Operator:

Good morning ladies and gentlemen. Welcome to Masco Corporation's Second Quarter Conference Call. My name is Ludy [ph] and I'll 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 Robin Zondervan, Vice President, Investor Relations and FP&A of Masco Corp. You may begin.

Keith Allman:

Thank you, Robin. Good morning, everyone and thank you for joining us today. As we sit here midway through the year, I'm pleased with our performance. Despite a challenging macroeconomic environment, we have delivered solid financial results with our continued focus on operational excellence, brand, service and innovation. Additionally, the strength of our repair and remodel oriented product portfolio has enabled us to drive operating profit margin expansion in the first half of the year, better than we expected despite a decrease in sales. Turning to our second quarter results. Please refer to Slide 5. Demand continued to stabilize as net sales decreased 2%, in line with the prior 2 quarters. Second quarter sales performance was primarily impacted by lower volume and mix. In the quarter, our gross profit grew $16 million and gross margin rose 140 basis points to 37.6% as a result of our ongoing initiatives to drive operational efficiencies and achieve cost savings. Our solid execution resulted in operating profit of $399 million an operating profit margin of 19.1%. In addition, our earnings per share grew 1% to $1.20 per share. Moving to our segments. Plumbing sales increased 2% overall and 1% excluding the impacts of acquisitions and currency. In local currency, North American Plumbing sales increased 5% overall and 2% excluding the impact of acquisitions. In International Plumbing, sales decreased 1% in local currency, demonstrating continued signs of stabilization particularly in Europe and China. Operating profit for the segment was up $4 million to $249 million and operating margin was 19.9%. The largely in line with the prior year, driven by our pricing discipline and operational performance as we continue to focus on productivity, efficiency and cost savings. We are pleased with our performance in the Plumbing segment throughout the first half of the year as our teams both in North America and International, continue to leverage our operating system and execute on our strategic priorities. Lastly, in Plumbing, Delta Faucet was awarded the J.D. Power Customer Service distinction for the third year in a row. This award recognizes our outstanding customer service and reinforces our commitment to industry-leading service. Moving to our Decorative Architectural segment. Sales decreased 7% in the quarter. Overall, paint sales were down high single digits as DIY paint sales decreased low double digits, while pro paint sales grew mid-single digits. In pro paint, we continue to execute on our strategic initiatives to grow share with our partner, The Home Depot. Our partnership dates back over 40 years and together, we are focused on meeting the needs of our customers through quality, service, brand and performance. We are proud of our sales growth and market expansion with the pro paint and we are continuing to invest to drive additional growth going forward. Operating profit for the segment decreased $6 million to $174 million, while operating margin was up 80 basis points to 20.8%. For the first half of this year, demand in our Decorative segment overall was generally in line with our expectations. However, DIY paint was more challenged than expected, partially offset by stronger performance in pro paint. Turning to capital allocation. We continue to generate strong free cash flow during the quarter and maintained a solid balance sheet. As a result, we executed on our capital deployment strategy and returned $206 million to shareholders through dividends and share repurchases. Now for a few comments on our outlook for 2024. Overall, sales for the total company were largely in line with our expectations for the first half of the year at down low single digits. As uncertainty within the broader macroeconomic environment has continued, we are tempering our expectations for sales in the second half of the year from up low single digits to roughly flat, leaving our full-year sales within our previously guided range of plus or minus low single digits. However, we are raising our full-year operating margin expectation to be within the range of 17% to 17.5%, driven by the strong first half performance in the Plumbing segment. We remain confident in our ability to drive margin expansion through our continued execution of our operating system. Additionally, with our strong focus on our cost structure and productivity, we are well positioned to leverage volume growth when the market returns to normalized growth rates. We now anticipate adjusted earnings per share for 2024 to be in the range of $4.05 and to $4.20 per share, narrowed from our previous expectations of $4 to $4.25 per share. We continue to believe that the long-term fundamentals of our repair and remodel markets are strong and that structural factors, such as age of housing stock, consumers staying in their homes longer and higher home equity levels will drive increased repair and remodel activity in the mid- to long term. With these favorable fundamentals, the continued successful execution of our strategic initiatives and our disciplined capital deployment, we are well positioned to drive shareholder value creation. We will continue to invest in our brands, capabilities and people to outperform the competition and deliver double-digit EPS growth through cycles for our investors. Now, I'll turn the call over to Rick to go over our second quarter results and 2024 outlook in more detail. Rick?

Operator:

[Operator Instructions] Your first question comes from the line of Matthew Bouley with Barclays.

Keith Allman:

Matt, Keith here. Thanks for the question. I think when we think about the DIY, specifically DIY paint subsegment, I think it's well known that, that subsegment tends to be more sensitive than other segments, sensitive to economic conditions sensitive to affordability sensitive to consumer confidence overall. So when you look and think about what's happened in the market, with regards to the price that's been put in, I think over the last couple of years, we're knocking at 40% price increases across our total company on average. So there's a lot of pressure that's been put on that sensitive segment. Rates being high overall affordability in that whole consumer basket through gasoline to groceries to everything. So it's well known that, that's a sense of segment. And we expected it to be down. I think when we look across regionally, it's pretty consistent. So it's a little bit more pressured than we expected. I think we highlighted that in our remarks. Looking forward, why we have the guide where we have it is based on really three fundamental things. One, is our comparables. When you look at the first half over the second half, our comparables soften a little bit and there will be some tailwinds. Secondly, we've talked about some of our SG&A spend being transferred from last year where it was in the second quarter to the third quarter this year. We're going to be using that to drive demand principally through advertising. We obviously have a lot of experience in that and we know what to expect. And then lastly, I would say that our guide contemplates, well, I'm not going to get into the specifics. Our guide contemplates what we're seeing in and recent demand trends as we exit the quarter.

Keith Allman:

I think, Matt, when you think about how we've performed in this volatile time, not only in our Decorative Architectural segment but across the company. And you see what we've been able to do with our margins as it relates to driving sticky and sustainable productivity enhancements across the P&L statement. And what we've been able to do with regards to price which is an opportunity we have, given our strong brands and our innovation pipeline; this business has really handled this volatile market well and we are in good shape. And what's -- what's exciting is about what we have to look forward when this demand does return to more stabilized and more normal growth rates. We have this business dialed in to really contribute incremental earnings on that incremental volume. So feel real good about both of our segments in terms of what we've been able to demonstrate in terms of performance.

Keith Allman:

If you think about -- I'll talk globally now, international versus domestic. We've started to see some demand challenges early last year in international or in domestic and then international lagged a couple of quarters. Last call, I talked about how I felt strongly that we've come to a stabilization point in North America. And whilst we were seeing signs of stabilization in Europe, I was a little reticent to call that a stable at that point but it was moving in the right direction. I'll tell you that we continue to see more signs of stabilization in international and I feel that we are in that period of stabilized demand internationally. So that goes for our key markets in Central Europe, Germany, in particular and China. So it feels very much like it did a quarter or two ago in North America. Internationally, the team at Hansgrohe continues to do a wonderful job and we are clearly taking share there. And that's -- while it's been consistent in talking about how it's difficult to nail down market size, specifically quarter-to-quarter. But when you look at our performance vis-à-vis our major competitors on the continent, we're doing a very good job and we're gaining share. So it's a combination of the market starting to come around, stabilization of demand, strong initiatives with regards to share gains and organic growth and a little bit of a slight, slight bit of some pricing tailwinds where we've had some carryover pricing from last year. And that's some incremental spot pricing in parts of our assortment this year. In North America, I can't say enough about the team in North America, continuing to do a very strong job of organic growth with influencer advocacy development that we've been focused on for about a decade, frankly and that just continues to pay off and we view that as a factory where we're producing advocates through influencers where there is an assisted sale in showrooms, for example. Our product assortment and our product launches in our spa business has been wonderful and we've got a great assortment that continues to -- and will continue to roll out. So we've returned to growth in that -- in our spa business. That's over and above the benefits of the acquisition of Sauna360, we think Sauna360, some nice legs to it as we start to leverage our outstanding dealer network and get that brand more and that assortment more available here in North America. So good hard work and we anticipate that continuing. And again, like my comments on your paint question around your Decorative question. The margins are indicative of how well we're doing in operating our operating system. We have a pipeline of Kaizen and continuous improvement activities. That is across our P&L. We're working on variable cost productivity, with labor productivity, scrap rate reductions, overall equipment effectiveness, improvements. We're working on variable cost productivity with regards to trying very hard and keeping a close eye and putting -- taking shifts off-line and combining shift, maybe even working some overtime to enable us to take a shift offline so we can drive that sort of productivity; those are sticky initiatives. So looking forward, when this demand does return to normal, we're excited about the prospects of earnings and what it can do for shareholder value.

Stephen Kim:

Appreciate all the color. I had a couple of longer-term questions for you, though. I guess the first one relates to what adjustments you might make in the event that there's an abrupt change in tariff policy? And if -- are there any lessons you learned from last time this happened that you would expect to apply in the future if needed.

Stephen Kim:

Yes. That's very helpful. And then a broader question about your product portfolio. I was wondering whether you're actively seeking to broaden or narrow your product portfolio at this time. Anything specific that you might talk about. And as you look out over the next few years, how do you assess the key strengths that Masco brings to the table that makes you a better owner of certain assets.

Stephen Kim:

Okay. I appreciate that very much, guys. Best of luck with the rest of the year.

John Lovallo:

The first one, Keith, just talking about some of the cost-savings initiatives and efficiencies that have been in place. I'm curious how you guys think about the sensitivity of your EPS guide to the top line? And what I mean is that if sales were to come in at the lower end of the range, do you think you could still sort of achieve the midpoint, maybe even the higher end of the EPS range just on the cost saves and execution?

Rick Westenberg:

Yes. And John, one thing I would add -- John, the only thing I would add is, as you obviously saw from our comments this morning, we've tempered our expectations for the second half of the year and that's factored into our guide. And even in spite of -- despite the lower or tempered expectations for sales. We've narrowed our guide keeping that midpoint. And we're confident we'll end within that EPS guide range.

Keith Allman:

Yes, John, I'll comment on exit rates. Coming out of the quarter. And it's -- there's -- when you look at quarter versus prior year quarter and what happens on the edge of 1 quarter in the following quarter, 1 year and then the previous quarter to next year, it makes that in itself can throw some complexity and some murkiness into how we look at the business. When you start parsing out to how we exit quarters and where the months are and what happens inter quarter, that gets even worse. So we don't do that. But I will tell you that our exit rates and our run rates at the end of the quarter and through July are contemplated in our guide. So those are factored in. Can you help me out with that second question here, John?

Keith Allman:

I think it's a couple of things. One is the nature of the consumer who uses the pro versus the DIY and how sensitive they are. And we're seeing that, call it a mix dynamic. In this case, it's a -- call it, a mix of who does your installation, you hire a pro. But we're also seeing that in terms of the high end of our assortment in Plumbing and then some of the high-end assortment in Deco, where it's just less sensitive. So people who tend to use a pro are less sensitive to some of the macroeconomic uncertainties and consumer confidence issues that are around. They are a more robust consumer because they're a little more affluent; so I think that's a piece of it. The other piece is our performance and our share gain which we continue to drive and to hold. So I think that really sheds a little bit light from my perspective on why pro is performing a little bit better than DIY, why the upper end of our assortment across the whole business is hanging in there a little bit better than the lower end of our assortment. And it really has to do with the subsegment of the consumer base and how sensitive they are.

Adam Baumgarten:

If we think about DIY, where do volumes currently sit compared to pre-COVID levels in paint?

Keith Allman:

Adam, I might add on to that and expand a little bit on your question which was specifically on pro paint, pre-pandemic now and back up and take a broader look at our entire company and our whole assortment as it relates to our performance pre-pandemic to where we are today. And I do so because I think it tells a very interesting story for our investors. When you look at pre-pandemic levels of volume and you extend that out at the traditional growth rate of, say, 2.5%, you get to where we are today. What you'll see and a little bit of timing differences. But broadly speaking, when the pandemic hit, we had a very substantial bump in our demand and then that demand went below the historical run rate extended from pre-pandemic levels and we went through that pull forward, if you will. And when you look at where we are now in terms of volume and you inflation adjust that COVID bump because there was significant pricing in there. So you really look at where the volume is what you see is a deferral of demand, we believe and that the size of that deferral, that area under the curve is roughly the same as the -- as what we saw post pandemic inflation adjusted. So our view is that we really are seeing a deferral of spend in the DIY space. And that's exciting for us because as we've talked quite a bit already today, our business is tuned in and that's -- the measure of that is our margins. And we have a state-of-the-art new paint plant coming up in Ohio and that ramp-up is going fabulously, the team is doing a great job. We have a significant, very large plumbing manufacturing plant in Serbia, that's coming online. And again, same story. All things are going well and that plant is coming up nicely. So as this demand starts to return to normalized levels. We've got the business tuned with regards to our cost control. We're watching our SG&A spend closely on the growth incentive -- our growth investments. And our capacity is in great shape to be able to support it, including some surge capacity for selling seasons on our paint side. So this business is ready to do some exciting stuff when this market turns.

Keith Allman:

A couple of components. We are seeing some trade down in the assortment while the upper entity assortment is holding on very well as I talked a little bit earlier. There is a little bit of trade down from mid to the lower part of our assortment, understanding we don't play in the very low piece of the assortment. So there's a bit of trade down and then there was also a bit of geographic mix where earlier on, we're seeing it more stable now for sure but China was challenged for a couple of quarters. In China, for us, with our Hansgrohe and Axor brand tends to be a higher end consumer. So as geographically as China goes down, that's a natural mix it. Now having said that, we -- Rick, I don't think we're really calling for much of an impact on mix for the year.

Operator:

Your next question comes from the line of Michael Rehaut with JPMorgan.

Keith Allman:

Not really leaning it away or kind of right in the middle. We're calling R&R to be flat to down low single digits and I think that's the right place to be.

Rick Westenberg:

Sure, Andrew. It's Rick. So from a commodity perspective, I'll take a step back overall. Really, in Q2, we didn't see a significant driver one way or the other. In the first half of the year, we saw commodities be a slight tailwind to our performance. And in the Plumbing segment, we have positive price/cost relationship. As we think about where we sit here today, as I think we've all observed, we've seen a bit of an uptick with regards to the metal prices of copper and zinc. It has trailed off a bit but still elevated as well as some of the paint inputs. So TiO2 and resin there's some pressure on that. So we see that as, as I mentioned in my opening comments, we see that as a bit of a headwind in the second half of the year. Now granted, it takes time for the commodity costs and ocean freight costs for that matter to work its way through our inventory and hit our P&L. But given the inflation that we saw really during the quarter, we do expect to have that be a bit of a headwind in the second half of the year, really later in the year. Despite that, we actually are, as you know, expecting margin expansion in the second half of the year, really in both of our segments. And so we're able to overcome those headwinds. We're monitoring that very closely and we're taking action accordingly. But we do expect to have margin expansion in the second half of the year and margin expansion overall. And thus, we've raised our operating profit margin expectations for the year.

Anthony Pettinari:

For DIY paint year-to-date, do you think your volume performance has been sort of in line with kind of the underlying DIY market? Or have your volumes maybe tracked a little bit better or a little bit worse than the industry? And if there's any sort of variance there, what do you think is driving it?

Anthony Pettinari:

Okay, that's very helpful. And then just we've seen existing home sales below $4 million, really historically low levels. And I'm just wondering how that is impacting different parts of your business. If you can just kind of remind us maybe which parts of Masco are most impacted or maybe at least impacted by the slowdown in existing home sales in the U.S.

Operator:

Your next question comes from the line of Mike Dahl with RBC.

Keith Allman:

I don't think there's really any difference in the DIY perspective this quarter from last quarter. I don't have any technical numbers on a quarter-by-quarter basis to say that. But just talking and being in the channel and getting exposed our business, I really don't see a difference as far as the low double digit down in DIY, you really have to look at the half, as I said, because there were some volumes that straddle one quarter versus the other quarter when you look year-over-year.

Unidentified Analyst:

Understood. That's helpful. And then, just shifting over to Plumbing. How do the channel inventories look today? Is there any kind of notable restock or destock dynamics that we should be aware of?

Operator:

Your next question comes from the line of Sam Reid with Wells Fargo.

Keith Allman:

Yes, Sam, I appreciate the question and good memory. So with regards to the lighting business, we -- the team has taken some really proactive actions with regards to opportunistic pricing, streamlining lines of business, exiting lines of business that had less profitable dynamics to them and of course, cutting cost and really has positioned the business for success going forward. We don't provide, as you know, breakdowns of financials within our segment. And what I would say is the top line performance has improved sequentially and we're expecting that the lighting and hardware business which are the complements to paint in the DAP segment, to be really going forward that performance top line to be in line with the R&R industry expectations which is as Keith articulated earlier, it would be flat to down low single digits. But we're definitely seeing a positive trajectory relative to where we were, let's say, a few months ago.

Keith Allman:

Yes, Sam. I would say from a pricing perspective, we can speak overall which was, it was for Plumbing for the segment, it was a positive 2% contributor in the quarter. From a channel perspective, we don't get into that specifically. I would say that from a trade perspective, it's pretty robust. But I would say that we're -- the team is really focused on taking price in reflection of our strong brands in our product portfolio and really capturing that value. But we generally work hand in hand with our customers to make sure that we've got really profitable growth across the ecosystem. But I would say I would stick to in terms of our expectations, our results and our guidance really at a segment level and that's positive low single-digit pricing this quarter and for the year.

