy. With that, we'll now open the call up for questions.

Your first question comes from the line of Michael Rehaut from JPMorgan. Your line is open. Please go ahead.

Thanks. Good morning, everyone.

Hi, Mike.

The first question I had was on some of the margin results, in particular, Cabinets and Plumbing. Earlier in the year, we saw a great margin increase year-over-year in both segments actually, cabinets and Plumbing. Still strong performance year-over-year in the fourth quarter, but maybe a little less than we were expecting. I don't know if others were similarly – maybe had a little bit higher margin outlook. But we're just trying to triangulate if you think about some of the improvement in the first half versus the second half, what were the differences there. On an absolute rate, it came down by a few hundred basis points. And how to think about, as you look at 2017 versus 2016, the trajectory for further margin improvement?

Sure, Mike. I'll take part of this, and Keith can also chime in on this one. So, let's start with the Cabinets segment. To your point, the first half of the year, we showed some pretty strong margin improvement in this segment. You may recall that we did cite in Q1 we had $4 million of favorability due to underspending on marketing and other initiatives in that segment, and then we also cited a similar favorability in the second quarter. We tried to guide the Street not to think about the margins that we are posting in the first two quarters of the year to be reflective of what our current run rate is but rather what our long-term potential of that business is. And so, what you saw is more normalized investment in the back half of the year as we introduced new products and programs that just require investment as you reset displays and other things out in the field. So, while we are significantly up from prior years, I think what you'll see in the Cabinet segment going into 2017 is continued steady margin expansion. And long term, we did say that we do believe that this business can be kind of low to mid-teens business. And I think just what happened is people got maybe a little bit overly aggressive in their forecast in terms of timing as to when we might experience those types of results. In Plumbing, you're right. We did experience some nice margin growth in the first half of the year, and that really continued into the back half of the year particularly in the third quarter. Where we did see a little bit of margin compression is in the third quarter. And we tried to outline that for you here on the call. We had the $5 million of medical insurance costs that we incurred unexpectedly in the quarter plus about $10 million of strategic growth investment, which was elevated a little bit. And we pulled some forward – we had foreshadowed about $5 million for the quarter back on our third quarter call and that did increase to $10 million for the fourth quarter, so a little bit more than we had expected. Sp we're not lacking any confidence as to where our margin profile is going to go in the Plumbing segment. We feel really good about the performance of the segment. So, no significant change on where we believe that business will perform long term.

Yeah. Just to piggyback a little bit on John's comments, we've been consistent in talking about our number one capital allocation priority, being to invest in our existing business. We've got great brands, strong innovation pipelines, and putting our money behind these brands and pipelines is the best returns for our shareholders. So, that's really what we're doing. The growth investment that we've had this quarter in Plumbing focused on Hansgrohe and Delta. With regards to Hansgrohe, we're driving share gains in our core European markets with increased marketing spend and some feet on the street to drive that. It's very productive for us. Obviously, it takes some time to work into those investments. There's a bit ahead of revenue. But we've proven frankly that we can leverage these, and we're going to do that. For Delta, we're putting money into our showrooms and our showroom displays. I was just out in the Midwest looking at some of those first displays, and they look great. And they're going to drive great volume and foot traffic, and our showroom customers are loving them. A lot of buzz out in the market for that. And we've made significant investments in e-business. We've got a great dedicated team at Delta that's focused on that. We've got variable comp and P&L metrics focused on that along with growth metrics, and that business leader is doing an outstanding job, and we believe we have the leading position in that online channel. And long term, as we look into next year and beyond, we fully expect this Plumbing segment to be in the high-teens margins. With regards to Cabinets, as John said, it's a similar story. We're investing behind that brand. In this particular case, it's really about product introduction and listening to the voice of the customer and delivering on that. So, we had some product launch costs here in this quarter. And if you look at prior quarters, we're a little light as we talked about and we're fully transparent on. We had a little bit of higher promotion that's been very productive for us. So, we had a great year. Our margins expanded 560 basis points in Cabinets, and we expect ahead of our exits of builder direct to grow this business and to continue to expand the margins as we look at 2017, so really about investing in our brands and our innovation pipelines and continuing with those investments to drive margin expansion.

