Q2 2020 Masco Corp Earnings Call
Everland are you there.
Good morning, ladies and gentlemen, welcome to NAASCO second quarter 2020 earnings call. My name is bottling and I'll be your operator for today's call.
As a reminder, today's conference call is being recorded for replay purposes to ask your question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press the pound key I'll now turn the call over today that Tyson Vice President Treasurer, and Investor Relations you may begin.
Thank you Beverlin and good morning, welcome to Masco Corporation's 2022nd quarter Conference call.
With me today, or Keith Allman, President and CEO, Masco, and Johnson advice mask, as Vice President and Chief Financial Officer.
Our second quarter earnings release in the presentation slides that we will refer to today are available on our website under Investor Relations.
Following our remarks, well open the call for analyst questions. Please limit yourself to one question with one follow up if we can't take your question now please call me directly at 31379 to 5500.
Our statements today will include our views about our future performance, which constitute forward looking statements.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the four can statements.
We've described these risks and uncertainties in our risk factors and other disclosures in our form 10-K, and our form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics are references to operating profit in earnings per share will be as adjusted unless otherwise noted.
We reconciled these adjusted metrics the gap in our earnings release and presentation slides, which are available on our website under investor relations with that and I'll turn the call over to Keith.
Thank you Dave.
Good morning, everyone and thank you for joining us today.
I hope you and your families and loved ones are healthy and safe.
This is certainly a difficult time for all of us.
Despite the numerous challenges created by the covert 19 pandemic I am proud that the masco team has demonstrated support for one another.
Support for our customers.
And support for the thousands of communities we serve.
Our team has risen to the challenge and I'm grateful for their dedication.
Similar to the responsiveness that masco has shown throughout the pandemic.
We are not standing on the sidelines in the fight against racial and justice and any quality.
We are concerned about systemic racism.
Passionate about creating lasting change and committed to doing our part.
Over the last five years, our enterprise wide diversity and inclusion strategy has included actions within our company and our communities.
We fully recognize that we have more work to do.
But weve laid a solid foundation that will enable us to accelerate progress in the future.
At Masco.
We are committed to creating an environment, where all employees are included.
All employees are treated with dignity and respect and all employees have an opportunity and equal opportunity to thrive.
Now turning to our quarterly results. Please refer to slide four.
We executed extremely well in the second quarter and demand for our products improved as restrictions on production east and our distribution channels reopened.
This strong demand resulted in a record sales quarter for our paint business.
And along with our focus on cost control.
Resulted in better than expected decremental margins, and our plumbing segment and strong incremental margins and our decorative segment.
Combined.
Sales for the quarter decreased 3%, excluding the impact of currency significantly outperforming our expectations.
Operating.
Decreased just $5 million, while operating margins expanded 50 basis points to 19.5%.
Net income from continuing operations increased 3% and earnings per share grew 14% to 84 cents per share.
Highlighting the strength of our capital allocation and portfolio moves.
Turning to our segments, excluding currency plumbing sales declined 13%.
Sales varied widely across our businesses and plumbing, mainly driven by the extent of production facility and distribution closures.
Our spot business experienced the largest sales decline in the segment due to facility closures.
However.
Production resumed quicker than expected during the quarter and we were able to achieve a sales decline of less than half of what we originally forecasted in this business.
We continue to see record levels of demand and backlog for our spas, which speaks to our industry, leading brands and to the desire of consumers to enhance their at home living experience.
Our international plumbing business saw significant improvement throughout the quarter.
Germany, our largest market.
So a positive sales growth in June while other European countries, such as the UK in Italy have been slower to reopen.
Our North American plumbing business also saw significant improvement throughout the quarter with Delta achieving a record sales month in June with strong strength in its trade retail and E commerce channels of distribution.
Our stronger than anticipated sales performance in plumbing.
Together with our disciplined cost control resulted in decremental margins of 28% significantly better than expected.
And our decorative architectural segment extremely strong paint volume drove both top and bottom line performance.
Yeah, why sales were up high teens for the quarter and even stronger in May and June.
Our pro paint sales declined low double digits for the quarter, but we did see notable improvement in June.
With our leading bear brand, we are well positioned to continue to capitalize on the strength of the DIY market and we remain committed to invest along with our partner the home depot and the large pro opportunity.
As we discussed last quarter, we are in dynamic and uncertain times and accurately predicting the depth and duration of the impact of this pandemic is difficult at best.
While we have withdrawn our full year guidance here's how we are currently thinking about our expected third quarter performance.
We anticipate third quarter.
Turning currency to be in the range of flat to up 10%.
With plumbing sales in the range of down 5% to up 5% and decorative architectural sales growth to be in the range of 17, excuse me, 7% to 17%.
Third quarter operating margins for both the company and each of our segments are expected to be similar to last year.
Importantly.
This outcome outlook assumes no further shutdowns of facilities or points of distribution, which is obviously a concern as cobot cases spike in many parts of the country.
While the third quarter appears to be robust based on the demand, we're seeing and the backlog for our products.
We have concerns that demand could lessen in the fourth quarter, if government stimulus reduces and if the economic impact of the pandemic worsens.
