Q3 2020 Masco Corp Earnings Call
Good morning, ladies and gentlemen, welcome to the <unk> third quarter 2020, <unk> earnings call.
My name is Maria and I'll be your operator for today's call.
As a reminder, today's conference call is being recorded for replay purposes.
Yes. Good question. Please press Star then the number one on your telephone keypad.
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I will now turn the call over to say the Shopko, Vice President Treasurer, and Investor Relations you may begin.
Thank you Maria and good morning, welcome to Masco Corporation's 2023rd quarter Conference call.
With me today are Keith Allman, President and CEO of Masco, Johnson, Nice Mascus, Vice President and Chief Financial Officer.
Our third quarter earnings release, and the presentation slides that we will refer to today are available on our website under Investor Relations.
Following our remarks, we will open the call for analysts questions. Please.
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 forward looking statements.
Weve described these risks and uncertainties in our risk factors and other disclosures in our form 10-K or form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics, our references to operating profit and earnings per share will be as adjusted unless otherwise noted.
We reconcile these adjusted metrics the gap in our earnings release and presentation slides, which are available on our website under Investor Relations.
With that ill now 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 are staying healthy and sales in these difficult times.
Please turn to slide four.
During the third quarter demand for our products was extremely strong as consumers continue to re evaluate how they use their homes in the face of ever changing responses to the pandemic.
With more time at home.
And more disposable income due to reduced discretionary spending on leisure travel entertainment and gas for commuting to name a few.
Consumers are investing in their homes.
I'm very proud of our strong execution as we met this increased demand and served our customers while maintaining our top priority.
I've employee safety.
This resulted in tremendous performance on both our top and bottom line.
Sales for the quarter increased 15%, excluding the impact of currency.
Operating profit increased $127 million or 43%.
Operating margins expanded 400 basis points to 21.4%.
We delivered strong incremental margins 48%.
As a result of our ability to profitably leverage the robust volume growth and.
And to pull the right cost reduction levers.
Earnings per share grew 73% to one dollar and four cents per share.
Turning to our segments excluding currency.
<unk> sales increased 12%.
North American plumbing sales grew 14% led by extremely strong performance at Delta, which drove greater than 20% growth across each of its retail E commerce and trade channels.
Trade sales in North America were particularly strong in the second half of the quarter with Delta achieving record trade sales in both August and September.
Delta was recently recognized as the home depot marketing partner of the year.
This is an annual award across all upon people suppliers and speaks to our commitment to partner with our customers to drive growth through innovation.
Omni channel expertise and strategic thought partnership.
Our spot business also rebounded nicely in the third quarter and achieved growth despite.
Despite still dealing with government limitations on the number of employees and its factories.
Record levels of demand and backlog for our spas continued.
As consumers look for ways to enhance their at home living and backyard experience.
Our international plumbing business also posted strong growth up 9% excluding currency led.
Led by growth in Germany, and China.
Well Europe as a whole rebounded in the third quarter.
Certain markets remain challenged such as the UK and Spain.
And our decorative architectural segment.
Sales grew an exceptional 19% as we drove growth in all product categories, including paint.
Bath and cabinet hardware and lighting.
Our d. I Y. paint sales remained very strong in the quarter with growth in the upper 20% range.
Propane declined mid single digits, a significant improvement from last quarter.
Paint demand has remained robust as it is a simple economical project that homeowners can do themselves to improve the appearance of their home.
Across all of our business units it was an exceptional quarter.
I would like to again, thank all of our employees for their tremendous efforts in serving our customers.
And keeping each other sales.
Now moving into our fourth quarter outlook, we anticipate demand to remain strong and expect fourth quarter sales growth excluding currency.
To be approximately 8% to 10% in both segments.
Additionally, we.
We expect fourth quarter operating margins for our plumbing segment to be approximately 19% and operating margins for our decorative segment to be approximately 17%.
Together this.