Susan Maklari:

My first question is you mentioned that you did see some benefit on the cost savings and some of those broader initiatives that you've been working on in the quarter across both of the segments. Can you just talk a bit more about what some of those were, how they've come together. And I guess as you think further out, the ability continue to realize those benefits as you try and close that margin gap with where we are today relative to the longer-term guide?

Susan Maklari:

Okay, that's great color. And then turning to capital allocation. You still are on track for that $600 million of repurchases or bolt-on M&A. Any comment on M&A, how that pipeline is looking? Anything of note there?

Operator:

Your next question comes from the line of Keith Hughes with Truist.

Rick Westenberg:

Keith, sure. So as you alluded to and I mentioned in my opening comments and during an earlier Q&A, we do see some commodity inflation and ocean freight, ocean freight here that it's going to be serving as a bit of a headwind as we enter the second half of the year. Specific to your question, we do see pricing in the Plumbing segment as an offset to that. Really, we're continuing to take low single-digit price increases with regards to our Plumbing segment. We'll continue to lever that. But really, that's a Plumbing dynamic. As it pertains to the coatings, it's really going to be a balance between where we end up relative to commodity or input costs and our net price with regards to our retail partner in that regard. So really no comment there. I would say, though, in addition to price, as Keith has alluded to a couple of times, the team has done tremendous work with Behr to driving operational efficiencies and cost down. So with regards to offsetting that commodity headwind, it's certainly, price is part of the equation but it's not exclusively priced. It's also operational efficiency, cost reduction and running the business tighter. And we're seeing that here in the first half and we'll continue to drive that in the second half of the year to deliver the margins overall, that we've guided to.

Operator:

Good morning, ladies and gentlemen. Welcome to Masco Corporation's First Quarter 2024 Conference Call. My name is Lidy, 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]

Robin Zondervan:

Thank you, operator, and good morning, everyone. Welcome to Masco Corporation's 2024 First Quarter Conference Call. With me today are Keith Allman, President and CEO of Masco; and Rick Westenberg, Masco's Vice President and Chief Financial Officer.

Now let's turn to Slide 11 and review our outlook for 2024. The year has started largely as expected, and as a result, we are maintaining our full year outlook, which is as follows:

for Masco overall, we expect 2024 sales to be roughly flat with operating margin growing to approximately 17%. Currency is projected to have minimal impact on our results. We expect sales to be down slightly in the first half of the year, with modest growth in the back half of the year. Additionally, we expect operating margin to be roughly flat in the first half of the year, with expansion expected in the second half.

Anthony Pettinari:

DIY paint accelerated pretty meaningfully from 4Q to 1Q. And I'm just wondering if you could talk a little bit about whether that acceleration was related more towards improving demand or maybe the timing of comps? And how should we think about maybe pathway to restoring price/cost and DA given volumes are improving?

Anthony Pettinari:

I guess the move from DIY paint from 4Q to 1Q, if you could just talk about the trends you're seeing there.

Anthony Pettinari:

Yes, year-over-year.

Anthony Pettinari:

That's very helpful. And then I'm just -- plumbing ball mix, I think, decelerated from down 4% in 4Q to down 7% in 1Q despite what looked like an easier comp. I'm just wondering if you could talk about if that -- if you view that as a deceleration, if there's anything in the weaker channels that you'd flag and maybe just more broadly about trends that you're seeing in Kitchen and Bath remodel that you'd identify as maybe tracking better or worse than expected for Masco?

Operator:

Your next question comes from the line of John Lovallo from UBS.

Keith Allman:

Really no change. We've performed this quarter as expected. We're holding our guidance and believe that we will start to see an uptick in the second half in the overall market. But -- no real changes as we see it in terms of how the consumer is behaving. Certainly, there's volatility left and that we're calling for flat, plus or minus low single digits. And our market is driven primarily by consumer confidence. So we're watching carefully where the rates go, what happens geopolitically. There's a lot of dynamics here, but fundamentally, how we view the market has not changed. And by and large, first quarter came in right where we expected it to come in.

Richard Westenberg:

Yes. No, I follow your math, John. It wasn't quite that significant, but Kichler and Liberty were down a bit more than our overall portfolio. And some of that's driven based off of decisions that are made. For example, Kichler has done a really nice job at taking some restructuring actions with regards to cost and price, but also portfolio exiting some lines of business that weren't as profitable. So that's driving a little bit of the year-over-year comp. And as we look for the rest of the year, I think what we will expect to see in terms of those business lines is more in line with the R&R industry as we kind of lap some of the comps.

Matthew Bouley:

A couple of questions on the margins. I think you again spoke to a total company operating margins being sort of flat year-over-year in the first half. Obviously, Q1 was quite -- was up year-over-year. So I guess my question is for the second quarter, does that imply margins really need to be down as soon as the second quarter here? Kind of any finer point on how should we think about that margin here in the second quarter?

Matthew Bouley:

And second one, just zooming into the Plumbing margin specifically, 19.1% margin in the first quarter. You kept the full year guide unchanged. I guess it would be helpful if you can kind of outline how price cost is playing into that. You had the benefit in Q1 and maybe we are seeing copper prices increase here. So just how is price cost playing into that? And was there anything else kind of beneficial in Q1 that sort of not continuing for the year? So yes, just kind of what the reasoning behind holding that guide unchanged?

Operator:

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

Keith Allman:

Well, I think we've -- Mike demonstrated an ability to manage commodity changes. Who knows where they will go. We're seeing a little bit of variability. We're watching crude oil. There's some freight components in terms of incremental costs as we ship around the Red Sea. There's pending labor negotiations in the East Coast. So those are the types of things that we watch, and we're uncertain where those may go and if they will result in headwinds, but I think we've demonstrated the ability to manage those with our pipeline of productivity initiatives and cost out as well as the strength of our brands and innovation and ability to get price where we need to.

Michael Dahl:

Yes. That makes sense. Okay. And then just shifting gears to the overall kind of capital allocation environment. We've seen a decent number of building products businesses trade hands or announce transactions, a variety of kind of scale there in terms of small to large. Can you just update us on kind of what you're seeing out there, how you're thinking about the environment and how it's unfolding year-to-date?

Susan Maklari:

Going back to some of the company-specific initiatives that you've got coming through, it seems like you're really starting to gain some momentum with them even with the backdrop still being fairly tepid in there. Given the progress that you're seeing, is there any change in the time line or perhaps the sort of progress or the things that we should be thinking about that could come through over the course of this year or next year?

Susan Maklari:

Okay. Okay. That sounds great. And then you also had some really nice improvements on the working capital side. Does that go to some of these efforts that are coming in? And can you just talk about what drove that? And any thoughts on how that could trend over the next couple of quarters?

Adam Baumgarten:

Just in Plumbing, how should we think about the magnitude of the price cost tailwinds on a go-forward basis? Do you think that 1Q was maybe the peak for that relationship? Or do you expect tailwinds throughout the balance of the year?

Adam Baumgarten:

And then just on the mix side in Plumbing. Did you see any headwinds in the quarter? And if so, was that really due to International? Or are you seeing some trade down? Maybe just some more color on the mix side of it.

Operator:

Your next question comes from the line of Philip Ng from Jefferies.

Keith Allman:

It's really as we expected. Don't comment so much on inter-quarter as there's obviously a lot of variability with regards to current year in quarter or prior year end quarter, system fill for new product launches and all those sorts of things. But I would say it's as expected and really no comment beyond that in terms of what's happening inside the quarter.

Keith Allman:

Sure. Yes, that was certainly a significant acquisition for Home Depot. And I think that really illustrates their focus, which we've been keenly working with them on the paint side with regards to the Pro, but they continue to be focused on the Pro, and that's consistent with our strategy, and we continue to work very closely with them particularly in our paint business to go after that Pro. And when you look at our stacked comp over the last several years of some 60% in Pro paint, that's indicative of not only the capability of our Behr brand and our service proposition, et cetera, but absolutely of our relationships and their focus on that Pro. So that's key.

Operator:

And your next question comes from the line of Garik Shmois from Loop Capital.

Keith Allman:

In terms of the overall International market, as I said, Garik, it's lagging a little bit in terms of finding the trough, if you will, versus North America. So we're expecting the International market to be down low to mid-single digits. Hansgrohe and that team there has done a phenomenal job and there's no question, while it's certainly difficult to pin down in a particular quarter, the size of the market when you're in well over 100 countries. But clearly, we're outperforming our major competition in Europe and continuing to gain share.

Garik Shmois:

And then just with respect to commodity volatility. Just wondering how you're thinking about pricing over the remainder of the year? You're thinking about or have announced additional price increases to offset.

Keith Hughes:

Similar question as the last one, but on -- in the paint business. What's the outlook for inputs in the next couple of quarters there?

Keith Hughes:

Any upward pressures or may be later out in the year? It sounds like that's a little more of a speculative view.

Operator:

Your next question comes from the line of Sam Reid from Wells Fargo.

Keith Allman:

The way we view pricing is really a function of the strength of our brands and where commodities go as it relates to our ability to drive cost improvement. And there's really no difference in pricing as we think about that strategy as it relates to various channels, and we're going to stay consistent with that. Beyond that, I'm not going to get into specific customer discussions or the like as it relates to pricing. But fundamentally, we look at the -- our capabilities to drive productivities, the strength of our brands and our innovation. And over time, we've demonstrated the ability to get effective pricing over cycles.

Richard Reid:

Awesome. And then switching gears to Plumbing. Last year, you guys were gaining some shelf space on the paint side in a few different kind of subcategories. Just curious kind of how those conversations with Home Depot are coming this year and whether there's any opportunity to kind of continue to gain share in paint as a part of your initiative?

Operator:

Your next question comes from the line of Stephen Kim.

Stephen Kim:

It seems like North America Plumbing margins might have been up like 350 basis points or so. It seems like International margins were down due to the volume. I didn't hear you talk about any specific cost saving programs, kind of general efforts and input costs and things of that nature. But could you talk about any specific cost savings programs that you've got going on in North America Plumbing? And give us a sense for how far along they are? How much more maybe we could expect and things of that nature?

Keith Allman:

It's a mix. Certainly, having efficient direct and indirect labor and that human capital side is part of it. Certainly, providing leadership and expectations and coordination with the technical or the human capital on the engineering side is a big component of it. And technology is a piece. And we're a leader, particularly in Plumbing, in the online and the e-commerce space.

Eric Bosshard:

Two things, if I could. Keith, I appreciate the strategic thinking on pricing and getting value for your brands. I'm curious what you're observing with the consumer regarding price elasticity in an environment where the consumer seems like it's a bit more disciplined?

Eric Bosshard:

And then secondly, you called out Delta growing, I think, 2% or 3% in what looks like a down market. Is that sustainable for that business to continue to grow in the market that is down? And is there anything that was 1Q specific that contributed to the growth of that business?

Operator:

And our last question comes from the line of Rafe Jadrosich from Bank of America.

Keith Allman:

I think pretty consistent, Rafe. I think in that 30% to 35% for plumbing, a little bit lower than that for decorative, that's been consistent with how we've performed, and I wouldn't anticipate any change in that. So -- and then, of course, on the downside, we managed the decrementals, and we've had some really strong performance in terms of having those decrementals be less than those incrementals, which is indicative of how the teams are managing the volatility, but no real change from what we've seen historically as it relates to the drop down on incremental volume.

Keith Allman:

How we work with our channel partners to drive demand is across the whole continuum of having the right price of continuing to drive down our costs through productivity initiatives, to keep a solid pipeline of innovation, I went through some of that earlier in my prepared remarks of what we're doing to make sure that we have that desired place on the shelf and that top of mind performance in the consumer.

Robin Zondervan:

We'd like to thank all of you for joining us on the call this morning and for your interest in Masco. That concludes today's call. Have a wonderful day.

Operator:

Good morning ladies and gentlemen. Welcome to Masco Corporation’s fourth quarter and full year conference call. My name is Slessor, and I will be your Operator for today’s conference call. As a reminder, today’s conference is being recorded for replay purposes. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star, zero for the Operator. I will now turn the call over to Renee Benedict, Director, Investor Relations and FP&A. You may begin.

Keith Allman:

Thank you Renee. Good morning everyone and thank you for joining us today. Before I get started, I’d like to share with you that we have appointed Robin Zondervan as our incoming Vice President of Investor Relations. Robin is currently our Controller and Chief Accounting Officer and will be transitioning to lead Investor Relations at the end of this month. I have full confidence that with Robin’s leadership, we will continue to have a world-class investor relations function at Masco and provide the investment community with the information and transparency you have come to expect from us. Now onto our results. I’ll start this morning with some brief comments on our fourth quarter and full year results, and I’ll finish with our view on 2024 as well as our long term margin expectations. Please turn to Slide 5. We delivered a strong finish to another dynamic and successful year. In the fourth quarter, our top line decreased 2% with volumes down across most categories, partially offset by favorable pricing, currency, and our acquisition of Sauna360. The smaller decline in volume relative to the first three quarters of the year supports our view that many of our markets appear to be stabilizing. Operating profit increased $38 million in the quarter due to a favorable price-commodity relationship as we continued to recover the significant inflation that we have experienced over the past two years and due to our continued efforts to drive efficiencies across our operations. Operating profit margin improved 230 basis points to 14.5%. With our strong execution, our earnings per share for the quarter increased 28% to $0.83 per share. Turning to our segments, plumbing sales were in line with the prior year in local currency with lower volumes being offset by favorable pricing and our acquisition. Plumbing performance in the quarter was led by Delta Faucet’s mid-single digit sales growth driven by strong performance in the wholesale channel. International plumbing performed better than expected in the fourth quarter as demand in Europe and China, while still challenged, appears to be stabilizing. Investments in our leading global plumbing brands, innovative products and customer service are producing results, and we will continue to capitalize on these initiatives. Turning to our decorative architectural segment, sales declined 7% primarily due to a soft DIY paint market, with DIY paint sales declining high single digits. While our propane business declined slightly in the quarter, we are very pleased with our three-year pro paint stacked comp of approximately 60%. This significant growth and share gain demonstrates the strength of our Behr brand and the quality of our products that continue to resonate with pro painters. We will continue to invest in this business to expand our services and build upon our successful collaboration with Home Depot to capitalize on the large opportunity in the pro paint market. Now let’s review our full year performance. Please turn to Slide 6. Masco executed extremely well in 2023 and improved nearly every operating metric for the full year. Gross margin improved 360 basis points to 35.2%. Operating margin expanded 120 basis points to 16.8%. Plumbing margin expanded 210 basis points to 18%. Decorative margin expanded 10 basis points to 17.8%. Earnings per share grew 2% to $3.86 per share, up from $3.77 per share in 2022. We delivered a return on invested capital of 36% and our free cash flow conversion was approximately 122%, which allowed us to return $610 million to shareholders in the form of dividends and share repurchases in 2023, and to complete the bolt-on acquisition of Sauna360 for approximately $136 million. Importantly, we have achieved compound annual earnings per share growth of 14% from 2019 to 2023, delivering on our commitment of double-digit EPS growth through cycles and demonstrating the power of our brands, innovation, and portfolio of lower ticket repair and remodel-oriented products. I want to thank all our employees for their strong execution, focus on the customer, and their continuous improvement mindset that delivered this tremendous performance. Turning to Slide 7, as we look to the future, we are well positioned to achieve strong profitable growth over the next few years through top line growth, market share gains, margin expansion, and disciplined capital deployment. Our current market assumptions for 2024 are as follows. For the North American repair and remodel market, we expect the market to be flat to down low single digits. For our international markets, we expect the markets in aggregate to be down low to mid single digits. For the paint market, we expect the DIY paint market to be down low single digits and the pro paint market to increase low single digits. We expect to outperform the market and for Masco’s overall sales to be approximately flat in 2024. Despite this flat top line assumption, we will continue to improve margins through disciplined pricing, selective cost reductions, innovative product introductions, and operational efficiencies across our business. This margin expansion will not be without its challenges as freight and shipping costs have recently increased, other commodity inputs remain elevated, and other costs such as people-related expenses and insurance are increasing. We are up for the challenge and have demonstrated our ability to execute in dynamic times. We expect to deliver increased plumbing margins of approximately 18.5% and decorative margins of approximately 18% in 2024, resulting in a Masco operating margin of approximately 17%. Turning to capital allocation, our strategy remains unchanged. Firstly, we will reinvest in our business to maintain and grow our leadership positions and win in the marketplace. This includes continuing to invest in our growth initiatives such as growing our share in the domestic plumbing wholesale channel, continuing to expand our international plumbing share, and continuing to gain share in pro paint. It also includes investing in our facilities to ensure we have the capacity to support future growth by completing our European faucet and shower facility and our midwestern paint manufacturing and distribution center. Secondly, our capital allocation strategy is to maintain a strong investment-grade balance sheet with gross debt to EBITDA levels of below 2.5 times. Our balance sheet remains extremely strong with gross debt to EBITDA of 2 times at year-end. Thirdly, we have a targeted dividend payout ratio of 30%. I’m pleased to share that our Board declared a 2% increase in our dividend for 2024, which will bring our annual dividend to $1.16 per share and marks the 11th consecutive annual increase. Fourth and finally, we expect strong free cash flow conversion in 2024 of approximately 90% and will deploy that free cash flow after dividends through share repurchases or acquisitions. Based on our projected free cash flow, we expect to deploy approximately $600 million through share repurchases or acquisitions in 2024. Our M&A strategy has not changed. We continue to review and selectively pursue opportunities that have the right strategic fit and the right return for Masco with the goal of adding 1% to 3% top line growth through acquisitions annually. Based on our expected operating performance and capital deployment actions, we anticipate earnings per share for 2024 to be in the range of $4 to $4.25 per share. Now looking out over the next three years, we will continue our strong execution and deliver margin expansion through 2026. For our plumbing segment, with our industry-leading brands including Delta and Hansgrohe, we expect to expand margins to 20% in 2026, up from 18% in 2023. For our decorative segment, led by our industry-leading Behr brand, we expect to achieve margins of 19% to 20% in 2026, up from 17.8% in 2023. This would result in overall Masco operating profit margins of approximately 18.5% in 2026. We believe we can achieve these margins with normalized 3% to 5% repair and remodel industry growth in ’25 and ’26 through leveraging incremental volume, exercising pricing discipline, and executing operational improvements. While 2023 clearly saw a reduction in demand, we believe that our markets will stabilize in 2024 and return to typical growth rates in 2025 and 2026. Structural factors are supportive of increased repair and remodel activity in several ways. Many homeowners have taken advantage of low mortgage rates and are likely to remain in their homes longer. 1.7 million more homes will reach the prime remodeling ages of 20 to 39 years old over the next three years, and home equity levels remain high. All of these structural forces provide tailwinds for our business and increase our confidence for a strong repair and remodel market. We will continue to invest in our brands, capabilities and people to outperform the competition in both the near and long term. With favorable fundamentals and our continued focus on executing our growth strategy, together with our strong free cash flow and capital deployment, Masco is well positioned to continue to drive shareholder value over the long term. Now I’ll turn the call over to Rick to go over our fourth quarter, full year and 2024 outlook in more detail. Rick?