Additionally, while we are focused on short term cost control. During this pandemic, we remain committed to driving long term growth and we will continue to invest in brand innovation and service to ensure we win in the recovery.
Lastly, I'd like to update you on our current thoughts on capital allocation.
We have suspended our share repurchase activity indefinitely due to the uncertainty at the current environment.
I'll remind you that we repurchased approximately $600 million of our shares prior to suspending our activity at an average price of $39.30 per share.
There is no change to our thoughts on M&A.
We remain active in the M&A market and have the balance sheet and liquidity to execute transactions. During these uncertain times.
Lastly.
Expressing confidence in our future prospects and the strength of our balance sheet.
Our board announced its intention to raise our annual dividend by 4% to 56 cents per share beginning in the fourth quarter.
This marks our seventh consecutive year of an annual dividend increase.
With that I'll now turn it over to John for additional detail on our second quarter results John.
Yeah.
Thank you Keith and good morning, everyone.
As Dave mentioned most of my comments will focus on adjusted performance, excluding the impact of rationalization in other onetime items.
Turning to slide six sales decreased 4% in 3% excluding currency.
Foreign currency translation unfavorably impacted our second quarter revenue.
Proximately $30 million.
In local currency North American sales in the second quarter matched prior year.
This performance was mainly due to lower volumes in our plumbing business, which were offset by strong volume growth in our DIY paint business.
In local currency international sales decreased 17% in the quarter driven by lower volumes.
Gross margins was 35.8%.
Down 90 basis points.
Our ESG needs a percent of sales decreased 140 basis points to 16.3% as a result of our focus cost continued in the quarter.
We do however, expect a portion of these costs to come back and impact the remainder of the year as demand improves.
These costs are related to investments in advertising to further strengthen our brands.
Plays.
To support New program wins.
In additional funding to advance our E commerce initiatives continued rapid growth of this channel.
Operating income of $344 million, the quarter down $5 million from last year operating margins, expanding 50 basis points to 19.5% despite lower volumes.
Our EPS was 84 cents in the quarter does increase of 14% compared to the second quarter of 2019.
While we do not normally provide monthly sales trends in this environment. We thought it would be helpful. For you to understand the improvement we saw throughout the quarter.
April was the low point.
The sales down 22% due to numerous restrictions.
Improving to down only 3% in may in.
And turning to growth of 14% in June as restrictions were ease in some of the pent up demand was fulfilled.
We anticipate continued solid demand in the third quarter sales.
Sales expectations, excluding currency of approximately flat.
To 10% growth as this pent up demand continues to get fulfilled.
Operating margins similar to Q3 of 29 team.
Many uncertainties remain that can impact these results.
Such as the effect of government stimulus programs in the impact the virus on the overall health of the economy and consumer.
Additionally, it is important to note that our expectations for Q3 assumes no further closures of our manufacturing plants or points of distribution related to covert 19.
Turning to slide seven.
Plumbing decreased 13%, excluding the impact of currency.
But improved sequentially during the quarter with June sales up high single digits, resulting in better than expected segment performance.
Foreign currency translation unfavorably impacted this segment sales by approximately $10 million in the quarter.
North American sales decreased 11% in local currency and solid growth in our retail and E. Commerce channels was more than offset by declines in our wholesale in specialty dealer channels.
The trade channel was more impacted by the closure of whole wholesale locations and plumbing showrooms.
However, we saw significant improvement and positive sales growth in the trade channel in the month of June.
While deltas sales in the quarter were down low single digit.
The recover exceptionally well from a significant decline in April to a record sales month in June.
North American sales in the quarter also unfavorably impacted by approximately 7% is result of facility closures and our spot business in California, and Mexico due to government orders.
Spawn manufacturing didn't ramp up in May in June as restrictions worries.
However, Watkins continues to operate in less than 100% capacity.
Due to ongoing employee limitations in labor constraints and our facilities, we should we expect to continue throughout the third quarter.
International plumbing sales decreased 17% in local currency.
Hansgrohe experienced a low single digit decline in the quarter in his home market of Germany.
However, sales improved in June with mid single digit growth.
Hi, guys grow saw a larger declines in the quarter, another European markets, including the UK, France, Spain, and Italy due to the slower easing of restrictions in those countries.
Sales in China also declined low single digits for the quarter, a significant improvement from the approximately 20% decline experienced in the first quarter.
Operating profit in the quarter was $159 million in margins were 18.3%.
Our decremental margin of 20% is better than expected due to improved volumes and solid execution on cost containment.
In terms of monthly sales trends.
Plumbing sales were down in April 33%.
Improved two down 17% in may in rebounded to 8% growth in June.
Turning to the third quarter, we expect sales excluding currency to be in the range of down 5% to up 5% is we currently see good demand for our products in North America, all international demand remains slower to recover.
We anticipate margins will be similar to prior year margins of 18.7%.
Turning to slide eight.
Decorative architectural grew 8% in for the quarter.
This strong performance was driven by low double digit growth for our paint business.
With high teens growth in DIY paint.
Partially offset by low double digit decline in propane, resulting in a record sales quarter to bear.