This would put masco is operating margin at over 17% for the quarter a year over year expansion of approximately 150 basis points.
As it relates to EPS DNA as a percent of sales.
We anticipate further investment in our brands innovation and service to ensure we continue to deliver long term sustainable value creation.
This 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 United States and the world.
Lastly.
I'd like to update you on our capital allocation.
While there remains uncertainty in the current environment.
Based on our strong balance sheet and liquidity, we do plan on resuming our share repurchase program in the fourth quarter.
While the amount of repurchases will be subject to many variables. Our initial plan is to deploy approximately $100 million towards repurchases in the quarter.
And finally there.
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 with the right strategic fit and return.
During these uncertain times.
With that I'll turn it over to John for additional details on our fourth quarter or excuse me at our third quarter results John.
Thank you Keith and good morning, everyone.
As Steve mentioned most of my comments will focus on adjusted performance.
Excluding the impact of rationalization and other one time items.
Turning to slide six we had an outstanding quarter sales increased a robust 15% excluding currency.
Foreign currency translation favorably impacted our third quarter revenue by approximately $13 million.
Local currency.
North American sales in the third quarter increased 16%.
This exceptional performance was mainly driven by strong volume growth in our DIY paint.
In North American plumbing businesses.
Local currency international sales rebounded nicely from last quarter and increased 9% over prior year driven by increased volume.
Gross margin was 38% in the quarter up 210 basis points, driven by increased volume and cost leverage.
Rs you know as a percent of sales decreased 200 basis points to 16.5% as a result, a fixed cost leverage and our continued focus on cost containment.
Operating income was $425 million up.
Oh up 127 million.
Dollars or 43% from last year.
Operating margins expanded 400 basis points to 21.4%.
Our EPS was one dollar for an increase of 73% compared to the third quarter of 2019.
Companywide incremental margins for the quarter were a strong 48% due to operating leverage on the exceptional volume.
Our continued focus on cost control and a relatively benign commodity environment.
While this tremendous performance is a testament to mask was operating leverage and commitment to cost control.
We also recognize the need to invest in our brands service.
Innovation to fuel our growth and plan to fund such investments in future quarters.
While uncertainty remains in precise forecast he was a challenge.
We do anticipate continued solid can tumor demand in the fourth quarter.
We expect sales growth, excluding currency of 8% to 10%.
But approximately 150 basis points of margin expansion from Q4 of 2019.
[noise] uncertainty, especially as the effects of government stimulus programs and the impact of the virus on the overall health of the economy and consumer could impact demand in the market and our expected results.
Additionally, it is important to note that our Q4 expectations assume no further closures of our manufacturing plants were points of distribution related to COVID-19.
Turning to slide seven.
Plumbing grew 12%, excluding the impact of currency.
Foreign currency translation favorably impacted this segment's sales by approximately $13 million in the corner.
North American sales increased 14% in local currency led by Delta.
The strong growth we experienced at the end of the second quarter in our trade retail and ecommerce channels continued in the third quarter, driven by robust consumer demand and some inventory restocking.
While manufacturing in our small business improved compared with the second quarter.
Walk ins continue to operate at less than a 100% capacity.
Ongoing government mandated employee limitations in our Mexican facilities.
Despite these challenges Watkins grew in the third quarter and they continue to experience very strong demand for their products.
Helping in a record backlog.
[noise] International plumbing sales increased 9% in local currency.
Hansgrohe drove low double digit growth in both Germany and China.
With lower growth in other European countries.
This growth was partially offset by continued declines in other countries, including the UK in Spain.
The economies have been slower to recover.
Operating profit was $271 million up $83 million or 44% from prior year.
With margins, expanding 510 basis points to 23.8%.
The strong incremental margin of 61% was driven by higher volume.
Cost productivity initiatives and a favorable price cost relationship.
Turning to the fourth quarter we.
We anticipate sales excluding currency to be up 8% to 10% margins of approximately 19% up 150 basis points from prior year.