I appreciate that, Keith, and thanks for the additional comments on the new products. Obviously, it's a key part of managing the business. Secondly on Decorative, this quarter, again on the margin side, kind of switched to down year-over-year versus being up year-over-year in the last couple of quarters. And there were several drivers, John, that you cited that was behind that. And I'm thinking in particular about the $15 million rebate or promotional rebates and the unfavorable price commodity relationship. On the rebate side, was that something greater than expected? How should we think about that in terms of a – I don't know if it's a onetime issue or just a year-end issue that may be was bigger than usual. And also, going into 2017, price commodity, we've talked a lot about TiO2 and how to think about – and you've had a couple of years of roughly 20%, slightly better than 20%. How should we think about the trajectory for 2017?

Yeah. Sure, Mike. In terms of the rebate question that you asked, because of the strength of our performance both at Behr and as well as Liberty Hardware in that segment, a couple of our customers did reach higher rebate tiers, which drove that. So, your question was unanticipated, yeah, we knew they were approaching it and we weren't certain they were going to reach it, but indeed they did. So, that's good news for both us and our channel partner that they're growing rapidly. In terms of the second part of your question on TiO2, yes, we have seen some relatively modest inflation in titanium dioxide, particularly as we entered the back half of the year. And as I'm sure you're aware, you've seen some of the manufacturers put out further announcements on future price increases for the first half of 2017. And so, we continue to work on this with our suppliers and we're going to continue to monitor the situation. We don't think inflation is going to be extraordinary in 2017. We do think, again, it will continue to be modest, kind of low single-digit inflation in 2017. But you never know how these things play out, so we'll stay on top of that. And to the extent that we need to, we'll put through pricing if we have to.

Yeah. In terms of as expected or not expected, there's always a little bit of fluctuation when you're talking about growth investments and promotions and rebates. But we really did call this out last quarter and we're on plan to continue to invest in this business. Making the hub store investment, we did the first 100 stores, and it worked out fabulously for us. We're making the next 100-store investment. We know why we're doing it and how we should do it. We're doing it close to the existing hub stores, so the Pros in a given city are free to go to The Home Depot wherever they are around that city to get their paint. So it's efficient for us. And we're confident that while the investment obviously is ahead of revenue a little bit, that we will grow our way and work our way into that. We expected some modest TiO2. We talked about that last quarter. We're seeing that. It remains to be seen what'll happen on the resin side, but as we've have talked over time, we remain flush with regards to price and commodities. And overall, when we look at this business, we're continuing to expect growth in 2017. And if there is margin degradation, it will be modest, and this business will continue to be in the high teens.

Okay. Thanks very much.

Your next question comes from the line of Dennis McGill from Zelman Associates. Your line is open. Please go ahead.

Hi. Good morning, guys. Thank you. I guess, the first question is just, I think you had mentioned that Joe was moving over to run the windows business or maybe he's just assuming the windows business as well. Just want to clarify that. And then if that's the case, how we should think about where Cabinets is in sort of restructuring efforts or recovery efforts? Is this a sign that you feel very favorable about the direction there and that's now more about executing as opposed to restructuring?

Cabinets is in great shape, Dennis. I was intimately involved with the improvement plan with Joe. And a big part of that improvement plan is this business is long-term in our portfolio. We wanted to build a solid bench, and Joe did that. Our CFO, Gordie Fournier, while he's a Michigan State Spartan, he still does a pretty good job. He's doing great. And Joe was still over that business. Gordie has stepped up his game and is running more and more of that business. Joe is spending a good portion of his week out west with the team at Milgard, rebuilding that team, and he's also spending time in Ann Arbor and helping Gordie run the Cabinet business. So very confident in the team at Cabinets as we've talked about. We're going to execute and finish up the final exit of some of that business that we purposefully are exiting in builder direct. We're driving good solid growth and profitable growth in retail. And in our dealer business, we're investing both at the lower opening price point in our Merillat and Quality brands, and KraftMaid is absolutely cooking. So, feel very confident in both continued margin expansion and overall net growth in Cabinets. Cabinets is in good shape. In terms of the Windows team, Joe is out there. We've made significant changes with eliminating positions, restructuring the organization. The general manager of that business has retired. And we're recruiting for a general manager for that business. And we have folks from our Masco operating system team that are out there. As we've talked last quarter, we had our senior executives and supply chain from Delta out there helping. And frankly, we're getting very nice traction. So, we expect very nice profitability improvement and continued growth out of that segment. So, the bench and the management team and talent development, frankly, is something that's top of mind for our organization and for me personally, and we are comfortably in good shape both at cabinets and windows.