Operator:

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. [Operator instructions] Your first question comes from John Lovallo. Your line is now open.

Keith Allman:

John, thanks for the question. I haven’t changed my opinion on our ability to gain share, which is that we expect as a company to both outperform the market and to expand margins, and we expect to continue to do that, so we will outperform the market and that’s driven primarily by our brands, which have developed over the years, as you know, to be leaders in their spaces, so there is both consumer pull as well as trade pull, where we’re well recognized by plumbers and pro painters as a quality brand, our service proposition as it relates to our channel partners, to be able to help them drive profitable growth with minimal inventory positions due to our repeatable delivery and service, and our people and our teams around the globe. Our expectation is to outperform the market. Now, in some spaces that we compete with, there will be greater share gains; in other spaces, where we already have substantial leading market share, those share gains will be more modest, but we definitely expect to outperform the market going forward.

Keith Allman:

Well, I think if you--you know, ’24, we believe is going to be flattish on the top line and probably more modest as it relates to margin improvements, and when you think about--when we think about our innovation pipeline and our projects that will drive efficiency and cost reductions, which will lead to that margin improvement, those happen more towards the out years and will take some time to settle in and to be realized into the P&L, so I would say there’s a bit of that margin acceleration in ’25 and ’26, primarily. When you think about it, John, the biggest driver will be the drop down in incremental revenue, and we have very strong, let’s call it 25, plumbing it’s knocking on 30% drop down on the incremental volume, and our plan, as we said, is to--our belief is that we’ll be relatively flat in ’24 and then in ’25 and ’26, when we think about the health of the consumer, when we see what’s happening and believe what will continue to happen with regards to stabilization as it relates to rates, etc., we’re expecting more of a typical growth rate in ’25 to ’26, call it in that 3% to 5% growth in R&R. Now, there is--we look at the same analytics and we listen to a lot of the same people as it relates to analytics around expectations, and a lot are calling for significantly more than that. We’re not - we’re just basing our ’25 and ’26 on more of a historical 3% to 5% R&R growth rate, so that will be a significant contributor to margin expansion as well.

Operator:

Your next question comes from Matthew Bouley from Barclays. Your line is now open.

Keith Allman:

Hey Matt, good morning. I think when you think about the improvement rate that we’ve seen this year, we’ve had some pricing catch-up that we had to do against some, as you know, fairly significant cost inflation, so that was a component of it. When we think about ’24, we have operational improvements that we’re going to continue to drive. When we think about the benefit of pricing, we’ll see, I would say a little bit of a headwind in our paint business. We’ve talked consistently about our relationship with our channel partner as it relates to price, where we keep our operating income dollars whole and match commodities with price, but that affects margin, and it affects it both ways where you go up or go down, so there will be a slight headwind in pricing in our decorative business and probably a slight tailwind in our plumbing business. To your direct question in terms of the rate of margin improvement, I think it really--that really points to--it really answers your question as it relates to pricing. Where we will see margin improvement, despite calling for a flat top line in ’24, is in the efficiency improvements that we’re going to continue to drive with our projects that we have in flight.

Matthew Bouley:

Got it, really helpful. Thanks for that. Then second one, just actually coming off that last point there, Rick, the cadence to the top line in ’24, obviously there’s been a lot of volatility in R&R end markets probably more recently year to date, maybe some noise around weather and all that. Can you just put a finer point around that early 2024 expectation - you know, how is demand tracking year to date, any kind of color on some of the volatility or improvement as you get into Q2 and beyond? Thank you.

Richard Westenberg:

Yes, and what I would say is it’s in line with what our guidance is indicating, so there’s nothing inconsistent with that, which is we do expect some stabilization, as Keith mentioned, but a bit softer, so down slightly in the first half of the year - that’s kind of what we’re seeing in the market today, but we are seeing some stabilization globally.

Keith Allman:

Thank you.

Stephen Kim:

Yes, thanks very much, guys. Appreciate all the info here. Could you talk a little bit more about the trends you’re seeing in hardware and lighting within the dec-arc business, and how that figures into your fiscal ’24 guide and maybe also your long term margin targets for dec-arc?

Stephen Kim:

Yes - well, within the hardware and lighting, that was pretty much what I was looking for. Then as I think more broadly about your guide for next year, I think Matt touched on it, but I just wanted to take a finer point. Are you saying--could we see sales and margins on a year-over-year basis be down in 1Q, or is that not what you’re envisioning?

Stephen Kim:

Okay, that’s very helpful. Appreciate it, thanks very much.

Operator:

Your next question comes from Michael Rehaut from JP Morgan. Your line is now open.

Keith Allman:

Our margin improvement expectations, and frankly the history of it, has been driven by a basket of initiatives that we drive. Certainly there is the incremental margin improvement that comes from incremental volume, so that drops down at, call it 25% to 30%, and that’s certainly above our fleet average of the company, so that’s the significant driver in our margin expansion. But it’s also part of the benefits of our continued investments in innovation, so we have an innovation pipeline and an expectation over those years to be launching margin accretive products and products that both contribute to our market outperformance on the top line, as well as margin improvements. We’re very excited about the momentum we have in terms of the Masco operating system and what that’s been able to produce in terms of leverage in our factories, in term of variable overhead. In addition to the new product launches and our brand building, in addition to the benefit to the top line, that gives us also pricing power, and we’re confident in that and being able to have that be a contributor to margin expansion as well. The big driver would be the drop down in the incremental volumes, but we also have a pipeline and defined initiatives around labor productivity, variable cost productivity, etc. to drive the margin expansion.

Michael Rehaut:

Okay, that’s helpful color, I appreciate it. I guess maybe secondly, kind of staying on this topic for a moment, you look at the decorative margins on average between 2015 and 2021, the segment averaged 19.5%, 19.4%, so it kind of seems like you’re getting back to that midpoint, whereas maybe plumbing, you’re getting a little bit above that, which kind of more speaks, I think, to the volume leverage. Just wanted to make sure I’m thinking about this right in that--you know, is the right way to think about this is that the operating leverage, the incremental margins much more so comes through on the plumbing side over the next couple years, whereas decorative, it kind of seems like you’re getting back to that historical gross margin, and maybe there’s some perhaps even deflation that is a margin benefit over the next couple of years as more recently, when you had an inflationary environment that was margin dilutive. Just trying to think about returning to that historical average and what’s assumed in decorative, because if I’m thinking about this right, it does seem like the incremental margins on sales leverage more so apply to plumbing than decorative, and would love any thoughts on that if I’m not thinking about it the way you are.

Michael Rehaut:

All right, perfect. Thanks so much, appreciate it.

Anthony Pettinari:

Good morning. Can you discuss price-cost spread in plumbing and DA in 4Q, and maybe any updated expectations around brass carryover? Then just thinking about COGS, maybe more holistically, what level of cost inflation does the full-year guidance contemplate?

Anthony Pettinari:

Okay, that’s very helpful. Then this is maybe just a minor point, but in terms of the DA margin target in ’26 being a range versus plumbing and company targets single points, is that the pricing mechanism you discussed, or just any background there?

Anthony Pettinari:

Okay, that’s helpful. I’ll turn it over.

Susan Maklari:

Thank you. Good morning everyone.

Susan Maklari:

My first question is thinking about the macro and what that could imply for the business this year. There’s increasingly an expectation that rates will move down as we get later into the spring and the summer, and as we think about that perhaps driving that existing home sales coming back, how should we think about the timing of those events relative to how you could start to see that coming through in the business, and what are the segments that could be most benefited by that?

Susan Maklari:

Okay, that’s helpful. Then shifting to the working capital, you’ve made a lot of really impressive progress there over the last year. As you think about ’24 and just the go forward, what’s the ability to continue to drive benefits from that, and anything you’d highlight there?

Susan Maklari:

Okay. Thank you and good luck with everything.

Richard Westenberg:

Thank you.

Adam Baumgarten:

Hey, good morning everyone. I believe you mentioned on the call that paint pricing was lower in ’23. I guess a couple questions - one, when did that occur throughout the year, and is the outlook for ’24 that you mentioned down based on just the carryover, maybe from some of the movements in ’23, or do you expect incremental pricing pressure beyond what you maybe recently saw?

Keith Allman:

To your point, Adam, there would be some carryover, obviously, with it being a little bit--the price give-back a little bit later in ’23.

Richard Westenberg:

That’s a good question. Yes, as I mentioned, first of all as I mentioned in my opening comments, I’m really excited to be part of the Masco team and the strong business and operations and portfolio that we have. I’m really excited about the portfolio brands and products in the business. I’ve had the opportunity to really get out and meet all of the business unit leaders, and I’ve been out to many of the business units - I was actually in Germany at Hansgrohe last week, really impressed with the team and really impressed with the mindset in terms of the Masco operating system and the mindset of continuous improvement, operational efficiency and cost reductions. I think we need to continue to exercise ourselves in that regard. I think with regards to opportunities, it’s really leveraging the mindset that we have here at Masco and across the business units, as well as leveraging our scale as we continue to grow the business and drive that productivity and that efficiency, really across all of our business but particularly on the plumbing side as we look at our global business.

Richard Westenberg:

Thank you Adam.

Mike Dahl:

Hi, thanks for taking my questions. I wanted to ask again about costs - I think a question was asked earlier around price-cost spread, and I heard the comments around price. I didn’t hear specifically your expectations for input costs for both segments that are embedded within the ’24 guide, so could you address that please?

Keith Allman:

Mike, specifically we’re thinking in plumbing, relatively flat commodities, sort of staying where they are now, and for paint inputs, while they’ve moderated sequentially when you look at resins, we are seeing a little bit of deflation in those input costs, but other costs, including copper-zinc, TIO2, they’re moderated--excuse me, they’ve moderated more and they will moderate a little bit more, but not significant benefit.

Richard Westenberg:

Mike, those are the two, really. Working capital, I think Sue had asked in terms of that dynamic, we do expect a little bit of build in working capital in 2024. We’ll watch that, obviously, but we’ve got it down to a pretty balanced level right now, so as the market returns, we expect some building working capital. Capital expenditures, as you noted, will be down year-over-year from ’23 to ’24, but it’s still higher than our depreciation and amortization, so our capex guidance for 2024 is $200 million, our D&A is $160 million, so that capex versus D&A is another contributor to the 90% guide.

Richard Westenberg:

Sure.

Truman Patterson:

Hey, good morning guys. Rick, looking forward to working with you going forward. First question for me, in your plumbing segment, your supply chain is heavily reliant on shipping products to the U.S. and Europe. I’m hoping you can give an update on some of the Red Sea shipping issues currently, any supply chain issues or incremental costs embedded in your ’24 guidance.

Richard Westenberg:

Truman, to your other question, although we’re seeing elevated costs, so far our service levels have been able to be retained, and so we’re not having disruption per se but we’re watching, obviously, the dynamics closely.

Keith Allman:

We do think that how we have repositioned our portfolio, Truman, to be the lower priced, lower ticket repair and remodel focus is more resilient than the higher priced, higher ticket items that are oftentimes more associated with new construction, so when you compare our type of project that a consumer would execute with paint, plumbing, lighting, hardware, etc., those tend to be more resilient than the bigger tickets, say cabinets and windows, which I’m very familiar with. So yes, we think that bodes well, and that fits in with the strategy and how we aim to be attractive, and who we aim to be attractive to as it relates to investors, as it relates to a higher margin, more resilient, less cyclical portfolio, and that’s really important to us. We’ve demonstrated, as we said, the ability to meet our commitment of double digit EPS growth through cycles when you look at 14% EPS CAGR from ’19 through to where we are today, 2023, so we’re very pleased with that and we think that is partly driven--more than partly driven by the reconfiguration of our portfolio, so that’s a significant part of it. Remind me of your second question, Truman, the second end of that?

Keith Allman:

Sure. We’re going to continue to invest in our share gains and continue to outperform the market, as we have up to 2023. To highlight a few of those, we’re particularly focused on the showroom channel in plumbing, and that involves our channel relationships with and our programs to drive growth. Our innovation pipeline is certainly a part of that brand and the pull that we have, as I mentioned before, both from the trade and the consumers is part of that. We’ve invested extensively in involving showroom associates and creating advocacy in the showroom market, so it’s not just about products, it’s also about capturing the hearts and minds of the folks in the showroom that sell our products, as it relates to involving them in literally in the design of our products, and we treat that as an operational type of exercise for us to create advocacy. We measure it and we drive it. Certainly pro paint - when you look at our pro paint, Truman, on a stacked basis over the last three years, we’ve driven 60% growth - six-zero. I know a year, year and a half ago, there was a lot of questions on the stickiness of that demand, and we’ve proven that we’re not only able to maintain those share gains but also intend to grow those share gains, and that’s through service, through having the right product in the can, obviously, but through our overall competitiveness as it relates to as applied costs and jobs. Look at our net promoter scores that we’re clocking on our new and existing pro paint customers - it’s industry leading, so we feel really good about that, so there’s a couple areas there, plumbing, wholesale, pro paint, but we’re really driving across the board an expectation of market outperformance and margin expansion.

Keith Allman:

Thank you.

Garik Shmois:

Hi, thanks for squeezing me in. First question is just on the 2026 margin targets. I was wondering if you could speak to maybe some of the levers you can pull more on the cost side if the remodeling market doesn’t, say, recover to that 3% to 5% expected range.

Garik Shmois:

Understood, thanks for that. I wanted to follow up just on one of the bigger ticket item businesses that you offer. Your cited bigger ticket is likely to remain--is more volatile or perhaps underperform smaller ticket, and just wondering about the spa business, what you’re assuming for that in 2024, maybe if we exclude the Sauna360 deal. What are you expecting on an organic basis?

Garik Shmois:

Sounds good. Thanks again, best of luck.

Operator:

Ladies and gentlemen, this concludes today’s conference. Thank you for joining. You may now disconnect.

Operator:

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter 2023 Conference Call. My name is Jerry 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 Renee Benedict, director of FP&A and Investor Relations. You may begin.