Turning to slide eight.
Decorative architectural grew 19% for the third quarter.
This outstanding performance was driven by high teens growth in our <unk> business with strong high 20% growth in our DIY, Pete partially offset by a mid single digit decline in propane.
The continued resurgence in DIY IP in some inventory restocking drove this performance.
We remain well positioned with bears compelling quality and value proposition to capitalize on this shift in consumer behavior.
Well propane declining demand declined in the third quarter, we saw nice improvement from Q2, you had sequential improvement through the quarter.
Our builders hardware business also contributed to the segment's results as they delivered exceptional growth across product categories and benefited from strong consumer demand and new program wins.
Additionally, our lighting business continued to improve achieving growth over prior year.
Operating profit increased in the quarter by 34% driven by incremental volume and continued cost control, partially offset by an unfavorable price cost relationship.
Turning to the fourth quarter, we expect a strong demand for paint to continue anticipate segment sales growth of 8% to 10% with operating margins of approximately 17% up approximately 70 basis points from prior year.
At the same time, we anticipate a price cost headwind and a more normalized level of investment in the fourth quarter.
And turning to slide nine we continued to strengthen our balance sheet with net debt to EBITDA at 1.1 times as we ended the quarter.
Approximately $2.3 billion of balance sheet liquidity.
<unk> includes full availability of our $1 billion revolver.
Working capital as a percent of sales improved 70 basis points versus prior year to 16.4% due to lower inventory levels and an improvement in accounts payable largely resulting from working capital improvements Kitchener.
It is important to note that our GAAP reported net cash from operations of $573 million to the nine months ended September thirtyth.
Reflects the cash taxes paid on the sale of our cabinetry business.
Excluding the impact of 100 of approximately $192 million of cash taxes paid on the gain on the sale of our cabinetry business.
Our year to date adjusted net cash from operations is approximately $765 million free cash flow of approximately $690 million.
This is consistent with our expectation of a 100% free cash flow conversion this year.
A reconciliation can be found in the appendix of this deck.
During the third quarter, we also successfully refinanced our 2021 debt maturity at historically low rates, which would result in approximately $4 million of annualized interest expense savings.
Lastly, as Keith mentioned, we plan to reinstate our share buyback activity in the fourth quarter.
We currently intend to deploy approximately a $100 million to share repurchases in the fourth quarter subject to market conditions.
And with that I'll now turn the call back over to Keith.
Thank you John.
The COVID-19 pandemic continues to impact our business as consumers revaluate their living environments.
The house is no longer just a place for shelter.
It has become the office the restaurants, the classroom that Jim.
The Entertainment Center.
And we are capitalizing on these changing needs with our leading products by providing an affordable way for homeowners to discover better living possibilities and to enhance how they interact with their homes.
At our Investor day, a little more than a year ago.
We committed to between $2.80 and $3 earnings per share in 2021.
I'm very proud of the entire masco team I'm pleased to say that we will achieve and lightly likely exceed this range a full year earlier than planned.
And while it is a bit early to provide a definitive outlook for 2021.
We believe that the strong consumer trend of increased investment in their homes will continue in 2021 and support growth for our products.
The changes we have made to masco over the past few years.
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 in this ever changing market.
With that I'll now open up the call for questions Ria.
Thank you in order to ensure that everyone has a chance to participate we would like to request that you limit yourself to asking one question and one follow up question during the Q and a session.
To ask a question. Please press Star then the number one on your telephone keypad.
To withdraw your question press the pound key.
Our first question comes from the line of Matthew Bouley of Barclays.
Good morning, and congrats on the results and thank you for taking the questions.
Wanted to start out with a question around the I guess longer term margin.
If you just mentioned a the the Investor day and thinking about how to guide. This year is kind of setting up on the margin side to come in above the range as you had given in both segments.