Well, Keith, I think as long as you don't hire any Buckeye's, you should be in good shape there.

Couldn't agree more.

Just a quick follow-up on Cabinets as well. With some of the exits that you've mentioned on the direct builder side and I think others have talked about this as well and it seems to be something that's pretty prevalent this cycle, at least this portion of the cycle, do you think the new construction piece of the business is just going to operate differently going forward than it has in the past, whether it be size of supplier or how you have to get to the builders?

That's a good question. I think we are seeing overall a shift from the bigger cabinet companies moving away from some of those larger but regional builder direct models, where, frankly, a local competitor can do a better job and can survive or be content, if you will, on lower margins in a model where they're working for their wages, and it works out well for them. So, I think that shift is probably there. I would tell you that there certainly is components of the builder business and I would include in that large national builder business that makes sense for a company like ours to serve. It's driven by a combination of local density in the area where we can optimize the last mile delivery and the management of the install and punch out of the job. It has to do, to a good extent, with some mix and the relative take per unit because the cost really doesn't vary for a home when you talk about last mile and install and warranty and punch out. But it certainly does vary on the top line and take per home when you start to move the mix. So, I think clearly, there is a shift where there's going to be more regional players that are taking some of the tighter business. But we're going to ultimately, very quickly here by the second quarter of next year have this business where we want it, and we think there are some growth opportunities there.

Okay. Thanks again, guys. Good luck.

Your next question comes from the line of Mike Dahl from Barclays. Your line is open. Please go ahead.

Hi. Thanks for taking my questions. Keith, I wanted to start with paint and going back to your comments in response to Mike Rehaut's questions related to the hub store investments. And it sounds like you're now embarking on the rollout of the next 100 stores. Can you just give us a sense of where you are in that process? Is this something that we should now think of as kind of layering on 100 a year over the next couple of years? And then if so, maybe this is John as well, but is this investment then – should we just think of this as kind of a recurring investment for the next couple of years?

So, Mike, just where we stand in terms of the 100 hub stores. Just for everyone's benefit, we've hired 100 hub store representatives to serve these – just for everyone's knowledge – these are Behr employees that we're putting in The Home Depot stores to assist the Pro contractors that come into the stores with their sales. And so, we placed 100 hub store representatives in the third quarter, and we placed and hired the second 100 hub store representatives in the fourth quarter. So, we're fully staffed with our 200. In terms of the way we're looking at it, right now, just because of the timing of things, we got a little bit of cost ahead of sales. So, we're funding their salaries, but we're still building up the revenue generation for each of the representatives. In terms of the go forward, will we incur additional hub stores? That really depends on the productivity of the first 200. And as you might expect, we've seeded the stores with what we think and The Home Depot think are the most productive Pro paint stores within their network. And then if there are going to be a third 100 reps, they would be the next most productive stores. That really depends on the productivity of the first 200 before we and The Home Depot would move to add anyone else at this point.

I'd tell you, Mike, we're committed to investing in the Pro business. It's worked out well for us thus far, and we definitely see a direct path to it continuing to work. What I love about how this initiative has played out is the flexibility that both the Behr team and Kevin Scott and his team at The Home Depot have shown. And in the case of the hub store staffing and rollout, we've shown that it works, so we're going to increase that. The team has also looked at information technology aspects of this segment, how we can invest in information technology so that it's a smoother transaction for the Pro in terms of how they're able to access data about the tinting of a particular job to how quickly they can get in and out of the store with regards to where they pay and how they pay to how quickly we get the product to them, et cetera. So, we're committed to continuing to invest in this Pro segment and this Pro initiative because it works. I think that's the key message. In terms of specifically if we're here to say that there's 100 a year and plan on that investment, no, I wouldn't go that way. We're going to make sure that this works out. We're going to drive leverage in this investment, continue to drive our productivity because at the end of the day, we need that to continue to invest, and then we'll invest. This double-digit growth that we're experiencing is a nice pace for us, and we intend to continue it.