Our outstanding DIY paint results benefited from the continued resurgence in DIY painting.
While it's still too early to call. This a trend.
We remain well positioned with bears compelling quality and value proposition to capitalize on shifts in consumer behavior.
While propane demand declined in the second quarter, we saw sequential improvement within the quarter with June sales down only low single digits.
Our Bill is hardware business also experienced growth in the quarter.
Driven by solid performance in the retail in ecommerce channels.
Growth was partially offset by lower sales in our lighting business.
As we mentioned on our first quarter earnings call.
Lighting sales were impacted by while the loss of a portion of a private label program in inventory rebalancing into customer.
Results were better than anticipated.
Sales were also negatively impacted by the closure of lighting showrooms due to state shelter in place orders.
Lighting sales improved sequentially in the quarter with year over year sales growth in June.
Operating profit increased in the quarter by 17% driven by incremental volume and focus cost containment, such as reduced marketing and advertising spending.
In terms of monthly sales decorative sales were down approximately 9% in April.
Were up 13% in may not been outstanding 23% in June.
Turning to the third quarter, we expect the strong demand for pain to continue in anticipate segment sales growth to be in the range of 7% to 17%.
In margins to approximately prior year margins of 18.9%.
We also anticipate higher investment in the third quarter and advertising and marketing in the segment and additional display expense in our builders' hardware business related to a program win and a retail customer.
Turning to slide nine our balance sheet remains very strong with net debt to EBITDA at 1.3 times as we ended the quarter with approximately $2.1 billion a balance sheet liquidity.
Which includes full availability of our $1 billion revolver.
Note that our quarter end cash balance includes a 200 million dollar benefit.
Due to the deferral of taxes owed on the sale of our cabinetry business.
This tax was paid on July 15th.
Working capital as a percentage sales have improved 50 basis points versus prior year to 18.1% due to lower inventory levels and an improvement in accounts payable.
Lastly.
During the second quarter, we received 2.3 million shares at no additional cost to complete our 350 million dollar accelerated share repurchase agreement and average share price of $36.63.
As Keith mentioned, our share buyback activity remain suspended therefore, we continue to estimate our 2020 average diluted share count will be approximately 266 million shares.
And with that I'll turn the call back over to Keith.
Thank you John.
The cobot 19 pandemic may have lasting structural effects on the economy consumer behavior and homeownership.
All of which we will continue to assess.
There could be increased interest in single family housing with more space in the house and more distance from neighbors.
Increased remote working could lead to higher remodeling spending.
Homeowners may take on more do it yourself projects, especially easy to do projects such as painting as to Paul as opposed to having other people in their homes.
And record low mortgage rates and lack of supply could lead to home price appreciation, which historically has a strong correlation with our sales.
All of these factors bode well for our lower ticket repair and remodel products.
The changes we have made to masco over the past few years.
Our culture of execution.
And our commitment to continue to invest in brand innovation and service to support our customers.
Positions us well to drive long term growth and value creation.
With that I'll know and I'll now open up the call for questions.
Operator.
We'll go to transform everyone have a chance to participate we would like to request. Thank you limit yourself to asking one question and one follow up question during the Q any session.
You asked a question. Please press Star then the number one on your telephone keypad.
Sure withdraw your question press the pound key.
Your first question comes from the line of Matthew Bouley month Barclays capital.
Hey, good morning, Thanks for taking the questions of everyone's doing well.
I guess I wanted to start perhaps on the sales guidance for Q3.
It's a relatively wide range.
And thanks for all the details around the monthly cadence, but I'd be curious if you could.
Give some color on sort of the starting point for the quarter and how July trended in both segments and you know kind of whats keeping you a little more conservative on providing such a large range there. Thank you.
Now the July was strong for us and we.
Our starting off the quarter confidently.
However, when we think about the large range I think it's clear that there is volatility and variability as we look forward in terms of what can happen with the consumer and that's fundamentally.
What to drive what's driven our thinking as it relates to the range and possible topline.
Okay understood.
Secondly, just on DIY paint specifically.
Obviously very strong results and seems like it's going to continue strong through the summer months at least and.
I hear you on making some investments there into Q3.
What do you what are you doing or what's kind of the intent around share through this is there an ability to kind of maintain or even lower really grow your market share.
While this underlying demand is strong or or does it make more sense to kind of limit the promotional investment in sort of ride to the underlying way if there. Thank you.
Well no question, there's an opportunity to gain share and we're doing just that.
A significant changes we look at the performance from a demand perspective, DIY related to pro and when you overlay that with our strong position with the leading DIY brand. We most definitely are gaining share and that's our intent to continue to do that.
We as we've talked about consistently Matthew our focus has been on three things number one is the safety of our employees full stop that's our focus number two is to make sure we're ensuring business continuity and keeping at okay close eye on our liquidity and we have very strong liquidity as a result of the strong cash flow.
Of our portfolio, so that strong and number three consistently we've talked about winning in the recovery.
And part of that winning in the recovery is making sure that we're investing appropriately and brand in innovation, John talked a little bit about some new displays particularly in this.
Decorative architectural segment that will also be spending and so it's.