Keith Allman:

Thank you, Renee. Good morning, everyone, and thank you for joining us this morning. Before we get into our results, I want to take this opportunity to welcome Masco's new CFO, Rick Westenberg, who joined the team on October 16th. Rick is an accomplished executive with more than 25 years of experience, including nearly 15 years leading global finance organizations. We're excited to have Rick on board and look forward to him participating in our fourth quarter earnings call in February. I would like also to take this time to thank Dave Chaika for serving as interim CFO over the last several months. Dave quickly stepped into the position and successfully led our finance team during this transition and we greatly appreciate his support. With that, let's turn to our third quarter results. Please go to slide 5. In the third quarter, we demonstrated our ability to execute and the earnings power of our business model despite a challenging environment, which saw a top-line decreased 10%. Volume was down 12%, partially offset by pricing actions and favorable currency impacts of 1% each. While sales were down $225 million, our continued focus on driving cost savings initiatives and a favorable price-cost relationship resulted in an operating profit decline of only $2 million in the quarter. This strong execution resulted in operating profit margin expansion of 170 basis points to 17.6% and a decremental margin of only 1%. Our earnings per share for the quarter grew 1% to $1 per share. Turning to our segments. plumbing sales declined 11% and local currency with North American and International Plumbing, each declining 11%. In North American Plumbing, overall demand remained soft with the wholesale and e-commerce channels performing moderately stronger than the retail channel. In International Plumbing, demand trends weakened in our key markets of Europe and China in line with our expectations. We continue to expect our overall International Plumbing market to be down high single digits for the full year. Despite the top-line decline, we successfully drove plumbing margin expansion of 230 basis points to 18.9% in the third quarter. This strong margin performance was driven by pricing actions, commodity and freight deflation and significant cost savings initiatives, particularly in our North American plumbing business. We also completed the strategic bolt-on acquisition of Sauna360, a leader in the sauna, steam, and infrared wellness industry. This acquisition complements our spa business, expands our wellness product offerings and leverages Watkins expansive dealer networks. Turning to our Decorative Architectural segment, sales declined 10% in the quarter. DIY paint sales declined low double digits. Propane sales declined low single digits against a mid-teens comp in the third quarter of 2022. On a three-year stack basis, our propane comp is over 65%, demonstrating a significant market share, we have captured with propaners through the strength of the Behr brand, quality of our products and our commitment to exceptional service. Together with our partner, the Home Depot, we believe we have a significant opportunity to continue to grow share in the propane market. Additionally, we are honored that Behr was recognized as the Home Depot 2023 Marketing Innovation Partner of the Year. This recognition is a testament to our creative marketing campaigns and our 45-year partnership with the Home Depot. Turning to capital allocation. We continue to generate significant free cash flow during the quarter and maintain a strong balance sheet. As a result, we executed on our balanced capital deployment strategy and returned $109 million to shareholders through dividends and share repurchases, including buying back 800,000 shares for $45 million in the quarter. Now, turning to our outlook for the remainder of 2023. With our strong execution, we now anticipate earnings per share for 2023 to be in the range of $3.65 to $3.75 per share, up from our previous guidance of $3.50 to $3.65. While the near-term demand for the repair and remodel market remains uncertain. We will stay focused on controlling what we can by closely managing costs, minimizing the impact of lower volumes and driving our margins back to at least 2019 levels of 18% each segment. We believe our portfolio of low-ticket repair and remodel products, our market-leading brands and innovation, and our geographic diversification positions us for growth and stability through cycles. As we look over the longer term, we believe the fundamentals of our repair and remodel markets are strong and supportive of long-term growth. These include high home equity levels, the age of housing stock, and home owners staying in their homes longer. We remain committed to investing in our brands, capabilities, and people to drive strong growth when market conditions improve. With favorable fundamentals and the continued successful execution of our growth strategy, along with our free cash flow and disciplined capital deployment, we are well positioned to drive value creation for the long term. On our fourth quarter call, we will provide our 2024 outlook, as well as an updated view on the margin expansion potential of our business over the longer term. I'd like to conclude with a thank you to our employees for their hard work and dedication to driving operational excellence and delivering for our customers and shareholders. Now, I'll turn the call over to Dave to go over our third quarter results and 2023 outlook in more detail. Dave?

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Michael Rehaut of JPMorgan. Please go ahead.

Keith Allman:

Good morning, Mike.

Michael Rehaut:

I wanted to start with the increased guidance and driven by the higher margin outlook, and really zero in a little bit on kind of the drivers of each and specifically trying to think about cost saving initiatives, as well as raw material trends and how we should think about any of these benefits as perhaps they've begun to accrue as you've moved throughout 2023. And if there's any way to think about carryover benefits on either the cost saves or the raw materials trends as we look into 2024.

Michael Rehaut:

Okay. Appreciate it. I guess secondly, we had a competitor last night talk about in early thoughts around 2024 and kind of shared expectations for the market to be down slightly based on current trends. I was wondering if that's something that at this point again, given how you’ve seen the trajectory play out so far in 2023 and given still kind of depressed, existing home sale turnover. If that kind of matches directionally at least the way you're thinking about things at this point and how you overall kind of characterize the demand backdrop, I know, as you've kind of noted 2023 has played out as you've largely expected. but clearly, some of the headwinds appear to be you know at least in place as we're entering ‘24 at this point.

Michael Rehaut:

Great. That was -- I appreciate the answer and the thoughts, Keith. Thanks very much.

Joe Ahlersmeyer:

Hey, everybody. good morning and thanks for taking the question.

Joe Ahlersmeyer:

I was wondering, I know you don't disclose price for your Dec Arch segment, but I was wondering if you could give at least directionally if price added to the top line in the quarter and margin in the quarter. It didn't look like it was maybe, the first quarter, where you didn't call it out.

Joe Ahlersmeyer:

Right. That makes sense. So, there's a follow -up. As you're talking about getting back to 18%, that includes, I suppose, the deflation plus giving back the price, because that's the mechanical margin benefit on the way down, right?

Joe Ahlersmeyer:

Understood. All right. Thanks a lot.

Sam Reid:

Awesome. Thanks so much guys for taking my questions here. I wanted to maybe dig a little bit on propane. It's been a great growth engine for you guys. I understand there's been a little bit of give back this year. Can you give us an update though on what the next leg of growth is from here and maybe touch on some of your initiatives specifically? I’m thinking job site delivery and maybe, where you are in terms of building out your propane sales force?

Sam Reid:

That's helpful. And maybe one more on paint, touching more on backlogs here. So, just do you have a sense as to where those backlogs sit for your propane customers? And then maybe, another one just on project sizes. Are you finding that project sizes maybe are mixing a little bit smaller, but that's still keeping pros relatively busy? Thanks.

Keith Allman:

We haven't really seen a significant change in our ticket size.

Operator:

Our next question comes from the line of Matthew Bouley of Barclays. Please go ahead.

Keith Allman:

Yes, Matt. it's always tough to tell if you're on the bottom or you're coming up, where we are in terms of stability. It's a volatile time period for sure. We have seen softening in international, in central Europe. Germany's economy is under a little bit of pressure. Of course, we've talked about China and we understand what's happening there. We do expect the softening to continue. I should say, we do expect it to be soft in Q4. hansgrohe is very resilient. We are gaining share significantly in Europe. So, to combat those choppy market conditions, the team has just gone to work and really penetrated not only in Europe, but also doing a fine job holding up in China and continuing to grow in some of our higher growth markets. In terms of where we see ‘24, I'm not going to get into the specifics of calling it down on the region, but a region-based [ph] that we are beginning to see some favorable signs in terms of more steady demand coming out of Europe and that that gives me a lot of positivity.

Matthew Bouley:

Got it. Okay. Thanks for that guys. and then second one on the retail channel, it sounded like it might have been a little weaker and plumbing relative to wholesale, clearly on the paint side. You might have seen DIY decelerating a bit. I'm curious what that means for a promotional activity. What are you kind of seeing at the retail level? in terms of trying to address some of that kind of deceleration out there and how might that impact your margin outlook. Thanks, guys.

Matthew Bouley:

Great. Thanks, Keith. Thanks, Dave. Good luck, guys.

David Chaika:

Thanks, Matt.

John Lovallo:

Good morning, guys. Thank you for taking my questions. The first one is, you know, what did you see in terms of plumbing mix, was geographic mix still a headwind internationally? And then in terms of plumbing pricing, I think it was 4% through the first half. I think it was 3% in the third quarter. Are you expecting further tapering as we move into the fourth quarter?

John Lovallo:

Understood. And then paint and coatings revenue was down high single digits and total segment sales were down 10%. How much was the hardware business down and what are you seeing there and what were sort of the drivers of the declines there?

John Lovallo:

Got it. Thank you, guys.

Operator:

Our next question comes from the line of Adam Baumgarten of Zelman. Please go ahead.

Keith Allman:

No, nothing beyond really what we've talked about. We may see a little bit more of international mix in our plumbing segment that could provide a little bit more headwind. Dave, maybe you can add color on to that. But we've -- the fourth quarters typically are slowest from a seasonality perspective. We do have costs that come in the fourth quarter, such as threw up on various accounts, compensation accounts and that sort of thing, that can have some headwinds. We've got a little bit of -- we bring up and start to more aggressively ramp up our new factories. We have a new paint facility outside; Columbus in Ohio and we have a new plumbing plant in Serbia. So, there'll be a little more expenses there in headwinds. But I think it's -- when you think about our margin and where we're going to be driving this in ‘24, I think it's best to think about the full-year ‘23 margins and then that strong incremental that I've talked about earlier on the call as it relates to share growth.

Adam Baumgarten:

Okay, got it. That's helpful. And then just maybe, if you could touch on POS trends at retail throughout the quarter and maybe, into October, if you're willing to share that.

Adam Baumgarten:

Okay. Thanks. That’s all I have.

Susan Maklari:

Thank you. Good morning, everyone.

David Chaika:

Good morning, Su.

Keith Allman:

I'd characterize it by saying it's a mixed bag, Susan. When we look in Europe, we did see a pullback in the consumer, and there's some noise there with various legislation that's been, it's now clarified to a degree anyway, more than it was last time we talked as it relates to driving for non-fossil fuel heating systems in central Europe and Germany. and that taking away some of the consumer's willingness to spend on, say, battery model projects and that sort of thing as they're concerned with putting in greener heating systems per what they thought was pending legislation. It looks like that's going to now be protracted out to 2028. So, we expect that consumer to start to come back. So, in Europe, the consumer was kind of a little later to the game in the pullback, if you will and is now coming back in Europe. In the U.S., holding up fairly well for us. as expected, I should say, so we're not seeing any accelerated slowdown whatsoever. Again, I think there's a lot of volatility and uncertainty, and it's the full impact of inflation, I think is yet to be seen in the consumer. but by and large, the consumer is still holding in pretty good for us and our products. And I think that's driven by the bang for the buck, if you will, that the consumer sees in painting a room, and in changing our faucets and light fixtures, where it's a relatively inexpensive investment in your home. I think with work from home, where that's not fully going to go back to everybody working in the office, and that puts more wear and tear on the paint, and it's not that expensive to do it and you can do a DIY if you want. So, I think that combination has helped us.

David Chaika:

Susan, I would add to it, I mean, consumers clearly have been resilient. [indiscernible] consumers now since there have been significant increase in rates and inflation over the past couple of years. That said, they have demonstrated they are resilient when you look at home medically levels, they're feeling very good about their home. So, we do think that when things do stabilize that, that consumer will be very interested in remodeling their homes and as Keith alluded to, we do think there will be a nice pent-up demand that we fully intend to capitalize on.

David Chaika:

Yes, Susan. Our typical philosophy is to allocate all of our free cash flow after dividends to share repurchases or acquisitions. So, with our significant cash flow and our pausing of share repos in the third quarter, we do tend to be fairly aggressive here in the fourth quarter. And then we talked about allocating $225 million likely towards share repurchases. If you look at ‘24, I think if you follow that basic formula of excess free cash flow, free cash flow after dividends allocated to share repurchases or acquisitions, you'd be right in the ballpark on how we're thinking about share repos for next year.

Keith Allman:

Thanks.

Garik Shmois:

Hi. Thanks for taking my question. Question on DIY paint, just if you move to down low teens year-on-year versus down a little single digits, I think in the second quarter. Just curious that was a sizeable change on year-on-year basis, just curious how trends performed sequentially there.

David Chaika:

Garik, I would say that the fundamentals are still supportive of DIY paint, particularly when you think about millennials going into the housing market. And the basic research that we've done is that these -- that the millennials are DIY-ers, and not only for a single project, but they're returned DIY-ers. And paint, as we've shown with regards to, if there is such thing as a fun DIY project, that's how it's viewed. And our positioning with that is favorable for us.

Keith Allman:

Well, container costs have come down off their peak levels. That certainly has helped with freight. Some of our metals, such as zinc is off the ‘22 high. Copper, I think, is at about 350 a pound now. ‘22 high was closer to four bucks. So that's come off. Now, we haven't really seen that roll through the P&L, because of the time in the water and then the flow through of our inventory. But that would be a ‘24 tailwind for us. All in all, in plumbing, let's call it low single-digit deflation for the year. In paint, certain input costs have moderated. We've seen resins moderated a little bit. We're starting to see a little bit of deflation in the third quarter, but still inflation based on a full year. It's not, we believe -- not going to be enough to cover the inflation we saw in the first half. So, let's call it approximately flat all in for the total company for the full year. And then the reduced commodity costs that we're seeing in the back end of the year here would be benefits for us in ‘24.

Operator:

Our next question comes from the line of Stephen Kim of Evercore. Please go ahead.

Keith Allman:

Yes. When you look across, Stephen, our segments and within segments, not everything is the same margin. So, there is a distribution of margins. And when you think about hardware, hardware is lower margin than paint. And that is an area, where we're looking to improve. And I will tell you that 18% is the target that we're shooting for now, but we think we have a significant room to continue to drive that even higher. And as I mentioned in my prepared remarks, we'll be talking about, where we see some long-term margin targets on our call next quarter. Within plumbing, we have a broad plumbing platform and we've talked before about how there's a continuum of margin in that platform from some of the beautiful chrome-plated jewelry in the kitchen and bath in plumbing to some of the less decorative components, say, of a plastic shower pan that we would install in our bathing business. So, there is variability in margin and I think the key takeaway I'd like to share with you is that we've demonstrated the ability to execute and drive margin, be it with our focus on where we play and with our masco operating system to drive efficiencies. So, we'll be tackling the whole business. But yes, there's variability, of course, across our segments.

Keith Allman:

Well, there's not a whole lot of variability when we look geographically and we look at margin variability on a product-type basis. We look at margin variability based on the raw component makeup of the products. We look at margin variability across channels. So that's all part of our operating system that we used to drive improvements. but we're not going to break it out specifically by those components as we talk here.

David Chaika:

Hey, Steve. we have made very nice improvements on the productivity line. Recall we had some inefficiencies in the back half of ‘22, particularly in plumbing that we've done a very nice job getting on top of. I'd say in terms of bucketing the biggest drivers clearly getting our price cost relationship back to where it should be throughout this year. So, we've had very nice cost recovery this year since we did lag it a bit last year. So that's the biggest bucket. The productivity is a nice tailwind to help with that, but the biggest bucket is the price cost recovery.

Keith Allman:

Thanks, Steve.

Truman Patterson:

Hey. good morning, everyone. Thanks for taking my questions. Keith, just wanted to follow up. You mentioned that brass deflation for the year should kind of run in the down low single-digit percentage. Should we assume that was likely inflationary in kind of the first quarter and perhaps the fourth quarter is trending down maybe in the mid-single-digit percentage or better range as we said today?

David Chaika:

Yes, Truman. I'd add too. Just the copper and zinc are down, but they have been bouncing around too. They've gone down these levels. They've gone back up close to the ‘22 averages. So, it would run with that consistently through ‘24 at this point, but it does look like it'll be a little bit of a benefit.

Keith Allman:

Yes. I'd say investments were roughly in line with what we anticipated in 3Q, maybe a little bit light. We do plan to continue to invest in our business as Keith talked about. It will impact a little bit on the fourth quarter, but roughly in line with probably what we saw in 3Q. I'd say the margin improvement is much more of our -- as we've talked about the productivity improvements, as well as getting the price-cost relationship back to where it should be.

Keith Allman:

Thanks, Truman.

Phil Ng:

Hey, guys. thanks for squeezing me in. I guess for you, Dave, you kind of mentioned price cost was a huge driver for margins this year, particularly plumbing. Your products have obviously resonated with consumers and shown good pricing power and your competitor has actually alluded to taking price next year in plumbing. Do you have any pricing actions geared for 2024? And when we look at the pace of price cost spread widening this year, do you see that spread widening, the pace of that spread widening even faster perhaps next year?

Phil Ng:

Okay. Keith, just to clarify, you meant 3Q price increase in plumbing. That was last year, right? Not so much.

Phil Ng:

Okay. makes sense. And then on the DIY side of things for paint, any color on where volumes are shaking out right now has a fourth quarter in terms of your guidance relative to pre-COVID levels. And Keith, you kind of mentioned that you see good momentum going forward long-term on DIY, just given the millennial cohort. Do you see that kind of flipping in 2024 in terms of trends in DIY versus wholesale? The pro channel has definitely held up much better than DIY this year in the retail channel.

Phil Ng:

Okay. Thank you. Appreciate the color.

Operator:

Good morning, ladies and gentlemen. Welcome to the Masco Corporation's Second Quarter 2023 Conference Call. My name is Michelle, and I will be your operator for today's call. As a reminder, today's conference is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Renee Benedict, Director, Investor Relations and FP&A. You may begin.