Great. Thanks for that. And it makes sense. Certainly, the top line would suggest that there's some good traction there. Then just shifting gears back to windows, this is the one business where there have been some real challenges in terms of tracking towards your longer-term goals and how you think about what that business needs to do to earn an appropriate return. And appreciate that there's a lot of work to do, but is there any more quantification you can give us about kind of what Joe is tasked with as far as getting to the 10% margin that I think is still your long-term target? What type of timeframe is involved there and how we should think about the progression?

Yeah. So, as you heard us say in our prepared remarks, Mike, that we think that the business is on track for its improvement plan that Joe and the team are initiating, and they're focusing on a couple of things. You may recall up until the first quarter of 2016 that this business had experienced 14 consecutive quarters of high single or low double-digit growth. So, the company's ability to grow is unquestioned. And they lost their path in the last couple of quarters, but we think Joe and the team are doing the right things in terms of not only the internal operational improvements that they're going after but then again, also reengaging with the external customers and continuing to drive the growth of this business. So, we do think long term that this business can exhibit those very nice growth dynamics that we had experienced several quarters back. And we do think also long term that this can be a double-digit business. But long term is not 2017, but it's probably 2018 or beyond. So, still got some work to do. We do think for this year, 2017, we think this will probably kind of a mid-single-digit business as Joe and the team continue to work their plan.

I'd tell you, a bump in the road doesn't change the city we're driving to. This is a part of our platform. We haven't changed that from a strategic perspective. We did have a challenging year. Joe and the team are doing a great job. We like what we're seeing initially, and it's going to continue. And as John said, we expect this to be back in that mid-single-digit margin range and to continue to grow and march on our way towards our long-term objectives.

Great. Thanks for that.

Your next question comes from the line of Nishu Sood from Deutsche Bank. Your line is open. Please go ahead.

Thanks. Wanted to ask a question about taxes, just all the discussion in Washington about tax reform. John, I was wondering if you could maybe give us an update on the cash balances overseas that might be subject to any tax changes. The border tax, if you can give us a sense of how much imported quantity there is that might be affected by that. And then the corporate tax rate, I think that's pretty straightforward or maybe there are some tax credits, like the Section 199. So, just maybe your general thoughts on that (45:50) might be impacted.

Sure. As you know, it's a fairly dynamic environment now around taxes, and there's not a lot of clarity to where the final outcome may be. So, we do have our tax group internally, a team that is evaluating the proposals. As we learn more about each, we kind of focus on it. So, in terms of what we're seeing out there in terms of the cash overseas, we do have about $600 million of cash over in Europe and other jurisdictions. Some of them would be easily brought back to the United States if there were a favorable tax regime put in place that we could bring it back. So, other foreign cash, though, recall, is trapped. It's more difficult to get cash out of certain jurisdictions like China and some of the other Asian countries. So, that will probably be able to be freed up as easily. In terms of the broader overall corporate tax rate, as we've been guiding you, we've been experiencing 36% tax rate and we are a 36% cash taxpayer. So, any relief on corporate taxes would be a benefit, subject to any of the other provisions that may get put out there such as the border adjustment tax that you alluded to and the Section 199 issue that you alluded to as well. So, a lot of kind of ambiguity out there, and we really won't know more until later in the year when some of this comes into clear focus. Keith, do you want to talk a little bit about the border adjustment tax?