It's a judgment call and it's a feel if you will have but we are committed to ensuring that we spend appropriately to win in the recovery and that's how we're thinking about it.
Thanks, Keith Congrats on the results.
Thank you.
Your next question comes from the line and Stephen Kim Evercore.
Yes, thanks, very much guys good quarter I wanted to ask you a little bit about what you're seeing in the U.S. with respect to inventory levels and restocking wondering if it's happening yet how long could at last.
And I'm imagining that would probably be more impactful in all in maybe your wholesale specialty dealer channel just wanted to confirm what that like down as much as high teens in the in second quarter.
I'm, sorry, Steve and I didn't hear that last portion of your question.
Im sorry, the wholesale in specialty dealer channel with in plumbing was that down as much as high teens into Q.
Yes, Stephen it's John No I would say no are actually.
Couple of points are like May you sell through has been very good is probably better than selling across our channels.
And we've seen.
Once we saw the trade channels search reopen we feel very good.
Sales trends there is there no our sales were not down.
The the teams that you described it was less than that.
In terms in terms of inventory Steven it really varies a lot business to business.
As you know we had some shutdowns in Q1, driven by government orders that certainly put a debt and our inventory levels as consumers continue to buy our products and paying for example, we're seeing an unprecedented amount of demand, particularly demand for the one gallon DIY friendly containers. So there there was some inventory.
Alex fluctuations both from a business to business perspective, as well as within our businesses, but our facilities are ramping production back up we're catching up.
On that backlog and we believe we're in a good position to serve our customers as we go in here through the summer months.
Okay, great. Thanks for that.
Just to clarify so are you, saying that you feel like in Threeq, you can pretty much catch up on whatever destocking occurred or do you think but this is something that we're going be talking about through fourq, you or even further.
No I think we're going to catch up.
Okay. Thanks very much.
Your next question comes from the line and John Lovallo en Banc of America.
Hey, guys. Thank you for taking my questions first one maybe I'll just try matts question one more time the June sales trends, obviously very strong plus 14% would you say July was comparable to that at least.
On a year over year basis.
Yes, John I think it was yes, I think it very very similar yes.
That's helpful. And then maybe just turning to SGN a that you know the $39 million. So pulled out on a year over year basis is very significant and I know you guys talked about some investment and displays and E commerce and so forth how should we think about absolute dollars of SGN a on a year over year basis in Threeq and Fourq will they actually be down on a year over year basis or.
Do you think those trend upwards again.
Yes.
Hey, I don't think there'll be.
[music].
Down year over year.
Im sorry, there will be.
I'm, sorry, I think bill.
I think SGN a.
Year over year, John well have some additional investment there when ahmeek.
In the things that we described like advertising.
Some head count coming back in as you might expect Weve.
Really pulled back on head count we had a hiring freeze we have wage freezes across the enterprise as we came in the second quarter in as good as demand is has come back we're starting to look at putting some of those things back into the system.
One of the things that go through SGN is Keith mentioned and I mentioned in my prepared remarks as some of the displays then we'll be going in.
Two.
Support Liberty in program when that they had and retail so I think we'll have some additional investments some advertising that we pulled back on pretty significantly well, we'll come back in.
The third quarter, So I think.
Overall.
Yes, I think we'll be in good shape I can tell you. We're monitoring this very very closely and to the extent that we see any changes will be very quick to react on our SGN a spend.
Okay. Thank you guys.
Your next question comes from the line of Michael Rehaut JP Morgan.
Okay.
Thanks, Good morning, everyone and congrats on all the hard work.
Okay.
[music].
Wanted to just again kind of zero in on Threeq, you a little bit and.
You know number one.
Appreciate the additional color around July.
If you're talking about the high end of the Threeq you range being a few points below.
June and maybe July.
Are you seeing anything in your order book or anything you know from.
Through like a forward look into the last few months that lets you you know maybe 10 point kind of mid point.
Although you know what youre seeing in July.
And then I guess also on the operating margin side.
When you look at operating margins being you know similar to a year ago, but down a bit.
Actually.
How much of that is maybe the you're coming back some of those temporary cost measures. We are holding back on some advertising and other types of span.
How much of that is.
One of some of those costs coming back.
Rather than perhaps just seasonality.
Well, certainly seasonalities that part of that if you look Mike it paint Q twos, our heftiest quarter and that it backs off a little bit in Q3. So there's an element of seasonality when you look at volume, particularly in pain.
The.
The biggest driver would be costs that we're planning to put back end of this business when we look at Q3.
And I think we we had a keen focus on business continuity as I mentioned and liquidity and we did not know what.
What this pandemic it was going to deal us in terms of overall demand. So we were cautious and we I.
I think it's.
Favorable that we were able to demonstrate that we do have the levers to be able to call control our spend.
Because this is an unpredictable environment.
So we're balancing that spend control with investment to win in the recovery and we feel where we sit today.
That's appropriate for us to start to layer that investment back end, we've talked about program wins and the displays.
Cost that we need to put in to support that program. That's a good thing.
We're going to continue to drive advertising promotions those sorts of things in terms of.