Keith Allman:

Thank you, Renee. Good morning, everyone, and thank you for joining us today. Please turn to Slide 5. I'm pleased with our performance in the first half of the year. We have demonstrated the resiliency of our business and our ability to mitigate the impacts of volatile market conditions, while maintaining our focus on growth, productivity and shareholder returns. In the second quarter, our top line decreased 10% against a strong 8% comp. Volume was down 12%, partially offset by pricing actions of 4%. While sales were down $225 million, our operating profit only declined $10 million due to strong cost recovery and improved operational efficiencies. This solid execution resulted in operating profit margin expansion of 140 basis points and a decremental margin of only 4%. In addition, our earnings per share for the quarter grew 3% to $1.19. I'd like to thank our employees for their dedication and continued efforts to execute on our strategic initiatives and deliver strong results. Turning to our segments. Plumbing sales declined 10% in local currency, with North American and international Plumbing declining 12% and 8%, respectively. In North American Plumbing, demand trends continue to be soft across channels and product categories. In International Plumbing, as expected, the slowing demand we began to see in Europe and China in the first quarter continued into the second quarter. We continue to expect our International Plumbing market to be down high single digits for the full year. Despite the topline decline, our Plumbing margin expanded 270 basis points to 20% in the second quarter. This strong margin performance was driven by pricing actions taken to recover the significant inflation we have experienced as well as improvements in operational efficiencies, particularly in our North American Plumbing business. We are focused on driving our operating profit margins back to at least the 2019 level of 18% over time, and I'm pleased with the progress we are making in the Plumbing segment. We also executed on our bolt-on acquisition strategy by entering into an agreement to acquire Sauna360, a leader in the sauna, steam, and infrared wellness industry. This acquisition complements our spa business, expands our wellness product offerings, and leverages Watkins expansive dealer network. We expect this transaction to close in the third quarter. Lastly, in Plumbing, we are pleased that Delta Faucet was named Showroom Partner of the Year by one of our large plumbing wholesale customers, demonstrating the value we provide to our customers and our strength in the wholesale plumbing channel. Turning to our Decorative Architectural segment, sales declined 8% in the quarter against a strong 15% comp. PRO paint declined mid-single digits against a robust comp of approximately 40% in the second quarter of 2022. DIY paint sales declined low single-digits against a strong low teens comp. During the first half of the year, we secured additional shelf space in adjacent product categories, launched new products, and invested in our PRO paint business. This demonstrates the strength of our Behr brand, quality of our products, and our commitment to exceptional service performance. Our over 40-year relationship with our paint partner, The Home Depot, is extremely strong and we believe we have a significant opportunity to continue to grow share together in the propane market. We're also excited to announce that we will begin distributing product from our new paint distribution and manufacturing facility located in Central Ohio in early September and we expect to begin producing paint in the new facility in the first quarter of next year. This new facility enables our paint business to continue to provide superior levels of service expected of us and the capacity to accommodate the growth we expect in this business. Turning to capital allocation, we continue to generate strong free cash flow during the quarter and maintain a solid balance sheet. As a result, we executed on our balanced capital deployment strategy and returned $89 million to shareholders through dividends and share repurchases, including buying back 500,000 shares for $25 million in the quarter. With the pending acquisition of Sauna360 for approximately €125 million, our share repurchases for the year will be approximately $350 million. Now, turning to our outlook for the remainder of 2023. As a result of our strong execution during the first half of the year, we now anticipate earnings per share for 2023 to be in the range of $3.50 to $3. 65 per share, up from our previous guidance of $3.10 to $3.40. In this uncertain environment, we remain focused on closely managing costs, minimizing the impact of lower volumes and driving our margins back to 2019 levels. We will continue to invest in our brands, capabilities and people to outperform the competition and deliver returns for investors, both in the near and long term. We believe we're well positioned to weather the challenging near-term demand environment and have strong long-term fundamentals in our repair and remodel markets. Structural factors such as high home equity levels, the age of housing stock and a homeowner staying in their homes longer, will drive increased repair and remodel activity in several ways. Home equity levels, which are highly correlated to repair and remodeling, remain at record levels due to rapid home price appreciation and can withstand significant pullbacks in home prices and still be above 2019 levels. Also, 1.8 million more single-family homes will reach the prime remodeling ages of 20 to 39 years old through 2027. Households with homes in this prime remodeling age then to have above average income and home values, which supports the likelihood of investing in remodeling projects. In addition, many homeowners have taken advantage of low mortgage rates and are likely to remain in their homes longer. And with record levels of equity, these homeowners are more willing to take on larger modeling projects to update their homes. All of these structural forces provide tailwinds for our business and increase our confidence for a strong repair and remodel market after 2023 when the economy stabilizes. With favorable fundamentals for our portfolio and continued successful execution of our growth strategy, along with our strong free cash flow and disciplined capital deployment, we are well-positioned to drive shareholder value creation for the long term. Before I turn the call over to Dave, I want to update you on our CFO search. As I mentioned last quarter, we have strong internal candidates, and our search firm has delivered strong external candidates as well. We are in the final stages of the selection process and anticipate naming our CFO shortly. Now I'll turn the call over to Dave to go over our second quarter results and 2023 outlook in more detail. Dave?

Operator:

Thank you. [Operator Instructions] The first question comes from John Lovallo of UBS. Please go ahead.

Keith Allman:

Well, clearly, John, volume is the main driver, and we're seeing a consistent performance in North America, if you will, in terms of against our expectations. We did expect to see somewhat of an increase, if you will, in the slowdown in Europe, and we did see that. So while our first quarter in Europe, I think it was down 3%, we expected that to accelerate as we saw that Europe was lagging a little bit in demand, and that has come to fruition. So when we think about our overall guidance, I'd divide it into a couple of pieces. One, in terms of the overall top line, as expected, it's coming in as we anticipated. So no real change there. I would tell you that our performance and our execution was stronger than expected. And so we had better margin performance coming through in the first half. And so that, I would say, John, are the components of it. We kind of -- as expected on the top line, and a little bit better than expected in terms of our performance.

Q – John Lovallo:

Understood. That's a good segue into my second question. Maybe it sounds like you are anniversary-ing most of the price increases. How are you thinking about incremental pricing opportunities across segments as we move into the back half?

Q – John Lovallo:

Thank you, guys.

Q – Michael Rehaut:

Thanks. Good morning, everyone. Maybe just to circle back to the prior question, perhaps trying to get a finer point on it. In terms of the guidance and what looks like effectively a reiteration of the back half outlook, in the second quarter and I think for the year overall, the top line doesn't look like it -- the top line outlook doesn't look like it's changed that much. You did have great margin performance in the second quarter though. And it looks like effectively, you're not necessarily expecting that better-than-expected margin performance to continue into the back half. So I'm just trying to understand, number one, if that's correct. And number two, specifically on the margin side, and I understand your outlook on the top line remains relatively unchanged, but what perhaps is different about what you were able to achieve in the second quarter given that the sales more or less came in line with expectations that might not follow through fully into the back half in terms of the better-than-expected margin performance?

David Chaika:

Hey Mike, it's Dave. I'll just add to that. We also are bringing online our European Plumbing manufacturing plant. That will be a little bit of headwind here in the second half as well. And then also, as we've mentioned in the prepared remarks, the negative mix impact we're seeing in international is probably a little greater than we originally viewed coming into the year, which accounts for again the second half being a little bit softer.

Keith Allman:

Michael, I think the opportunity is to continue to drive full loyalty. That's a loyal group. And over the past three years, we have gained significant confidence and, of course, significant share when you look at our growth versus the market. So, we very closely monitor customer experience with our product. And it's clear when we look at Net Promoter Scores and other metrics that they're very satisfied with the switch that they have made to either greater share of wallet or trying Behr for the first time. So, it's really about continuing to stay focused as we have, frankly, for the last decade on improving month-over-month, quarter-over-quarter, our capabilities in the service and generating greater loyalty. So, things like buy online and pick up in store, an expansion of our delivery options, our PRO outside sales force, continuing to figure out ways that we can work more closely together with the folks at The Home Depot to drive better loyalty, enhancing our actual loyalty programs, so things of that nature. Our capacity is also a component of that as we saw when we're able to provide outstanding delivery in spite of what happens in the supply chain, that's a big plus for us. And so that's part and parcel of the rationale for our new plant in Ohio. So enhancing our services, identifying new capabilities, focus on the PRO, strengthening our relationship every day with The Home Depot, that's really the story.

Michael Rehaut:

Great. Thank you.

Stephen Kim:

Yes. Thanks very much, guys. Sorry, about that. Thanks very much guys. Yes, wondering if I follow-up here a little bit on the price/cost commentary. It sounds like you saw some benefit this quarter in terms of price/cost. I'm curious as to whether or not you're including an improving outlook for price/cost in your margins forecast for Plumbing. And in general, are you still expecting to see a return to market growth in late 2023? If you could just sort of update us on your market outlook, particularly as it relates to Plumbing.

Stephen Kim:

Really more like just the net of price and cost in the Plumbing segment. I think you already talked about the anniversarying pricing in Dec Arch. But within Plumbing, I'm curious broadly for the segment, is your outlook for margins in the back half in plumbing informed by an improving view of net price/cost?

Stephen Kim:

Okay. That's helpful. And then second question, still staying with Plumbing, you talked about mix effect. I think it was relegated to -- your comments were relegated to international at this point. My recollection is that last quarter, you actually also started to see a little bit of mix impact, negative mix effect in Plumbing. So, I'm curious if you could provide a little bit more detail around what you're seeing. Did it intensify -- is it is it intensifying in international? Is it spreading in any way into North America as well? And is there any kind of margin impact that we should anticipate as a result from negative mix shift in plumbing?

Keith Allman:

I think with our reconfigured portfolio of lower-ticket products, I think that really helps to mitigate the large swings that you may see in bigger-ticket items.

Keith Allman:

Yes, there will be a little bit, but not much.

Operator:

Thank you. The next question comes from Matthew Bouley of Barclays. Please go ahead.

David Chaika:

Hey, Matt, it's Dave. In the DIY business, we did see continuing softening throughout the quarter. And I think we expect that to continue here in the back half of the year when you look at existing home sales, that tends to have a higher correlation with DIY paint in many of our other product categories and with existing home turnover being down roughly 20%, we anticipate DIY in the back half of the year probably being a little softer than we originally anticipated.

Matthew Bouley:

Okay. Understood. Thanks for that. And then secondly, on that new paint facility, I guess just one, are there any start-up costs associated with that as well into the second half of next year? And just higher level on that, curious if you could speak to sort of what this does for Masco around service levels. Where did you see room for improvement? Could it lead to additional shelf space wins or PRO expansion? Just kind of any additional longer-term expectations that might arise out of that new paint facility. Thanks.

A – Keith Allman:

Matt, if you think about the success that we've had in our paint business, it really goes down to the relationship that we have with our channel partner, The Home Depot, and our ability to provide innovation and service to our customers and the consumers that purchase Behr. And the basis of that is really focus and the fact that everything we do is focused on that Home Depot customer and on our supply chain around those outstanding Home Depot point of sale. And so what this new facility does, is it gives us the capacity to be able to maintain industry-leading delivery performance. It gives us the logistical costs and ties in very tightly to where our consumers want to buy, and it really hones in our ability to provide that ongoing service.

A – Keith Allman:

Thank you.

Susan Maklari:

Thank you. Good morning, everyone. My first question is in plumbing, you mentioned that you saw some in the wholesale side relative to some more weakness on retail there. Can you just give us a bit of color on, how you're thinking about the inventory levels across the channels? And any commentary on sell-in versus sell-out as we think about the second half?

Susan Maklari:

Okay. And then on your raws, you mentioned that you are starting to see some relief on the Decorative Architectural side of things. Can you just talk about across both Plumbing and Dec Arch, how you're thinking about the commodity cost and the input cost and how that may flow through over the next several quarters and maybe into next year?

Susan Maklari:

Okay, that’s helpful. Thank you. Good luck with everything.

David Chaika:

Thanks Susan.

Mike Dahl:

Morning. Thanks for taking my questions. Keith on the Plumbing comment in terms of you're driving that business to get back to that at least 2019 levels, which was a little above 18%, and I think for five, six years, you were traveling somewhere in the 18%, if not a little bit better. It seems like you've kind of gotten the work done on price/cost more or less. Is it really just a question of when do the volumes come back as far as getting to that 18%, or what other drivers do you think you can pull or need to pull to get back there or higher?

Mike Dahl:

Got it. Okay. And then just sticking with Plumbing, can you give us a little more color on the new acquisition, Sauna360? It sounds European-based, but just a little more color on maybe geographies, products, relative size, or profitability?

Mike Dahl:

Great. Thanks, Keith.

Truman Patterson:

Hey, good morning, everyone. Thanks for taking my questions.

Truman Patterson:

Hey, good morning. When I look at your first half performance, right, revenue is being in line with your expectations but margin was much better in each of your segments to start the year. I'm really just trying to understand what's been the driver of this op margin performance. Was it a little bit better pricing environment, some cost-out initiatives or lower investments you know, maybe some accelerated cost afflation etcetera. What were kind of the big drivers of that?

Truman Patterson:

There's nothing one time in nature on those kind of internal productivity improvements, where they couldn't continue into the back half a year. Is there?

Truman Patterson:

Okay. Got you. And then, you know, in certain, categories we heard of in the U.S. specifically, we heard of a little bit of demand improvement in the back part of the second quarter. Just trying to understand across any of your channels or product categories, if you all in the US saw any sort of kind of stability or improvement.

Truman Patterson:

Okay. All right. Thank you all.

Operator:

The next question comes from Joe Ahlersmeyer of Deutsche Bank.

Keith Allman:

These businesses really have been impacted by the market softness as all of our businesses have. I'd say that for Q2, they were down in that 20% range. We expect them -- they've taken price. We're working on cost actions as we are across the entire portfolio. I would say that to expect these businesses to perform roughly in line with our low double-digit volume decline expectations of the R&R market.

David Chaika:

Hey Joe, it's Dave. I think you're more likely to see the typical margin seasonality stronger margins in Q3 compared to Q4. Q4 tends to be a lower margin quarter in general with lower volume. I think in terms of year-over-year, we do expect year-over-year expansion probably less -- more modest year-over-year expansion here in 3Q from what we saw clearly in 2Q. Then considering our comp in Q4 of 2022, probably a little bit more year-over-year expansion in Q4.

David Chaika:

Correct.

Operator:

Thank you. The next question comes from Philip Ng of Jefferies. Please go ahead.

Keith Allman:

Hi Phil.

Keith Allman:

Yes. If I said that, I misspoke. I would say, if anything, probably was a little bit stronger. I think that has to do with some project backlogs working through the system. But not -- I wouldn’t mean to heavily enter that, its just maybe a slight better performance in PRO versus DIY. So, I want to clear that. Could you, Phil, ask me the second part of that question?

Keith Allman:

Still seeing -- you know in North America, we saw -- really earlier we saw the volume start to turn down. So, volume and topline challenged in Europe. Europe was down only about 3% in Q1 and then started to accelerate as expected. So, we're in both North America and Europe in Plumbing, we're experiencing volume challenges. I would say very solid execution. We're really driving good price/cost realization, getting our supply chain back in tune and providing the service levels and the productivity and cost efficiency. That was a real driver. So, when we think about our performance versus expectation as we said earlier in the call, not kind of where we expect it to be, but our performance particularly in plumbing is better than expected. We quickly got after the cost, we’re driving productivity, and the team is doing a great job in both North America and Europe.

David Chaika:

Yeah. I'm not going to size them up, Phil, but just enough to contribute to a little bit lower margin performance in the second half as compared to first half, we're talking growth investments in PRO representatives for paints. It could be a little bit of additional marketing compared to the first half. But beyond that, just a little bit of a headwind on the margin side.

Operator:

Thank you. The next question comes from Adam Baumgarten of Zelman & Associates. Please go ahead.

Keith Allman:

When we talk about low inflation, that includes everything, all-in, in the cost basket. Specifically to your question that on raw's, yeah there's different levels of vertical integration, some different supply chains that are used. So there's differences to how we manufacture and certainly a difference in the distribution cost structure and how we go to market. So there's a couple of big differences there.

Adam Baumgarten:

Okay, got it. That's helpful. And then just maybe any update on the promotional environment in the paint aisle at this point, just given the softness in DIY?

Adam Baumgarten:

Okay. Thanks. Best of luck.

Operator:

Thank you. The next question comes from Garik Shmois of Loop Capital. Please go ahead.

David Chaika:

Hey, Garik, it's Dave. Yeah, I'd say it's a little -- our read is sort of choppy. The consumer seems to be strong. Clearly, when you look at spend across industries, the consumer seems to be spending in other industries such as travel and leisure, and you've seen those industries pick up significantly this year, a little more pullback in home improvement spending probably as affordability has been pinched a little bit as rates have risen. So the consumer, we think, is still very interested in investing in their homes, especially as home equity levels remain high, but we have seen a little bit of a pullback. And I'd characterize it as a bit choppy and a bit uneven overall, but still think the consumer seems to be pretty healthy.

David Chaika:

Garik, I'd say the -- our pipeline has not changed. Clearly, the M&A environment has changed, as we've talked about, definitely has been slower over the past year or so, less opportunities coming to market. Sellers clearly see that some buyers might not be as competitive, so they pulled back, plus they don't want to potentially sell off weaker earnings. So definitely a slower M&A environment, but our outlook and our focus on bolt-on acquisitions has not changed, and we continue to cultivate some nice opportunities.

Operator:

Thank you. Our last question comes from Keith Hughes at Truist Securities. Please go ahead.

Keith Allman:

It's really about service, Keith. It's 10 years ago when we started this, we made a list of the things that we could do to improve the service for the PRO painter. We have tweaked what's in the can, in some light cases, but fundamentally, we believe we have the brand and the innovation and the right price points to be successful. We've got a great partner in terms of the distribution channel. So it's really about service. So it's about understanding what the PRO needs and scaling that up and making sure we're delivering that across the entire market. So as I've mentioned before, different delivery options that they like, better loyalty programs, more improved service, it's a lot of keeping on to what we've been doing and continuing to drive it, and it's worked. It's certainly -- the COVID situation and our ability to supply got our product in a lot more hands of the builders. And we saw tremendous Net Promoter Scores, so they like it. So it's a matter of staying focused and continuing to drive incremental improvements in service and to continue to grow at a greater clip than the market.