Yeah, I think about the three issues regarding the border adjustment tax. Number one and John alluded to this, there's a lot of moving parts here, and we really don't know where it's going to ultimately land and when, if it does land, when it does land, if it will be on finished goods or on components or how it will be structured. So, nothing is set yet. So, the key here is to be diligent and to watch what's happening and to have scenarios around what potentially could happen. And we're doing that with our outstanding tax department. The second thing is this potential tax puts a premium on supply chain flexibility. And when you look at our supply chain, we really have outstanding teams in both our business units as well as here at corporate to drive synergy across our business unit, and that's obviously easy to say. But take a look at our working capital as a percent of sales. To me, that is one of the most all-encompassing, ultimate, if you would, metric around the quality of our supply chain leadership teams, and we are industry leading and we've continued to improve these outstanding results. So, we have a great team, and they've got the tools to use. We've got 40 factories in the United States and roughly I think 13 factories outside the United States. We've talked over several quarters about the ability of our supply chain to handle our planned growth without significant capital investment. Said another way, we planfully kept some capacity in our chain. And that capacity can be used together with this outstanding team to take advantage of flexibility. So, that second point of flexibility, we're very strong. And then thirdly, it's really about competitiveness. It's about how do we stack up against the competition because this will happen to everybody in terms of our mix of business and our flexibility. And when you think about it, our windows business and paint business really is not an issue. This is a make it here, sell it here supply chain for those two. In terms of Cabinetry, we import a little bit of lumber and wood, but we import significantly less lumber than our main competition. So, we have a structural competitive advantage there. And then Plumbing, which would be our most impacted segment, we have significant manufacturing facilities in Indiana, Tennessee, California, North Carolina, Texas that are very flexible. And we've demonstrated that flexibility. You may recall there was an anti-dumping issue a while back on plywood. So, we changed the value added. We decided to laminate the melamine here, and we decided to cut it to size here to reduce the value added and essentially, avoid the impact of that anti-dumping tariff, and we did that in about six days. So, we've got the flexibility. We have the competitive advantage. And I am not concerned about this issue.

Got it. No, that's very, very helpful. Switching gears to Plumbing, the international sales component has had a good run here. So, I just wanted to dig into that a little bit. You touched on – I imagine, obviously, Hansgrohe driving most of that. You touched on the core European market growth in your commentary. Just wondering if you could dig in to the drivers of that a little further. Is that mainly core market, new product growth as you were mentioning? Is that continued expansion into new territories? If you could just kind of give us the rundown there, please.

A combination of several things. Not so much expansion into new territories per se. We're focused on seven core markets. China, United States are two of those seven, and then we have the rest primarily in Central Europe. So, it's regions where we have solid teams, where we know the markets, where we have great customer relationships. So, it's more about increasing the share of wallet, if you will, of a region where we're already established. And that's important because that's the highest leveraged place for us to go with our investment. In terms of the type of investment, again, it's a combination. We are increasing our marketing spend to build a consumer brand and get Hansgrohe more known and create consumer pull. We have very strong trade pull, and we've been very diligent in cultivating that. And now, we're moving a little bit more into the consumer pull. Honestly, this is a similar playbook to what we did in Delta, and it's very effective. So, there's some advertising and promotions, marketing spend, if you will. And then there's feet on the street. Thorsten Klapproth, our CEO over there, is carefully putting in folks to help drive in segment-focused areas to achieve our objectives of continued growth. So, it's a combination of salespeople, of restructuring to go after targeted segments, increasing brand spend to drive consumer pull, and of course, taking care of the core.

Great. Thank you.

At this time, I would like to remind our participants that in order to ensure that everyone has a chance to participate, we would request that you limit yourself to asking one question and one follow-up question during the Q&A. Your next question comes from the line of Keith Hughes from SunTrust. Your line is open. Please go ahead.

Thank you. Just going back to windows, I know it sounds like we have several things and problems going on, but ERP install was one that hit the segment. Can you talk about what the spend on that was in 2016 and how much in timing of that will fall away in 2017?

Yeah, Keith. So, you may recall on our third quarter call, we talked about the fact that we're going to slow down the rollout of the ERP. And so, roughly, we spent approximately $15 million and a roughly $3 million to $4 million a quarter that we've been spending on that. And we continue to roll out the ERP over the course of 2017, and we don't expect that $15 million to increase at all. It will be a very similar spend level going into 2017 and beyond.