Continuing to build our our brand and continuing to take share in this recovery. We also admittedly have some increased cost as we look into the third quarter as it relates to hiring costs over time, there will be a little bit of premium freighters, we're continuing to smooth out our supply chain. So when you roll all those and then you look at that variability that's.
Why we're making the call for Q3 margins to be similar to last year.
And then following the.
Sales question.
Appreciate it.
On the order book and what are we seeing all we have wherever we have a real solid order book and we have.
As John mentioned, the the sell through has been very strong stronger than the cell and so we have some ability for us to continue to.
Put some inventory back into the channel and our order book is strong.
Thank you.
Your next question comes from the line Candela Keybanc.
Hello, everyone.
All right again warning.
What a quarter focused on plumbing and two parts.
First what is the plumbing SK, you've mix, you're seeing so kind of it.
Rough.
Verse fittings focused on the U.S.
And then kind of that thoughts about it and retail is picking up a lot of.
Traffic from the trades, having Stanley talked about record retail salads are reducing people going to retail it. It wasn't so bad in the trade and then also just rough trends in the U.S. and fittings first question.
I think generally speaking the rough tends to have a little bit more new construction component to it then finish as you can certainly dealer.
A remodel or repair and remodel job with a fossett et cetera.
Versus going under the deck and working with staffs are working with rough plumbing. So there was a little bit of a.
Tougher impact on or off as it relates to the temporary shift we saw earlier in the quarter away from new construction now we're starting to see that build.
In the in the last month of June in the quarter as it relates to rough but.
To answer your question I would say that finished fair to little bit better than rough for that.
Demand mix in terms of retail versus wholesale I think.
Pretty consistent story to what us and others have been saying when we when you have points of sale on points of distribution closed I see plumbing showrooms.
That volume goes down so there was a shift to retail a shift to ecommerce that we've we saw in the first call. It two months of the quarter and then in June that we're saying that start to come back and we're seeing actually some some very nice traction in showrooms as people are starting to interface with that channel more as their reopened.
And is there any difference in the consumer behavior in plumbing, specifically in the U.S first Europe. If you could kind of contrast that it might offer some insight. Thank.
Thank you.
I don't know that I'd say so much.
That is consumer behavior. So much we really havent seen haven't seen that.
On the best way to tell that really is to look at channels of and traffic and channels that look at mix.
Really what we're seeing I would say broadly speaking is that Europe has been slower to recover than our recovery here in the United States.
And that May say, something about our infection rates here in the United States versus Europe frankly.
But it's been a little slower.
In Europe, you look at the UK.
Just thinking here, Spain, Italy, I would say those those countries approach to.
Reopening has.
Vince significantly less aggressive that in the United States, and that's where I would say, there's a difference more so than say consumer behavior.
Thank you.
Your next question comes from the line of my goal of RBC capital markets.
Good morning, Thanks for taking my questions.
A quick quick quarter against such a fluid.
Backdrop.
First first question I had just on.
Duck arc and paint specifically.
Are you kind of commented that propane got back to down low single digits in June.
If I, if we take about that business being I think roughly 20%.
Over the total coatings segment it sounds like that was maybe like a two point drag in the quarter.
Based on the overall trends so when you're looking at the guide for Threeq, you up 7% to 17%.
And any thoughts on.
How to.
Frame what propane.
Expectations are and how much that could either contribute or continue to drag on segment results.
Yeah, Mike so.
The first of all the the pro business about 25% our pain sales.
And as we look forward to Q3.
You know, we expect it to be.
Just modest growth from from here on I mean, we don't expect significant.
Yes.
Slight improvement from where we're at today, but not a significant improvement is what we're counting on in the third quarter.
Okay got it and then the second question just back on.
Margins appreciate the certainly at the investments on the cost returning same time if.
At the midpoint were back in a growth environment and teeth normally lever on that and and at least in and plumbing not not sure about on Dec arc foot and plumbing email so how some.
Cost tailwinds from raw mats potentially.
It's the is there is the reason for flat margins. Then overall just is it timing of when these investments come through on a year on year basis or is it.
I guess trying to think about how to frame.
Whether the investments are significantly larger and in general or or whether it's it's truly just kind of catch up from on deferred to Q in into Threeq, So little more stacked a year on year than you normally be.
Mike I think it's more of the latter part.
It's more just kind of a catch up from some of the Q2 spend that we did not incur.
Yes and.
Well I across all segments, it's pretty much the same story.
That we're putting in the investor and displays for for the builds hardware business a lot of the investment there were putting back into the business as Keith mentioned, a couple of minutes ago similar right. We're reinvesting some of the head count because we're slowly listening.
The head count freeze that we had the hiring freeze that we had on.
Turning to reinvest in the brands.
Appropriately.
We're not trying to get too far out there, but we think appropriate investment on in the brands. It makes sense at this point to continue to support.
Our brands in the brands with our retail partners.
In terms of price cost.
I'd say.
As you think about the commodity basket there, we're seeing Mike now.
Break that apart I guess in to the two segments zinc has been relatively flat maybe up a touch.
Copper has.