Renee Benedict:

We'd like to thank you all for joining us on the call this morning and for your interest in Masco. That concludes today's call. Thank you.

Operator:

Good morning, ladies and gentlemen. Welcome to Masco Corporation's First Quarter 2023 Conference Call. My name is Michelle, 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 would now like to turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. Please go ahead sir.

Keith Allman:

Thank you, Dave. Good morning, everyone, and thank you for joining us today. Please turn to Slide 5. I'm pleased with the start of our year and want to thank our employees and supplier-partners for executing well in an environment that remains challenging. We are focused on winning in the recovery by continuing to engage with our customers, launch new products and expand the breadth of our brands, at the same time, managing our costs in these uncertain economic times. In this period of volatile macroeconomics and slowing demand, our top line decreased 10% in the first quarter against a strong 12% comp. Volume was down 14%, partially offset by pricing actions of 6% while operating profit declined in the quarter, primarily due to the lower volume, higher input costs, and continued investments for future growth. Our strong execution delivered a decremental margin of approximately 20%. Our earnings per share for the quarter was $0.87. Turning to our segments, Plumbing sales declined 8% in local currency with North American and International Plumbing declining 10% and 3% respectively. Both our North American and International Plumbing businesses continue to further strengthen their industry leading brands, customer service and new product development. In North American Plumbing Delta Faucet launched new products at the Kitchen and Bath industry show, such as the Delta Shower Sense Digital Shower, and the Delta Steam Shower, each offering consumers a more customizable shower experience. In our Spa business, Watkins Wellness launched a complete redesign of its top selling HotSpring's Highrise offering. These spas have exciting new features to enhance the consumer experience that we believe will help Watkins outperform the competition even in the challenging market. In our International Plumbing business, Hansgrohe launched new products at ISH, the world's leading plumbing trade show, including a new product portfolio of sanitary ceramics and bathroom furniture paired with their premium faucets and showers. Additionally, they introduced the next generation of their in-wall iBox valve, which allows installers to connect any type of plumbing fixture without the need for major construction work. Hansgrohe also displayed their focus on the environment with a concept study of a bathroom that consumes 90% less water and energy, highlighting their commitment to the development of innovative and sustainable products. With our strong brands, geographic diversity, and innovative products, our Plumbing segment is well positioned to continue to gain global market share. Turning to our Decorative Architectural segment, sales declined 10% in the quarter against a strong 17% comp. PRO paint declined mid-single digits against a tremendous comp of over 50% in the quarter of 2022, and DIY paint sales declined high single digits. In the quarter, Behr continued to launch new products and services and received recognition for their industry-leading customer satisfaction. We gained shelf space with our adjacent paint categories such as aerosols, interior stains, caulks and sealants, and applicators as these programs expanded into additional stores. We launched Behr Dynasty Exterior for the summer painting season, expanding the lineup of our number one rated Dynasty paint line, and we continued to invest in people and capabilities to better serve the PRO painter by adding additional sales reps, increasing job site delivery capabilities and expanding our loyalty programs. Lastly, in a recent third-party paint satisfaction study, Behr earned the number one rating in the exterior paint category and the number two rating in interior paint, demonstrating the strength of the Behr brand, quality of our products, and our exceptional service performance. Turning to capital allocation, with our strong free cash flow and balance sheet, we returned $121 million to the shareholders through dividends and share repurchases as we bought back 1.1 million shares for $56 million in the quarter. Now turning to our outlook for the remainder of 2023, while we delivered solid first quarter results, we remain cautious and continue to expect softening demand trends in 2023 as our markets adjust to increasing interest rates, persistent inflation, and tighter consumer spending. In this uncertain environment, we are focused on adjusting our costs and minimizing the impact of margins from lower volumes. We have enacted select hiring freezes and have reduced staffing with headcount down approximately 5% year-over-year. We announced the closure of one of our plumbing manufacturing facilities, and we have delayed the opening of our new Spa plant as we continue to balance investing to win in the recovery with cost reductions. With the actions we are taking to address this dynamic environment, our continued strong capital deployment and the uncertain macroeconomics, we continue to anticipate earnings per share for 2023 to be in the range of $3.10 to $3.40 per share. While near-term market conditions remain challenging, we believe the long-term fundamentals of our repair and remodel markets are strong. Those cyclical factors, such as home price appreciation and existing home turnover, will likely remain a headwind for 2023. We believe structural factors such as consumers staying in their homes longer, the age of housing stock, and high home equity levels will drive increased repair and remodel activity in the years to follow.

John Sznewajs:

Thank you, Keith, and good morning everyone. As Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization in other one-time items. Turning to Slide 7, sales in the quarter decreased 10% and excluding currency decreased 9%. Lower volumes decreased sales by 14%, partially offset by net selling prices of 6%. North American sales decreased 10% in a local currency. International sales decreased 3%. Despite lower volume our strong execution in the quarter resulted in our gross margins expanding 150 basis points to 33.6%. This is the first time in seven quarters that we've expanded gross margins as we are now recovering the significant cost inflation we have absorbed over the past two years. Our SG&A as a percentage of sales was 17.8% due to higher brand and marketing investments such as trade shows and sales meetings to support our growth strategy of investing in our brands, service and innovation. Operating profit in the first quarter was $312 million and operating margin was 15.8%. Operating profit was impacted by lower volumes, higher input costs and growth investments partially offset by higher net selling prices. Lastly, our EPS in the quarter was $0.87. Turning to Slide 8, Plumbing sales in the quarter decreased 10% against the 9% count and excluding currency decreased 8%. Lower volume, decreased sales by 12%, partially offset by net selling prices, which increased sales by 5%. North American Plumbing sales decreased 10% in local currency. This was driven by continued lower demand that we started to experience in the third quarter of last year. The slower demand was fairly broad based across product categories and channels. Our Spa business, which is approximately 15% of the segment, declined over 20%. That has now worked through the significant backlog generated from the spike in demand for its products. International Plumbing sales decreased 3% in local currency against an 18% comp as demand softened in many European markets and China. For plumbing overall changes in channel inventory positions during the quarter did not significantly impact our results. Segment operating profit in the first quarter was $202 million with an operating margin of 16.5%. Operating profit was impacted by lower volumes, higher brand and marketing investments, partially offset by higher net selling prices. This resulted in a decremental margin of 19%. While input costs have declined from their peak levels, particularly container costs, overall input costs remain elevated. Turning to Slide 9, Decorative Architectural sales decreased 10% for the first quarter against the strong 17% comp. Paint sales declined high single digits with PRO paint sales decreasing mid-single digits against the robust comp of over 50% in the first quarter of 2022. DIY paint sales declining high single digits. Keith mentioned we gained shelf space with our adjacent product offerings such as aerosols, interior stains, caulks and sealants and applicators. For PRO paint we are investing along with our partner in our joint capabilities to continue to grow share in this large and growing market. Lastly, our operating profit was $133 million and operating margin was 17.6%.

Operator:

Thank you, sir. [Operator Instructions] Your first question will come from Matthew Bouley at Barclays. Please go ahead.

Keith Allman:

Hey, Matthew, this is Keith. I'll start off and John, maybe you could add some detail. I think when we, when you think about margin and our performance vis-à-vis the outlook, it's really driven by volume. And as we've talked in the past, volume, incremental volumes, detrimental volumes are in around that 30%, 30% to 35% range. So that is a fundamental driver of what's happening to our margins. Additionally, as I talked in my prepared remarks, we endeavor to strike a balance here of managing our costs in these uncertain times, and we've demonstrated our ability to do that thus far and we'll continue to do that, but it's also important that we continue to invest in our business. So you'll see continued investments in marketing and advertising. For example, this quarter, we had two significant trade shows, which when added up our material investments for us that haven't happened in many years. We're getting together more as an organization in terms of sales meetings to continue to drive. So there's additional investments on top of the headwind that we plan on experiencing from lower volumes. And then there's pricing actions that counter that and we'll take, we have taken pricing and we'll see those anniversary here mainly in the second quarter, then a little bit into the third quarter. But so hopefully that gives you a little bit of an idea of what's driving our thoughts on the margins as we look to the year.

Matthew Bouley:

Gotcha. Okay, yes thanks. Thanks John for that clarification and thanks Keith. So second question, you mentioned in Decorative that there were some shelf space wins in your adjacent categories. I'm just curious if you can kind of put a little finer detail on that. Any color around kind of load in or was there a margin impact from that in the Decorative business?

Matthew Bouley:

All right, thanks Keith. Good luck guys.

Operator:

Your next question will come from John Lovallo at UBS. Please go ahead.

John Sznewajs:

Yes, John, maybe I'll start and Keith feel free to chime in. So John as you know, kind of Keith alluded to answering Matt's question, we did deliver some strong performance in Q1 and obviously the 6% price helped, and this Keith also just referenced. A lot of that pricing benefit starts to subside as you go through the year. I mean, we'll say have some benefit in Q2 because that's been a lot of the pricing got initiated, but that benefit will really subside pretty significantly as you go into the back half the year. So with that benefit going away, that will have some impact on margins. And Keith also mentioned that we do expect you know, volumes to be pressured this year. If you think about the strong comps we're up against here in the first half the year volumes were softer in the back half of the year last year. So we continue to expect that down. So with overall our 10% guide to the top line being down, I think that weighs on it. And then we've got some additional investments that we're making. Keith mentioned the fact that we're continuing to invest in programs and initiatives across the entire portfolio, but very specifically in the PRO paint initiative. And kind of the last, kind of headwind we've got and is, we've got a couple of facilities that are starting up in the back half the year that will create some expense headwind to us. So that, all those things are kind of pressuring margins. Now and to your question, volumes remain flat could there be some upside of that? Yes there could be and I expect there to be if volumes remain flat, but that's not the model that we're forecasting at this point. Keith, I don't know if there's anything you…

John Lovallo:

Okay. That's helpful guys. And then maybe more of a high level strategy question here. If we think about the PRO paint effort at Home Depot, I mean, what do you see as sort of the biggest challenges to growth there? You know, is it, is there a sufficient dedicated sales force? Are there enough specialty products needed to complete bigger jobs? How, where do we get, how do we get to the point where it's very competitive with shareowner PPG? I mean, what are sort of the missing elements in your view?

John Sznewajs:

Yes, and John, what I also can point out to you, maybe just add to, sorry to cut you off there. You can take a look at the business. We've grown this to a $900 million business. It's in a market that's sized, call it $9 billion to $10 billion. So what I like about how we're positioned, and everything that Keith just said is that we think we've got a great runway in front of us for future growth because of our relatively small presence in the overall market, even though it's a $900 million business, we've got a lot of opportunity to continue to grow this over the coming years with the -- not only the quality of the product, the initiatives, the people, the strength of -- the combination of Behr and everything that the team has done, along with our channel partners, the Home Depot. It's a very powerful combination that the two companies. And so we think that gives us a lot of opportunities for growth going forward.

Operator:

Your next question will come from Mike Dahl at RBC Capital Markets. Please go ahead.

Keith Allman:

Mike, yes sure, Mike. As you know, I'm a little bit reticent to talk about in quarter and where that looked month-to-month as there's a lot of variability there if the prior period had a fewer days or if there was a load in for a new product launch or those sorts of things. So we tend to stick to the quarter. I will tell you that we did see a little bit of softening through the quarter and that coming out in April, it's fairly consistent with how we exited the quarter. So it's not that we're trying to signal what we're seeing in terms of something different than really, really what came out of the quarter is pretty consistent. It's more of a understanding that we're in volatile times and that we're one quarter in and we'll, as we'll learn a lot in the second quarter and we'll look at the guide and we'll look at, have a more informed opinion. It's just an extremely volatile period right now. That's what we're saying. Nothing at all about any sort of in-quarter or how we answered the quarter or how we're doing at the beginning of this quarter.

Keith Allman:

I think we've done a pretty good job of recovering. We'll anniversary some significant price that we gave in the little -- mostly in the second quarter. I think the -- we've taken some pockets of further price increases in our Plumbing business where we need it and we'll continue to evaluate it. But I think the fundamental message is there's an anniversary of the significant price increases that we gave last year that will come into the second half and really the dependency as it relates to margin is on the volume.

Michael Dahl:

Very helpful and thanks John. Thanks, Keith.

Michael Rehaut:

Great, thanks. Good morning everyone. And John, it's been a pleasure working with you and best of luck in the future. First question, I wanted to zero in a little bit on the paint segment. I guess both of my questions are kind of centered on that. First, if you could talk any bit about the competitive backdrop. We've heard a lot about Sherwin Williams potentially getting more aggressive. And I'm wondering specifically when you talk about investments in the segment over the coming quarters, where those investments would be concentrated in terms of either personnel or potentially other types of marketing, or even promotions or brand spend? If any of that is in response to possibly the overall competitive backdrop becoming a little more fierce?

John Sznewajs:

Yes. Mike, one maybe to address specifically one, a component of your question related to promotions, promotional activity. They're -- I'd say overall the level of promotion in the industry has been fairly moderate and perhaps similar to last year. And we continue to think we offer our price competitive marketing and we have a product in, and we think that there will be selective promotions, but we don't see it elevating or escalating over the coming weeks, months, whatever. To the extent our channel partner decides to pursue promotions that's their decision, but ultimately we will support them in that if that's the direction they choose to go, but that's their decision, not our decision.

John Sznewajs:

Yes, Mike, I'll take a start at this and Keith, feel free to chime in. So if you take a look at the differential that you cited and you consider the price cost relationship that we've got, as we've said before, that results in margin compression and if you consider the amount of price we put in, we put in the double digit pricing over the course of the last couple years. And if you think about a 10% price increase would lead to about 180 to 200 basis point margin contraction that accounts for the vast majority of that margin compression Mike that you cited. There are some of the investments will be a headwind that we have because, as you bring on new sales force, there's always cost ahead of sales generation and so that will be a little bit of a headwind to it. So those would be, probably the significant things. There's not a -- there's a little bit of a margin differential in PRO because of some of the investments that we've made in things like people, job site delivery and other capabilities, the loyalty program that Keith cited a couple minutes ago. And so that will be a little bit of a headwind and create a little bit of margin, a headwind. But the bulk of it's going to be the price recovery relationship that we've got. Keith, I if there's anything else?

Michael Rehaut:

Great. Thanks so much.

Adam Baumgarten:

Hey, good morning everyone. Just on the decremental margin piece, I believe last quarter you were talking about, overall decremental margins, maybe being in that low 20% range and you're around 20 for the first quarter. Is that still kind of how you're thinking about the balance of the year or has that changed at all?

Adam Baumgarten:

Okay, got it, thanks. And then just on the price increases in Plumbing, I think it was 10 days or so ago, maybe a week in Delta, Brizo and in Peerless, just wondering how that's being accepted by the market, just given that we're not hearing a lot of price increases broadly speaking out there in building products?

Adam Baumgarten:

Hey great. Thanks a lot. Best of luck.

Operator:

Your next question will come from Susan Maklari at Goldman Sachs. Please go ahead.

Keith Allman:

Susan, I think there's an external and an internal view that we look at the usual suspects in terms of external data in terms of home prices and home equity increasing existing home sales, better-than-expected GDP in U.S., Europe, China, consumer confidence, those are the externals that we look at, but really our action would be more fundamentally triggered by what we see in terms of POS and incoming order rates. So that's really what we would key on to say, hey, it's time to maybe look at a different investment rhythm based on what the market is seeing. And that's -- I think that's the key, there's flexibility. And having activation points that we look at and having those plans on the shelf and of course, we have those.

Keith Allman:

No, really not at all. In terms of inventory position, we actually -- I think it was small. I wouldn't say it was material, but we had a little restocking in our Plumbing segment where some of our bigger wholesalers put in a little bit more inventory. Certainly, we want to be ready for spring selling season and I think when our business leaders look across the channel inventory, I'd say we think we're in pretty good positioned for the level of demand that we're seeing at this point. So no real hesitation in anticipation of some sort of event or turn down as it relates to inventory.

Susan Maklari:

Okay, thank you very much. Good luck.

Operator:

Your next question will come from Keith Hughes at Truist. Please go ahead.

Keith Allman:

Could you say that again? You broke up just a little bit, Keith. The last part of your question, are there any other channels...?

Keith Allman:

But for Spas, it's been pretty consistent and broad-based, Keith. When we look at product categories from bathing to accessories to fixtures, taps and showers, pretty consistent retail to trade, I would say that maybe trade held up a little bit better earlier on in the quarter as we were working through some of the backlogs and some of the bigger projects, but it's been pretty consistent. But you're exactly right, we have experienced some 20% decline in the quarter in Spas, now that's after a three-year run of some 50% growth. So it's been a real strong period of growth. And I think the new launches in Spas and the total new refresh of our best-selling line of Spas it's just fabulous. I think that's going to really help us compete in this challenging environment. But it's been pretty consistent but for the Spa business as it relates to decline.

John Sznewajs:

Yes. I mean, Keith, we've seen some degradation in volume. That said, I would kind of point you to the fact that we were up against a pretty significant comp in the beginning, from the first quarter of last year, a 9% comp is quite strong for this segment. And so, I think that plays into some of the volume decline that we saw in the year, just up against the big number from the first quarter of last year.

Operator:

Your next question will come from Stephen Kim at Evercore ISI. Please go ahead.