So, the comments earlier of that business getting back to mid single-digit EBIT in 2017, what's driving that? It doesn't look like it's an ERP cost falloff. What kind of things will be coming in to help out?

Yeah. A couple of things, Keith, that should be driving. Obviously, the big one is that we incurred $31 million of warranty expense in 2016, which we know won't recur in 2017. So, that's a big mover. The other thing is, recall, when we got into the issues in the second and third quarter, we were running a fair amount of labor inefficiencies. And there's one thing that Joe Gross is really good at doing is going into a facility and identifying those inefficiencies and streamlining processes to make them better. So, while they won't go to zero, I think Joe and the team have got a really good view as to how to improve the underlying efficiency of the operation.

Yeah. Thank you.

Your next question comes from the line of Bob Wetenhall from RBC Capital Markets. Your line is open. Please go ahead.

I can't believe you have a Spartan on payroll, but we'll move past that. It's great that you guys have returned $1.4 billion, and you got a great investment grade credit rating. Kudos to Sznewajs for that. Just trying to understand, Keith, it's been transformation story since you became CEO. You got rid of the installation business and spun it out. You got close to $1 billion cash and immense liquidity. Do you want to go out and buy something like a big windows business or a door business or where do you want to grow? What makes sense? You got a great Plumbing business. You're very clear in terms of your objectives with the paint business at Behr. What's the next step for the business? Is it more of a balanced capital allocation approach? Would you like to expand in adjacent categories? What do you see in the landscape today?

I think it's the way you characterize it as a balanced approach, that continues. I would put mergers and acquisition up a little bit in terms of how we're looking at it, but we haven't changed our approach to those, to mergers and acquisitions, that being our focus is on bolt-ons and paint and plumbing. And we are looking at other areas. The pipeline is growing and our velocity through that pipeline is faster than it was a year ago. So, I like how the team is looking at it, but we're going to be patient. We're going to be careful that we don't overpay. And our focus is on return on invested capital. We need to be able to bring value to a business that we buy and the business that we buy needs to fit in to our portfolio. And for us, as I said, our focus is on bolt-on. Paint and plumbing is the center of the target of the bull's eye, if you will, but we're looking at other areas. In terms of the relative size and if we would make a big one, we would if it made sense. That's not our focus. But if we were able to find a bigger, call it, transformative deal that added shareholder value, that was a solid return for us above our cost of capital and where we had a real no-kidding ability to add value to the business in terms of both top line and profitability, then we would look at it.

Thank you. That's helpful. And I'm glad you guys are getting more forthright with that. You mentioned in your prepared remarks that you're comfortable that you're exceeding $1.80 EPS target for 2017. And I was just hoping you could kind of give a big picture overview of what your thoughts are in end markets on the new res and the R&R spending side. And if you're already comfortable at this early stage in the year saying we're going to get ahead of that, what specifically? Is it better top line growth or better margin performance after a year of investment last year? What's getting you over the line and kind of how much better do you think you can do than $1.80?

In terms of the overall macros, as I said in my prepared remarks, we really do think that the fundamentals are strong. And we're 80% plus in – 83%, I think, is accurate in terms of our R&R as a percent of our mix. And we think that's stable and growing. On the new construction side, the demographics of those millennials, as the average age gets up to 30 over the next five years, is very positive with regards to the increase in families and the need for moving out of the basement and starting to form households, which then starts the move-up cycle. So, we think the macros are very solid. While interest rates are going up and could maybe put a potential bit of a drag on new home construction, we still think it's going to grow in that 8% range. That's our call on that. And we see a pivot to faster growth in single family than multifamily. And in single family, we have a greater take per home than in multifamily. With regards to how we see exceeding our $1.80, mainly on margin expansion. We're off, as you know, on our estimates and how we called the market, particularly in the coatings market. We thought the coatings market would grow a little faster than it did. We're taking share, we believe, call the market flat to down a little bit last year. So, we're off a little bit in that, but we're making it up in better margin performance and better conversion costs. With regards to specifically how much we think we're going to beat it by, Bob, that's why you got to come to New York in May and we'll talk about it.