As a result in the last month or so and so to today, it's above where it was a year ago, so that it could be potentially.
A little bit a headwind in the future recall that it takes about two quarters for raw material inflation of flow through in hit RPL, So maybe a little bit of the the the tailwind it will enjoy.
And on the commodity side will help offset some of the tariff impact it will continue to feel as we go into the second half the year on the plumbing side of the business.
Then if you.
Your turn into the and look at the raw material basket.
The decorative architectural aside.
Our tea.
Two has been relatively stable through the year and we expected to be continue to be steel to really the balance of the year.
The one area that we had seen a little bit of using is on resins.
And we do.
We are seeing a little bit of potential for that too.
Maybe Q2 to be the bottom of that and and to see a little bit of inflation as we go into that.
Last half the year, so there's the potential for.
Some put price cost headwinds in the second half the year on a decorative architectural side.
Okay. Thanks, that's really helpful.
Yes.
Okay.
Your next question comes from the line of Susan Maklari of Goldman Sachs.
Thank you good morning.
My first question is a bit higher level. It feels like from your commentary that what we've been seeing over the last couple of months is that.
The mix shift that we historically see recessionary periods really has not come together to the same extent.
You think that that's that's accurate and I guess, how are you thinking about mix shift going forward and this sustainability and some of the trends that we've seen.
I think Susan that that is an accurate statement.
In terms of the mix shift that maybe you would say is typical.
Let's say a recession that we havent haven't seen and there's there's several different theories on on why that is perhaps it's more affluent.
The customers that would buy that higher level mix havent really benefited in terms of unemployment or haven't been affected by the pandemic. So far so that's an aspect of it but we are we are seeing a.
Hi, good high quality mix at that high level, and we're seeing it across our segments, we talked about.
Record backlog in our spot business and that's a high dollar discretionary purchase and we have.
Very solid demand. So I think I think that's a fair statement in terms of where we think.
Next we'll go as we look.
Through the rest of the here, we really don't think it's got to be much of a factor. We've we had a little call. It channel mix early on you know in the quarter as.
Retail was stronger than trade and we have a little bit of a mix headwind in Europe as that economy has yet to really.
Pull back through but we anticipate that when we look at the full year impact that it really isn't going to be that material as it relates to mix.
Okay. That's helpful and on keeping your comments you talked about capital allocation and it sounds like the M&A pipeline is perhaps picked up a little bit for you can you just give us a little more color on what you're seeing there on how you're thinking about perhaps M&A relative to shareholder returns it and that kind of breakdown.
The.
Pipeline has really been about the same we continue to continue to work and to drive it we have interesting targets I think.
Probably you know in this type of event of an environment that there's less of a willingness to sell.
Clearly, but we're still talking to people so I wouldn't expect much activity or much difference in terms of.
How we think about M&A in shareholder return and how that fits into our capital allocation.
As I talked about really no change.
Our capital allocation strategy is to fund the good idea about because of our businesses and to support our core business first and foremost.
And we're going to maintain a respectable unhealthy dividend continue to grow that dividend and then as it relates to share buybacks and.
M&A or acquisitions.
We're going to be patient and I think we've demonstrated that and we will take advantage of episodic times to buy our stock a little bit more heavily as we have in the past and will also be patient and make sure that are our M&A targets, our shareholder value, creating and that there by and large when looking at bolt on to our exists.
Segments and that hasn't changed.
Okay, great. Thank you good luck.
Thank you.
Your next question comes from the line of Seldon Clarke Deutsche Bank.
Hey, good morning season. Thanks, a question on what's the right way to think about either incrementals are decrementals in either plumbing or decorative if sales come in at the.
Either book end of your guidance are there.
I know you talked to add some temporary costs, but.
Would those scale with revenue growth if you come in in decorative for example at the higher end of the 70, 70% range or should the fixed cost base stay fairly consistent.
Yes, so I would tell you that our incrementals really haven't changed much overall from the company perspective on that 30% to 35% range.
The plumbing segment, you should be an approximate that same range 30, or 35%. The decorative architectural segment will be a little bit less than that closer to 25% to 30% range. So.
Yes.
So that should reflect some some good leverage of fixed cost, but really no significant change from what we've experienced historically.
Okay.
That's helpful. And then just a couple of quick ones on the spot business.
First is just how much seasonality is there in that business and.
And you talked about seeing a significant pent up demand but.
Did you lose any market share in the second quarter or all the major manufacturers constrained from a production standpoint.
When you when you when you look at the industry everybody's constrained at this point so.
You're right on that assertion for sure no question about it in terms of seasonality typically.
This is a very seasonal business, however, with our strong order book in our backlog.
We anticipate that seasonality.
Through the summer falling into the winter frankly to not be there. This year, we've got a tremendous backlog and we're looking forward to filling it yeah quite honestly. So in this is this is clearly not a demand issue. This is is this a supply issue. I mean this was we were not permitted to manufacture and so it's a key point, we're seeing really good strength in this business.
Okay. Appreciate the time thanks, guys.
Thank you.
Your next question comes from the line and Baumgartner upgraded please.