John Sznewajs:

We didn't give commentary specifically by the cadence by segment. I would say that your commentary about the company in total, Stephen, is right. I mean, so what we said is year-over-year sequentially, we improved Q2 could be a bit of -- might be a bit of a challenge for us. But as we go into the back half of the year, things that, the ability to expand margins sequentially gets better because on a year-over-year basis, just because of the softer margins we posted in the back half of last year.

John Sznewajs:

Yes, the quarter hasn't played out, but that could be the case.

Keith Allman:

There's a lot of volatility that remains to be seen. Our current thinking is that we'll go to growth as we exit this year and enter into next year, but that certainly remains to be seen.

Operator:

Your next question will come from Tim Wojs at Baird. Please go ahead.

Keith Allman:

Yes, Tim. I would say that we've executed better than expected in the first quarter, frankly as the supply chain has come around, there's still some work to do. We have pockets of tightness with some of the supply base. But all in all, I'd say it's getting better as the volumes have eased a little bit. Our delivery rates are improving, productivity, et cetera. So I would say, all in, while it's not perfect, it's getting better.

Keith Allman:

There's -- there really hasn't been a change in how we're thinking about the International business, but I will tell you that the way we are thinking about it is that we expect it to have more volume pressure as we look through to the end of the year than what we've experienced so far. It's held up really nicely. And I think declined 3% against a strong 18% comp. So in this kind of environment, that's really strong. When we think about how we're looking at that for the full year is to be down overall high single digits. So we are experiencing -- are not experiencing -- we are expecting a little tougher top line environment there than what we've experienced so far. But that's not a change in our thinking.

John Sznewajs:

Tim, you had asked in terms of the competition. We're doing very well relative to competition in Europe, and we are most definitely taking share. Hansgrohe team is doing an outstanding job.

Operator:

Your next question will come from Truman Patterson at Wolfe Research. Please go ahead.

Keith Allman:

So the team has done a good job of getting our efficiencies in order. As you well know, in a period of declining volume that that is an ongoing effort as we work to balance depending on where the volumes go, our variable costs and how our shifts run. So it's -- the work is never done when you're in a volatile environment like this. But I would say that the significant amount of our inefficiencies that we've experienced associated with the last couple of years are fixed and behind us and the team got after honestly a little quicker than I thought they would. So that was a nice positive in the quarter. In terms of the specific spend that we'll have, we have a new plant start-up. There will be some start-up costs in our European plant that we're moving -- continuing to move forward with. So that would be a little bit of a headwind. And then the reduced volume and the drop down of that is the main driver.

Truman Patterson:

Perfect. Thank you all. Good luck in the upcoming quarter.

Operator:

Your final question will come from Phil Ng at Jefferies. Please go ahead.

Keith Allman:

Yes. It really hasn't changed much. And when you look at our full year guide compared to how Q1 fared, it's pretty consistent across both segments. So I'd say not a lot of change, really. And again, we're 1 quarter in.

Keith Allman:

They haven't seen anything material, Phil. A slight but not material, maybe a little bit of trade down in Europe in Plumbing. But beyond that, net for the company, we haven't really seen any significant mix impact or trade down, and our guide doesn't really reflect that either.

Keith Allman:

Thank you.

Operator:

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for participating and ask that you please disconnect your lines.

Operator:

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

Keith Allman:

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I'll start this morning with some brief comments on our fourth quarter, and I'll turn to our full year results and our view on 2023. Before I get started, however, I'm sure you saw our announcement that John Sznewajs has decided to retire from Masco, effective at the end of May, and we are working to identify his replacement. John has been a fixture at Masco and in the industry for over 25 years now, and has been an invaluable partner to me, our Board and the investment community during his 15-year tenure as CFO of our company. He will be sorely missed, and we wish John all the best in his future endeavors. Now please turn to Slide 5. In the fourth quarter, our top-line decreased 5%, as we saw lower volumes across most categories, partially offset by significant pricing actions of 9%. Our operating profit declined in the quarter due to the lower volumes, higher operational costs and currency. This was partially offset by pricing actions and expense control as SG&A declined $22 million to 17.4% of sales. Our earnings per share for the quarter were $0.65. Earnings per share benefited from a lower average diluted share count as well as effective tax rate of 24%, lower than our previously guided 25%. Turning to our segments. Plumbing grew 2% in local currency with a 1% decline in North American Plumbing, offset by 7% growth in International Plumbing. Hansgrohe drove market share gains in many key markets, including China, Germany and France. Our International business has continued to execute well, which speaks to the strength of the Hansgrohe team, its strong brands and its ability to gain market share. In North America, our spa business has now worked through its extended backlog and backlogs are now in the normal range of four to six weeks after a tremendous three-year run of more than 50% sales growth. Turning to our Decorative Architectural segment. Sales declined 8% against a strong 15% comp. DIY paint sales declined low double digits, while PRO paint continued its excellent performance with mid-single digit growth against a tremendous comp of over 50%. Now let's review our full-year performance. Please turn to Slide 6. 2022 was a challenging year with strong growth in the first half followed by notable declines in demand in the second half. Despite these volatile conditions, Masco and our 19,000 employees across the globe responded well to deliver for our customers and our shareholders. For the full year, the company grew sales 4% for a two-year stacked comp of 21%. Strong pricing actions increased sales by 9%, offset by volume declines of 3% and currency impact of 2%. Volume growth in the first half of the year was more than offset by volume declines in the second half. Operating profit declined 7% with an operating margin of 15.6%, and earnings per share increased from $3.77 -- to $3.77 from $3.70. Total commodity and other inflation was low double digits for the full year. This inflation, together with supply chain challenges, resulted in lower margins for the year despite our significant pricing actions. We are focused on improving our margins by continuing to drive productivity as we apply our 80/20 mindset to return to our pre-pandemic levels. Turning to our segments. Our Plumbing segment grew 6% excluding currency, led by strong growth at both Hansgrohe and Watkins. In our Decorative Architectural segment, full year growth was 6%. DIY paint grew low single digits for the year, while PRO paint grew over 25%. PRO paint has had a tremendous three-year run of approximately 70% growth, and now accounts for one-third of our paint business or over $900 million. This strong performance earned Behr its second consecutive Partner of the Year Award for the Home Depot. We will continue to invest in our paint business to capture further share in both the DIY and PRO markets. Our recently launched adjacent paint categories such as aerosols, interior stains and caulks and sealants have performed well and are expanding the offering to additional stores and expect further share gains in 2023. We will be launching Behr Dynasty Exterior for the summer painting season, expanding the lineup of our number one rated Dynasty paint line. And we will continue to invest in people and capabilities to better serve the PRO painter and continue our strong PRO performance. Turning to capital allocation. Our strong balance sheet allowed us to deploy approximately $1.2 billion in capital during the year. We repurchased 16.6 million shares for $914 million, representing approximately 7% of our outstanding shares. We increased our quarterly dividend 19% and paid $258 million in dividends to shareholders. And we finished the year with net leverage of 1.8 times, providing us ample financial flexibility. Our balanced, disciplined approach to capital allocation and strong cash flow resulted in a return on invested capital of approximately 39%. Lastly, on the ESG front, we believe our business should be part of the solution to the world's climate crisis. Therefore, we have established a target to reduce our emissions by 50% by the year 2030, aligned with science-based targets. This is consistent with our commitment to doing business the right way and our purpose to provide better living possibilities for homes, our environment and our community. I want to thank all our employees for their outstanding efforts throughout 2022. It is a team effort to continue to deliver for our customers and shareholders. Now, turning to 2023. We expect the softening demand trends in the second half of 2022 to continue into 2023 as our markets adjust to increasing interest rates, persistent inflation and tighter consumer spending. Overall, we anticipate volumes to decline in the low double digit range, offset, to a small extent, by pricing actions. Our current market assumptions for 2023 are as follows. For the North American repair and remodel market, we expect the market to be down approximately low double digits. This is after a very strong three-year run of approximately 20% growth. For the paint market, we expect the DIY paint market to be down high-single digits and the PRO market to decline by mid-single digits. And for our International markets, principally Europe, we expect markets to contract by high-single digits. As a result, we anticipate Masco sales in 2023 to decline approximately 10%. With this lower top-line assumption, we will drive to minimize our decremental margins to be in the low 20% range versus our typical 30% decremental margins. We are focused on recovering the significant cost inflation we experienced over the past two years through operational productivity, supply chain normalization and additional pricing actions. With this focus, we expect our operating margin to be approximately 15% in 2023. Turning to capital allocation. Our strategy remains unchanged. First and foremost, we will invest in our business to maintain and grow our leadership positions and win in the recovery. The second pillar of our capital allocation strategy is to maintain a strong balance sheet with gross debt to EBITDA levels of below 2.5 times. Third, we have a targeted dividend payout ratio of 30%. Our Board declared a 2% increase in our dividend for 2023, which will bring our annual dividend to $1.14 per share and marks the tenth consecutive annual increase. We expect our cash flow conversion to be over 100% in 2023, as we manage our working capital. We will deploy that free cash flow after dividends to share repurchases or acquisitions. Based on our projected free cash flow, we expect to deploy approximately $500 million to share repurchases or acquisitions in 2023, in addition to paying the remaining $200 million of our term loan. Lastly, there is no change to our M&A strategy. We continue to review and selectively pursue opportunities that have the right strategic fit and the right return for Masco. With the actions we are taking to address this more challenging environment, coupled with our continued strong capital deployment, we anticipate earnings per share for 2023 to be in the range of $3.10 to $3.40 per share. While we expect the near-term environment will remain challenging as our markets and the economy adjust to higher interest rates and prices, we believe the long-term fundamentals of our repair and remodel markets are strong. Cyclical factors such as home price appreciation and existing turnover will remain challenged and likely a headwind for 2023. However, structural factors, such as consumers staying in their homes longer, the age of housing stock and high home equity levels will drive increased repair and remodel activity in several ways. Many homeowners have taken advantage of low mortgage rates and are likely to remain in their homes longer. 1.5 million more homes will reach the prime remodeling ages of 20 to 39 years old over the next three years. And home equity levels remain high and can withstand significant pullbacks in home prices and still be above 2019 levels. All of these structural forces provide tailwinds for our business and increase our confidence for a strong repair and remodel market after the economy stabilizes in 2023. We will continue to invest in our brands, capabilities and people to outperform the composition in both the near and the long term. With favorable fundamentals and our continued focus on executing our growth strategy, together with our strong free cash flow and capital deployment, we are positioned to continue to drive shareholder value creation for the long term. Now, I'll turn the call over to John to go over our fourth quarter, full year and '23 outlook in more detail. John?

Operator:

Thank you. [Operator Instructions] Our first question comes from Michael Rehaut with J.P. Morgan. Please go ahead, Michael.

John Sznewajs:

Thank you, Mike. Look forward to catching up with you later.

Keith Allman:

Hey, Mike, this is Keith. As you pointed out, the past two years have really been unprecedented, in recent times anyway, with regards to the rate of inflation coupled with supply chain difficulties, which clearly impacted our margins. We are absolutely focused on bringing the costs out of our operations and taking additional price where needed. Now, when you look at the impact of this significant inflation, and we've talked about this before when you -- particularly in our paint business, recover the dollars, we performed well in the overall dollars, but a significant margin erosion arises from that dollar-only coverage when you talk about increases to this level. So, there will be incremental pricing that we take as we move through the year in some parts of our business. We expect these levels that we're experiencing in 2023 to be the kind of the base of which we will build going forward. And when you think about that with regards to our 30% incremental leverage on additional volume, that would actively improve our margins. So, we anticipate [and are] (ph) driving very nice margin expansion as we get through 2023. We do feel that this is going to be a relatively short-lived recession. I'm reluctant to put a number on where we can go to, but I think if you think about the margins historically that we experienced pre-pandemic, that's certainly where this business is heading.

Michael Rehaut:

Okay. No, that's a great answer. And before I ask my second question, perhaps you could fold it in. You highlighted the incremental investment in PRO. I'd be curious to know how much of a drag that might be in this current upcoming year. But secondly, I mentioned also that overall volume expectations for '23, I think, being much more conservative than some of your peers and we're certainly in that direction ourselves in terms of how we're thinking about things, would be helpful, and sorry if I missed that earlier, if you think about the low double digit volume decline, you kind of broke it out between, I believe, how you're thinking or at least on a top-line basis the two segments. But from an end market perspective, I'd assume that repair/remodel end market demand, you're thinking about in a similar level, but correct me if I'm wrong. And also, how that other end markets that you play in such as Europe or new res, which is admittedly pretty small, how those different end markets play into the down low double digits? And if you're expecting that to kind of accelerate as the year progresses? Thanks.

Michael Rehaut:

Great.

Stephen Kim:

Yes, thanks very much guys. And again, John, I'm sure you're going to get a lot of this, but it's been a pleasure and best of luck. First question for you, I guess, sort of at a high level. I understand that certainly things are uncertain and you don't want to lean too much, I suppose, on your outlook for later in FY '23. But you did provide a -- some commentary about a quarterly cadence, which I found very helpful. I was curious as to whether when you said that you anticipate that the sales growth and the margins would improve quarter-by-quarter as you make your way through 2023, is it your sense that by the time you get to the end of the year, we could actually be looking at some positive comparisons on the top-line and then certainly on the margin as well?

Stephen Kim:

Okay. That's helpful. Thanks for that. And then, just a sort of a broader question about your expectations. Obviously, 4Q came in a little bit lighter than I think you were expecting. What's interesting to me is the timing of when you provided that commentary or outlook, was right about when mortgage rates were peaking in the U.S. And I would say, in general, since late October, there's kind of been a growing sense in the U.S. housing market that perhaps we've at least -- we can see where the bottom is, we -- January was actually surprisingly strong. I know you're going to say one month doesn't a quarter make and all that, but if you could just sort of comment a little bit as to what it is that worsened in your -- worsened relative to your expectations despite the fact that maybe the housing market, which is sort of the leading indicator perhaps, looks like it's actually gotten better?

Keith Allman:

Sure. Stephen, if you think the fundamental question of, if things are better, what would that drive in our business, and I think we've covered that in terms of thinking about our dropdowns on the incrementals and how we manage on the down with the decrementals. I would also put a finer point on this notion of volatility and things can change. And sure, yes, absolutely, a month doesn't a quarter make and a quarter doesn't make the year, particularly if you think about our business and our industry is in June or July and then what have ended up happening in kind of a tale of two halves of last year. So, things can change and this is a volatile time and we're specifically focusing our organization on adaptability and looking at signals. Now, in terms of how our guide or how the industry may improve, you point to rates, obviously, that's a factor. We are a new -- a repair and remodeling company and a little bit of new construction, but fundamentally, we're in repair and remodeling. So, some of the things that could change the assumption for us would be home prices and home equity holding up better than expected, for example. Certainly, an increase in existing home sales would help. When you think about our International, down high single digits, if we saw better than expected GDP in U.S., Europe and China, that would clearly help. We're strongly related to consumer confidence. So -- and then, on the performance side, the ability for us to gain more share than expected. So, there are things that could -- we're watching and that could drive the economy to perform better than our guide. Again, I'll take us back to -- our fundamental message here is, we have a very adaptable business, small ticket used on big projects, used on small projects. We cover very effectively on the premium segment in China, a brand leader in Europe and, of course, a strong fundamental base here in North America. So, our business is built for that and for these sorts of things in terms of variability and that's what we're driving. But there are areas, Stephen, that could lead to better-than-expected performance on the overall macro.

Operator:

The next question comes from Michael Dahl with RBC Capital Markets. Michael, please go ahead.

Keith Allman:

Thanks, Mike. I'll -- this is Keith. I'll start off on the paint raw basket to give you a perspective on what we're seeing in terms of inflation and how we're thinking about that. If you look at our overall paint raw material baskets, while we have seen some relief in feedstocks for resin, but TiO2, for example, and other specialty chemicals are very sticky and remain elevated. So, we are continuing to see overall in the basket an elevation. On the indirect costs, which is a big portion of our raw materials and our manufacturing process, we are seeing continued inflation, so it remains a challenge. And I'm talking about things like pallets, transportation, labor absolutely is still elevated. So, we've seen some sequential moderation, but the raws continue to remain relatively elevated. We are still recovering from significant cost increase that we've incurred over the past couple of years. So, at this point, we really have minimal raw material deflation built into our plans for 2023, and don't expect to see it. And that's based on what we're currently seeing from our supply base and from the market.

Michael Dahl:

Okay. That's great. Thank you, both. That's very helpful. And then, on my follow-up question, I wanted to ask about the SG&A. So, the comment that it's going back to 17.5%, certainly, conceptually understand the idea of needing to invest in the business and some of the baskets qualitatively that you've talked about. But when I look at the numbers, I mean, what that really implies is you're guiding sales to be down, give or take, $900 million year-on-year with SG&A dollars down immaterial now maybe $20 million, $25 million. So that seems like an awful lot of reinvestment. Maybe you can help us understand a little bit more bucket out quantitatively some of the things that you've discussed in terms of what's [Technical Difficulty] sticky outlook on SG&A dollars.