So, 2017 for Masco is going to be like healthy top line, kind of low to mid-single-digit growth, you got the right people in place on the Windows business, you're getting rid of less profitable business in Cabinets. So, it's really going to be a margin story with a free cash flow focus.

Yeah, Bob. I think that's right. Because if you recall, when we set that $1.80 target, we assumed constant currency from May of 2015. Currency has moved against us pretty significantly. So, the fact that we're expressing the fact we're going to beat the $1.80, just goes to the confidence we have in the operations of our business.

Good stuff, guys. Love the confidence. Good luck this year.

Thank you.

Your next question comes from the line of Stephen Kim. Your line is open. Please go ahead.

Okay. Thanks very much, guys. I had a question for you about the Plumbing business. My recollection was that last winter, there was like a pull forward that benefited your 4Q, which means that you had kind of a tough comp in this past quarter on a year-over-year basis, and that, therefore, my expectation would be that you might have an easier comp as you get into the 1Q. I just want to make sure I was thinking about that right on the Plumbing business. And then with respect to the marketing spend there, I was curious whether you think this is going to continue at the same rate in 2017 as it did in 2016.

Yeah. So, I'll take the first part, Stephen. You're right. We did have a pretty tough comp in the fourth quarter of 2015. In my prepared remarks, I said we grew 14% in the Plumbing segment in Q4 of 2015, so what we posted in Q4 of 2016 is a really good result coming against that tough comp. You're right. We have a slightly easier comp going into Q1. I think we were up 5% ex-currency in Q1 of 2016. SO, I think we do have a slightly easier comp than we did in the fourth quarter. But with respect to the second part of your question, I'll let Keith take that one.

Yeah, our market spend, particularly as we think about Hansgrohe, we think that will continue. And we're going to drive leverage across Central Europe as we continue those investments. So, yeah, I would anticipate that we're going to continue these kind of investments because they're working for us. And these are strong brands, and we have, as we've talked about in the past, particularly with Hansgrohe, we have outstanding coverage across the globe, doing business in over 135 countries, but we have relatively thin market share in most of those countries, but we're able to make money because of our strong gross margin. So, we have a nice white space in those spaces. So, yes, I would anticipate that investment to continue. With regards to state side here with Delta, there is some lumpiness to the spend, right? So, sometimes we have new product introductions or we have displays that we change. So, quarter to quarter, there will be some lumpiness. But with regards to this overall Plumbing platform and the business, I think it's a smart move to continue to invest it. We're going to continue to grow this business, and we're going to keep those margins up in the high teens.

One of the things, Stephen, just to call out for Q1 of 2017 is we is do have our large biennual trade show, ISH, in Frankfurt that there may be some incremental spend in Q1 in the Plumbing segment on that one, several million dollars. So, just you might want to factor that into your thinking about Q1.

Right. Yeah. Thanks for reminding us about that. Okay. Great. And then in Cabinets, obviously, retail had very strong results. I think you mentioned up strong double digits, which is great. So, it looks like you kind of gained some share there in retail. I was curious if you could comment on what role promotional activity and marketing spend maybe played in that. And we had expected about $5 million in marketing expense in 4Q. I was wondering, did that actually happen? And what should we expect in fiscal 2017 beyond that $5 million in the first quarter that you talked about?

Promotions in retail did play a factor in the growth, no question about it. And we do that because it works. It drives profitable growth in our Cabinet segment. And when you have the advantage that we have of having fewer brands and stronger brands, this is the type of thing that happens. The retailer comes to us and says they want to do exclusive promotions, and we do that together with them. So, it makes good business sense to drive profitable growth in this fashion. Think about it. We've got leading market share in both big boxes, and when you think about the mix of retail in our Cabinet business versus our competition and then you look at our overall margin, we're right there. So, the numbers don't lie. That tells the story about us being able to leverage this competitive advantage with our brands and do it in a very profitable way. And interestingly enough, we did it with the same calendar we've been using for the last 2,000 years. We didn't change anything on our calendar, and we're driving this business profitably.

Great. Okay. Thanks very much, guys. Appreciate it.

At this time, I would like to thank our participants for their participation in today's call. That is all the time we have today. You may now disconnect.