Hey, Thanks for taking my question I'd, just didnt paint curious if you saw any meaningful difference sales growth between exterior and interior and maybe how that trended throughout the quarter.
Sure Yes.
Because given the nature of the seasoning generally in the second quarter, we see we saw a stronger sales and exterior paint than we did an interior paint.
During the second quarter Adam.
And probably a little bit stronger than we wouldn't normally see his.
Versus historical second quarters, but in I take it thats the nature of.
The current environment in the pandemic.
Got it and then just to confirm on the decorative guidance for Threeq. You on sales you are you assuming positive sales growth for the pro paint business and also will killer in liberty be up in that in that guidance that yet.
So kissler Liberty will continue their growth, though it will be modest.
Over on the segment because they're relatively small pieces of the segment and then we are expecting.
Modest growth for the pro business in this in the third quarter.
Got it thanks appreciate it.
Your next question comes from the line of Ghansham life loop capital.
Hi, Thanks, just wanted to follow up on the on a pro question do you think we're at a point just given the trends that you're seeing in July and expected Q3 that were more.
The level program and I guess, Conversely, if not do you think there over the next several quarters in years potentially that you're going to see secular shift back category to the resurgence in DIY interest.
Hey, Gary I'm going ask you to repeat the question there is little bit of.
Interference on the call when you are asking your question sorry.
Just wondering if you're starting to see propane shields normalize into July and in the third quarter.
Then.
Personally if not do you worry that there could be a secular shift away from this category due to the resurgence in DIY interest.
The we are seeing a throughout the quarter, we are seeing pro pick up a little bit was strong and exterior as I think people, obviously are more comfortable having people on the outside of their home than inside.
And we saw it as we mentioned in our prepared remarks lift up in the quarter in terms of if we're concerned about that the resurgence of the of or lack of resurgence of the pro no we're not.
We have a.
Solid plan and track record for share gain in the pro or we're going to continue to do that but fundamentally we have the leading DIY brand and DIY is our sweet spot for lack of a better word and we're excited about this particularly when we look at some of our research where are we.
We think.
A full call it 30% of the painters that have painted in that in the pandemic, where first time painters and if you Peel that back about half of those first timers, where millennials now this is.
A thesis is that we have been talking about for some time as it relates to the millennials coming into the market forming households, and that big covert being able to be a tailwind for our DIY business and we do think that this will be a structural shift and and we are poised and ready to take advantage of that so.
Our.
Having both a an incredibly strong brand in DIY and a growing and solid business in pro I think is good spot debate.
Okay. Thanks for that I'll follow up question is are there any incremental costs associated with transitioning to one gallon paint production and away maybe from five gallon and how quickly or is there any sensitivity. If you have to toggle between the two quickly production.
Yes, there's there's a little bit of inefficiency, obviously, because you're not running your plant as smoothly and with one gallon fill rates as you are with five.
And one of things we will be doing is we will be investing an additional one gallon capacity here in the coming months and so.
In support of this trend and so we feel confident that.
No we can.
Prove our efficiency you get back on track there.
Thank you.
Your next question comes down the line of Truman Patterson of Wells Fargo.
Hi, Good morning, guys nice results and thanks for taking my questions.
First on Kishore, there you know some moving parts there.
Previously you had to push price pretty meaningfully to cover the increase tariff costs.
You know it seems like demand is rebounding in that category in June but can you just discuss has that continued into July.
And our your margins starting to normalize in that business are you actually really you know recapture the tariff costs in this environment.
Yes, we are seeing continued improvement in the demand throughout the quarter that ended July here. So that's that's a good side. We continue as we've talked about to work to strengthen this business and we've worked on restructuring.
We talked last quarter about closing, a DC and some workforce rationalization, so thats advancing well and were largely on track for our turnaround plan with this business and we're continuing to drive it. So we feel good about the team down there and the progress that that they've made we continue to to advance our strategies.
Cost strategies brand building strategies, 80, 20, and Assortments simplification, so that we can invest in growth more.
And it's on plant.
Okay. Okay. Thanks for that and then just following up on a few other questions.
DIY why you know who has been very robust past few months.
Double digit growth rates plus.
I don't think anybody expects that to really.
Continue forever.
More recently in July have you seen any sort of deceleration or consumer fatigue or anything in the DIY category.
No two minute not at this point and July continue to be very strong.
Okay. Thank you.
Your next question comes from the liner.
Jefferies.
Hey, good morning, everyone appreciating how the pandemic is impacting us your international business, it's having an impact on demand for plumbing. This year, but if we zoom out to 2021, how are you thinking about the growth profile of the U.S. versus international plumbing business any big Delta out there.
Well I think were.
Or equally position and well positioned bolt on both sides of the Atlantic here, We've got to strong franchise of bear we've got both orders and the water. If you will as it relates to D. I lie in pro and an effective way, where we've worked to have.
Significantly improved our margins in pro so we're we're very much in tune to growing both sides.
Of that business, leading brand in Delta in the United States that continues to grow well and and as we said had a record quarter.
In June so that momentum is continues to be strong and then when we look over in Europe, We've got an outstanding brand with hands growing and because of the nature of that brand, we're able to operate really around the world quite profitably and still have a significant amount of white space in share gain potential.