Keith Allman:

Yes. Mike, when you think about it, it's kind of in general areas, the economy is coming back and the way that we approach growth and the way we develop advocacy in the markets, you have to be out in those markets. So, I think you were at KBIS in -- out in Las Vegas. That's an example of a big national Kitchen and Bath Show in the United States. Every two years, there's a similar, even bigger show, I know you're aware of this, in ISH, where we have significant investments and big presence there as a matter of -- of course, of business. And that hasn't happened in four years, and that's coming back this year. And there's other examples of that across the globe where we're investing in what I would say is a more normalized way of building advocacy for our brands and launching our new products. Now, when you look, for example, in Europe, at ISH, we've always had our significant competitor in a very big position out there. They've made the decision not to reinvest and won't be there. We don't think that's the right thing to do. In fact, we're leaning into that investment. We're showing a great new product assortment with Hansgrohe in terms of our showers and our faucet launch. We're getting into adjacent products with our bath furniture, and we're continuing to build our brand. When you look at where we're investing in, continued growth and continued momentum. Look to the PRO, as John mentioned, that's an investment for us. PRO loyalty has been building over the last three years. We've gained significant share, and we intend to continue to outgrow that market. So, adding more people on the street to continue to get new customers, new painting customers to try our products, we've seen that be very successful when they try it. There was a lot of question on our ability to maintain the share gain and the stickiness, we've done that. So, we're focused on continuing to drive those share gains, and it takes an investment to do that. In terms of operations, things like buy online, pick up in store, expanding delivery options, expanding the PRO sales force, as I mentioned, working and expanding our loyalty programs. This is all fundamentally part of our strategy. And at the end of the day, we're committed to managing our decrementals in the downturn, while at the same time, investing so that we win and exit stronger coming out of this recovery. And we think that's the right equation for our business.

Operator:

The next question comes from Matthew Bouley with Barclays. Matthew, please go ahead.

John Sznewajs:

Yes. Sure, Matthew. So, I'll give you a little bit of color on that. And you touched on it partly in your question. And a portion of what we expect to see happen in the year in Plumbing is due to the spa business, because it is a high-ticket item and it's one that, as Keith mentioned in his prepared remarks, is now back at normalized backlog levels -- backlogs. And so that's a portion. But the other portion that I would guide you to think about is, if you look at the sales cadence through the course of 2022, Plumbing had much less of a pullback than our paint business did in 2022. And so, as we see the calendar role to 2023, partly due to the spa business, partly due to some of the stronger comps that they're going to be facing in the first part of the year, we should expect to see a little bit of soft -- a little bit more softness perhaps in the Plumbing segment as a result of those strong comps that they'll face.

Matthew Bouley:

All right. Thank you for that. That's super helpful. And then, just second one, sticking with Plumbing on the margin side and the guide there. I mean it seems like the assumption on the decrementals, I guess, on the softer end of the low 20%-s you mentioned for the entire business for the year. And I heard you say earlier, you're not assuming much in terms of raw material tailwinds for the business. So, just kind of any help on kind of what you are assuming there? Is it ocean freight, et cetera? What are some of the areas where you feel like you can sort of manage that decremental in 2023? Thank you.

Matthew Bouley:

Got it. All right. Thanks, Keith. Thank, John. Good luck, guys.

John Sznewajs:

Thanks, Matt.

John Lovallo:

Good morning, guys. Thank you for taking my questions. And John, best of luck with everything. The first question I guess is, are you guys anticipating implementing additional pricing actions in 2023, or is it really just largely carryover pricing at this point?

John Lovallo:

Got it. Okay. And then, I think, the outlook for $500 million of either acquisitions or buybacks, I think you mentioned buybacks would be sort of back-half weighted. Just more curious on the acquisition front. I mean, what you're seeing in terms of pipeline there?

Keith Allman:

Yes. I think it remains to be seen, but the cost of capital and the leverage limitation that, that represents could make it a little bit more difficult for financial buyers and could help us. But we are seeing a little bit of a slower deal flow, but again, very active in the cultivation and trying to make sure that we drive strategic fit and right return.

Operator:

The next question comes from Garik Shmois with Loop Capital Markets. Please go ahead.

John Sznewajs:

Yes. So, as we look at our DIY paint volumes, Garik, we are at roughly 2019 volumes, if not, just slightly under them right now. So we -- the market has kind of reverted back to those 2019 levels.

John Sznewajs:

And the other thing I would point out, Garik, and I should have mentioned this earlier, to the extent that the economy does soften, you do tend to see a shift more towards DIY consumers take on projects, more projects themselves as opposed to have the projects done for them. So that could be a tailwind for us as we go into 2023.

Garik Shmois:

No, great. Thanks for the color. On the pricing side, you mentioned you're looking at some targeted price increases. I'm curious just given some of the softening in demand, are you seeing any pushback on pricing? Any impact on mix at all?

John Sznewajs:

And Garik, the one point that I would just add to Keith's good comment is, as you think about price for '23, the significant majority of price will be carryover price rather than newly implemented price in 2023. So, I just want to make sure that, that distinction is very clear to everyone.

Keith Hughes:

Thank you. I just want to go back on the guidance in Plumbing. You highlighted some several things that have done well, particularly the spa business. They're coming off some big numbers. But is there any other detail you could give us? The decline you're forecasting is greater than your -- equal to or greater than your decline in remodel that you're assuming. What else is going on there?

Keith Hughes:

And will it be all the same cadence you talked about earlier, or will the decline be more ratably during the year based on your forecast?

Keith Hughes:

Okay. Thank you.

Operator:

Thank you, everyone, for joining us today. The call has now concluded, and you may disconnect your lines.

Operator:

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter 2022 Conference Call. My name is Alex. I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions]. I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin.

Keith Allman:

Thank you, Dave. Good morning, everyone, and thank you for joining us today. Please turn to Slide 5. In the third quarter, sales matched prior year with significant pricing actions of 9%, offsetting volume declines of 6% and currency headwinds of 3%. Demand moderated more than expected in the third quarter with most categories experiencing declining volumes year-over-year. Our operating profit was impacted by these lower volumes, higher operational costs and unfavorable foreign currency. Partially offsetting these headwinds, SG&A as a percent of sales improved 110 basis points to 15.6%, as we continue to manage our SG&A and discretionary spending. Operating margin was 15.9% for the quarter and earnings per share was $0.98. Turning to our segments. Plumbing grew 5% in local currency against a 15% comp with 4% growth in North America and 5% growth in international. Our spa business and international plumbing delivered positive volumes for the quarter. International plumbing sales were led by strong growth in China as we continue to gain share. European markets in the quarter were flat in local currency against a double-digit comp in the third quarter of 2021. While incoming orders have moderated in Europe, we saw good demand in several markets such as China, India, and the Middle East, demonstrating the benefit of selling to over 100 countries. We were price/cost positive in the third quarter in plumbing, and we expect that relationship to continue to improve in the fourth quarter as our pricing actions are in place and we continue to anniversary the higher costs from last year. In our Decorative Architectural segment, sales grew 1% led by PRO paint sales, which increased mid-teens against a more than 45% comp in Q3 of 2021, more than offsetting sales decline in DIY paint, lighting and hardware. PRO paint volumes increased low-single digits as we continue to see good demand from PRO paint contractors. We are retaining the significant share gains we have achieved over the past 12 months, and we continue to increase the rollout of additional capabilities and services along with our channel partner to strengthen our value proposition to the PRO painter. This strong performance is a testament to the satisfaction that PRO painters have with our high quality products, competitive PRO offering and our partnership with the Home Depot. We are pleased with our performance in PRO paint and we'll continue to capitalize on the significant growth opportunity. Moving on to the overall demand picture. POS and incoming orders slowed more than expected late in the third quarter across most of our product categories, and we anticipate this slowdown to continue into the fourth quarter. In the third quarter, we also experienced higher operational costs, mostly in plumbing that will continue into the fourth quarter. These operational costs include higher than expected freight and material costs due to persistent inflation, as well as production and absorption inefficiencies associated with changing volume levels. Lastly, the U.S. dollar continues to strengthen, which will result in lower revenue and operating profit dollars than we'd previously forecasted. Because of these dynamics, we are lowering our earnings per share expectation for the year to $3.70 to $3.80, from our previous expectation of $4.15 to $4.25. We are enacting plans to address lower volumes and elevated operational costs. While market conditions are softening, we believe, we are well-positioned to outperform in more challenging times and deliver long-term shareholder value. Our portfolio of lower ticket repair and remodel-oriented products serves both DIY and PRO customers, and we have product, channel, geographic, and price point diversification to provide stability and resilience through a cycle. We've taken significant pricing actions and will continue to recover cost inflation experienced in 2021 and 2022 as certain commodities and cost pulled back from their highs such as copper, zinc, and ocean freight. We continue to invest in our leading brands and innovation to capture share. We have experienced agile management teams that have successfully navigated uncertain economic environments before. And we have a strong balance sheet, cash flow, and liquidity that can be used to our advantage. This confidence in our business is exemplified by the new $2 billion share repurchase authorization approved by our Board of Directors. This authorization is a continuation of our capital allocation strategy. First and foremost, we invest in our business to drive profitable growth; second, maintain a strong investment grade balance sheet; third, pay a relevant dividend with a targeted 30% payout ratio; and fourth, deploy excess free cash flow to share repurchase or bolt-on acquisitions. We have consistently executed on this strategy to drive long-term shareholder value and will continue to do so. I'll now turn the call over to John for additional detail on our third quarter results and full-year outlook. John?

Operator:

Thank you. In order to ensure that everyone has a chance to participate, we would like to request that you limit yourselves to asking one question and one follow-up question during the Q&A Session. [Operator Instructions]. Our first question for today comes from Michael Rehaut from JPMorgan. Michael, your line is now open.

Keith Allman:

Thanks, Mike. This is Keith, I'll take that one. We did see moderating demand POS in the quarter a bit more than we expected. It was fairly broad-based I would say, across categories in terms of incoming orders in POS, which we think is most important. Most categories saw this decline across channel. So broadly speaking, we did see moderating, POS demand on the consumer -- on the customer side across channels and categories. We do expect volumes to be down in both segments for Q4 understanding that Decorative had a 15% comp and Q4 PRO paint, I think, was like 50% comp. So we do expect volumes to be down in the fourth quarter across both of those segments. In spite of this, we do have backlog in some of our business, wellness in particular and we did it as John and I both mentioned we had another solid quarter of PRO paint growth. In terms to your question with regards to inventory and inventories in the channels, I would say that inventories are in pretty decent shape. I wouldn't say that they're overstocks or excessive. Some destocking is occurring across categories and channels for sure. But there's always movement in inventory levels, particularly in changing macroeconomic environments and changing markets like we have, evens out usually around the end of the quarter. We do see some stock de-stocking that happens around quarter-end that we've talked about in the past. So we are not really expecting inventory destocking to be a material impact for us as we think about Q4. So the majority of it we would say is an end market demand driven.

Michael Rehaut:

Great. Thank you for that. I guess, secondly, maybe just shifting to raw materials. If you could just kind of give us a sense of where you were I think on a consolidated basis, if you have by segment, that's obviously also very helpful in terms of price/cost and what the raw material headwinds were during the quarter itself? And looking into 2023 given more recent movements in the various inputs, how should we think about raw materials in terms of where the prices stand today if you think that that could turn into a tailwind?

Keith Allman:

Hey, John, this is Keith. Let me -- if I can just insert here just a minute. You referenced some commodities that have come down in paint I think you meant plumbing --

Keith Allman:

…when you referenced conferencing, that's obvious, our Plumbing segment.

Michael Rehaut:

Yes. No, that was great and appreciate that clarification. I think the only element of -- and I apologize, I guess, my multi-part question was just on a net basis for 2023, given where commodity prices are currently, if you would expect raw materials to be a net tailwind on the whole for next year?

Operator:

Our next question comes from Adam Baumgarten from Zelman. Please go ahead. Your line is now open.

Keith Allman:

When we think about promotional activity in general, I would say that it's been more muted than in the past. I think given that where the volumes were we have increased our advertising and planned to continue to do that. In terms of promotions overall in the industry, I suspect it'll that, that we'll see a little bit of an uptick in that, but it remains to be seen. Our preference obviously is to compete on brand service and innovation and continue to drive that, that's worked well for us. And I think if we do see increased promotions, it will be more spot promotions, if you will, rather than the - what was traditional pre-pandemic, say, where they were more ingrained into the market more consistent. That's what we're currently seeing.

Keith Allman:

Yes. I think when you look at what happens in an environment where there's a quick volume reduction, there's a couple things in the cost side that are impacted. Firstly is on the material side. The costs that we have seen that particularly in plumbing that have backed off a little bit from their highs, take a little bit longer to flow through our P&L because of the lower volumes and that's the case for us. It's taken a little longer than expected, say a quarter or two to flow through the box -- because of their volume. So that's a piece of it. And that really comes with time, we -- as the -- as they roll through the P&L. It also drives absorption issues and variable overhead principally. And as we see where that'll settle in, that, that's going to give us the ability to better dial-in our shift patterns and balance our factory to drive productivity. And this is quite typical when you see rather rapid volume reductions and we're working that. Inbound logistics talking about specific in plumbing that's been timely deliveries can be challenging and drive productivity issues. Frankly, we expected to see a more rapid improvement in that. Things are improving but not to the pace that we thought they would be. So we're continuing to work those down. So in terms of the operational costs that we're currently facing, that gives you a flavor of how we're attacking it. We expect to be through that by the end of Q1. In terms of a more protracted recession if there -- that is there, as John mentioned in his calls, we have an experienced management team that have been through times like this. And our focus, frankly, is to come out of a recession stronger than when we went into it and we were able to demonstrate that in 2008 and 2009 and we're going to demonstrate that again here, but the usual suspects in terms of levers we have around variable costs that we would look to in terms of either delaying spend or cutting back and marketing and advertising, travel, entertainment, those sorts of things. And then of course, there's always fixed cost levers that we could look into. Now, given where our capacity utilization is across our own supply chain, our own factory network, et cetera, and the high-level demand, I don't anticipate that would involve any sorts of reconfiguration of our manufacturing footprint just because of the demand and our expectation for growth, but that gives you few of the levers both short-term and mid-term.

John Lovallo:

Good morning, guys, and thank you for taking my questions. The first one is on the implied 4Q plumbing margin seems to be implied in sort of the low-to-mid teens versus I think expectations of closer to 20%. It doesn't seem like the sales decline explains this, so just curious if you can give us some more color on what's going on there.

Keith Allman:

Sure. I would say the biggest piece is the volumes. So we have the FX there that we talked about and the lower volumes. That does a couple things that that give us challenges with regards to cost. And I've talked about this a little bit in my last response. One is the longer time for the lower material costs that we expected to hit our P&L. And then section -- secondly is the absorption issue. So that's a factor. And then John mentioned the elevated freight and in some case -- and labor costs, so that was -- that's an area that and we expected to see more relief in coming into Q4 than we have. So that's -- that's a second challenge. And thirdly, operational inefficiencies, principally in our plumbing area driven by inbound logistics and the reliability and timely of those deliveries that gives us labor efficiencies and challenges in the shop floors that hasn't improved as much as we expected it to. Now it is improving and we continue to take actions to drive that improvement at a faster rate. But as we look at that improvement and paradoxically, while the lower volumes does give us absorption issues. It does give our supply chain some relief. So we're getting after this and the improvements are coming, but they won't be totally behind us until Q1. So that frames up some of the margin challenges and why, while we'll be a little bit better in margin, it's not as good as we had previously guided to.

Keith Allman:

Well, I think we're going to end up; this is not a run rate that we'll stay at. We're starting to filter back in SG&A. We've put in little -- we put in more advertising in our paint business. And we're committed to continue to invest in brand service and innovation because that fundamentally is what'll make us as strong as we can be coming out of these sorts of pullbacks or recessions, however you want to think about it. So we're very careful in terms of how we look at SG&A. It is a dial that we have that we can turn that, that we can either delay some growth spend or delay as I mentioned advertising, travel, entertainment, participation in shows, those sorts of things. But we're very careful with it. We're focused on the long-term exiting of this pullback so that we're stronger than we went in as I mentioned.

Operator:

Thank you. Our next question comes from Matthew Bouley from Barclays. Please go ahead. Your line is now open.

Keith Allman:

There's a couple of items I'd point to and then John maybe if you want to add some color to it. Clearly the volume moderation is a big piece of it. There's no question about it. And then secondly, I'd remind you when we talk about how we typically perform in price as it relates to commodities, we generally hold our margin dollars. But when you do that that results in margin percent pressure, just by way of example, something like a 10% increase to recover only commodity costs results in almost a 200 basis point reduction in margin. So those two -- the interaction of price versus commodities and the volume reduction of the principle drivers.

Matthew Bouley:

Got it. That's very helpful. Thanks for that guys. And then second just kind of shifting to the international business I guess with Hansgrohe, it sounds like I believe you said at the top that that Europe is slowing, whereas you got some of the other geographies where are actually a bit more supportive. I'm just curious if you can expand on that a little bit kind of what are your expectations for how European demand evolves in that business and to what degree can those other geographies continue to offset that? Thanks, guys.

John Sznewajs:

Yes. Yes. Matthew, maybe a little bit of additional color to frame this up for you. Recall that international sales are approximately 20% of our overall sales. And in that, Europe represents about two-thirds of that international sales and the rest of the world represents about a third. So we're -- Keith has just talked about it and what we referenced, so the two-thirds is roughly flat. The one-third of the business is growing nicely. So I just want to make sure everyone's got that in context, because a lot of people think our international business is solely Europe and it is -- it's much more diversified than that. Due to the good work that the Hansgrohe team has done over the years to expand their sales base across the globe.