And opportunities. So I think we feel equally strong and feel good about our share gain and our growth opportunities. Both here in North America as well as abroad.
Okay, that's really helpful.
And then just given the strength, you're seeing in plumbing and things kind of firming up of catch LER.
In recent months any concerns that we should be mindful of in terms of logistics importing components from China did pandemic and does that pose a risk on just kind of meeting that demand whether it's on the plumbing a lighting side.
Okay, I really have to hand, it to our supply chain and when I say supply chain I mean.
The folks that work in our factories, the folks that plant our inventory and our suppliers. We have we have really lean down that group and manufacturing is not typically set up to go.
From 60 to 30.
In a matter of a couple of weeks and then jump from 30 to 90 in the following month and our supply base in our factory and the professionals that work there have done a phenomenal job and particularly from a supply chain standpoint, and a supply base.
At our big suppliers, they have been there to support us and we're not going to forget that we're very thankful for the supply chain that we have and we do not things can change clearly this is that dynamic environment, but we do not anticipate.
Any significant or material issues as it relates to our supply chain.
Okay. Thanks, I appreciate the color.
Your next question comes from the line of Keith Hughes of Suntrust.
Are you on mute Casey.
Mr huge enrolling in Arizona.
Yes, sorry mechanics, and as you start again on the Watkins business.
Played a role.
In the decline in the second quarter can you give us any sort of feel for how much that will be reflecting the plumbing business third quarter.
Okay, that's maybe a modest headwind and in the third quarter inconsistent on up to 400% capacity, even though they've got very strong demand and the team has done a terrific job, they're responding to that demand.
Because of some of the capacity restrictions that are still in place.
Hey, resist will be a bit of a headwind, but not significant.
Okay. Thank you.
Your next question comes from the line of Stephen Ramsey Thompson Research group.
Good morning, just a quick question high level I guess Pontification I mean, you then.
That Q2 is come back strongly.
In the Q3 results are expected to be pretty solid and you talked about the factors shaping up for single family are in our.
As being very positive, there's still a lot of macro uncertainty but.
It's still I will just like to get your thoughts on bridging 2020 into your regional.
Now taken off 2021 guidance given at the Investor day, It seems achievable, but just curious if the factors are setting up now for 2021 to be strong year.
Yeah, I think I think so you know we've we look at where we're reviewing that original investor day targets and we think it's very possible that we could could be in there as I recall plumbing. It that 18 to 18, a half percent Deco and that 17 that have to 18 masco overall at 16.5%.
In terms of margin.
Yeah, I think that I think that is doable.
We.
Have without a doubt seeing the benefit of our portfolio reconfiguration certainly the pandemic played into that but when you look at our resilience.
The fact that low ticket items.
And the DIY orientation.
Our right in the sweet spot of where the consumer wants to be at this point, where they want to spend their money I think that that that bodes well for what 2021 could or could be for us I will also say Steven that.
We're in a dynamic environment and that we're not we've we've.
Not giving guidance for the full year here and 20, and we're certainly not going to give.
Specific guidance for 21, but as we look at small ticket DIY why the overall health of the consumer and how we're positioned against that feels pretty good.
Great. Thanks.
Your next question comes from the line and Justin Thier Zelman and associates.
Hi, Good morning. Thank you guys I just a quick question on the fall disruption could you could you reiterate what that was too so the growth and the plumbing business and then does that fall into North America, and or international or both just curious if you could back out the small disruption for your North America International markets just to say the distinction between the two.
Yes.
The this the.
Interruption or the headwind for spot was really driven by a California state order and by a Mexican national order and that's where we have the majority of our manufacturing. So we were down could produce for for quite a period of time in terms of the accounting international yes. So.
Justin that's all in our North American plumbing results Okay.
So I'll get that from a transcript, but as you look at the too.
The two geographies with North American geography trending a little bit better. Obviously, then the international geography is there any major distinctions in terms of behavior as folks shelter in place in North America versus international markets as you see it or is there anything else that explains some of the disconnect in terms of the differences and growth.
I think it's as I mentioned, a little bit on a prior answer I think it's more.
Country, a nationally oriented as it relates to closure and associated reopening cadence us versus international that has so much consumer behavior.
Where our demand for spas.
Which interestingly enough our spot business is one of the most global we have in in Masco as it relates to present, a volume from outside North America, and we have strong demand in Europe as well.
Okay.
And just the states.
Just to maybe sometime in the North American impact on a spot business was 7%.
Okay Thats perfect and then the last question for me as well, but the back switching gears to paint business point of sale or the sell through versus the settle in was is it fair to say that the sell through was stronger it sounds like it was much stronger than what you reported in your results.
That's correct.
It was that I guess from that standpoint, how does that work from a channel inventories that standpoint is that is going to throw off typical seasonality of of the tech typical by and ourselves and.
Trends for you as we think about a third fourth quarter.
Not significantly just to know.
Okay. Thank you very much.
Ladies and gentlemen, we have reached our allotted time for questions.
Thank you for participating in today's conference call. This concludes the Paul you may now disconnect.
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