And I also hear you around some intentions around investing for growth. So as we think about 2021 is the idea that you're going to sort of intentionally bring those margins back into the long term range or you know is there a potential that you can kind of remain above those long term ranges for an extended period.
At here. Thank you.
Matthew when do you think about our margin targets for 2021 that we set up at the Investor day, we need to remember that that was based on a significantly lower volume expectations for 20 to 21, I think we had plumbing in that 18 to 18 and a half range Deco was 17 and a half to 18.
Overall masco.
Just shy of 17% and as I said this guidance was based on a low volume outlook and you know as Weve talked along this call in another calls we leveraged volume very nicely. So there's lots of variables.
And we will continue to invest in our brands innovation and service like we talked about and that will certainly be a somewhat of a headwind if you would to margin expansion, but what's stronger and our fundamentals and increased volume.
I would think that we would be able to exceed those targets in margins that we talk about at our Investor day in 2021.
Okay understood.
Secondly, maybe zero zero for Q margin guide in plumbing.
Just given where you kind of ended Q3, implying a bit of the step down sequentially. That's larger than typical for Q4. So is there anything that Q3 plumbing margin that is I don't know I guess unsustainable or onetime in nature that might drive that that type of step down like it.
There's a couple of the things that are interacting as we think about plumbing in the fourth quarter.
Recall that once the pandemic hit.
We very swiftly and acted significant cost cutting measures as we are in the throes of assessing what exactly the impact was going to be at liquidity and cash flow et cetera.
On on demand.
And we demonstrated I believe with our third quarter results.
That our demand has remained robust.
So now as we move into the fourth quarter, we do expect to see some increased production costs, certainly overtime, a higher bonuses higher volume rebates, probably will have some additional little bit of additional air freight as we continue to balance out inventories in our supply chain and keep up with strong.
Demand.
Commodities will be a little bit less favorable as we look forward and.
And we do anticipate as I talked about bringing back some additional investment spend to make sure that we are going to win in the recovery, we talked about investment in brands in advertising and marketing.
Continued and increased investment in innovation. So that's the dynamic that we're looking at as we think about margins Q4, really a pretty similar for the other segment as well, but definitely for a plumbing.
Okay. Thanks Keith.
Our next question comes from the line of John Lovallo of Bank of America.
Hi, guys. Thank you for taking my questions as well maybe starting off just with kitsch. We're just wondering if you can give us an update on how the.
The performance was in the quarter I would say that you know a very strong segment performance.
Oh, they did they did a great job really impressed with the team down there can.
We continue to execute a I would say.
Better than plan, you know at or better than planned. So we achieved growth that was very solid and the team's doing a good job I'm plant.
Okay, and then you know maybe.
Maybe just going back to the plumbing margin to 23.8 in the quarter.
It sounds like there's going to be some increased investment coming forward, which which makes a lot of sense, but how much of that was constrained investment in the quarter was was that a factor or.
Was it just the other factors that you talked about.
When you say constrained investments John how much did we have a reduction of the divestment in Q Q2 is that what you're asking.
Yes, maybe I'll take this one you know in terms of yeah. I mean, if you think about our performance in the third quarter and plumbing.
Yeah, as we exited Q2, one of the things as Keith mentioned, we really clamped down on expenses at the start of the pandemic and we kept them constrained is going into the third quarter and so as you think about typical expenses that we might be running a particularly in the machine area right a lot less traveling entertainment right because personally we're not we're not having our teams.
Very much so.
Things like promotional expenses were down significantly in the quarter.
Things like trade shows that we would typically attend Raul down in the quarters and so that led probably to a little bit better margin expansion on top of the on top of the you know the benefits we enjoyed for the operating leverage.
In Q3, and so as Keith mentioned as we as we roll from Q3 into Q4.
Yeah, we're watching it we're trying to contain our expenses as best we can but we have to have probably reinvest to grow the business and so we are we are viewing. The fact that we may need to layer some of those costs back in as we go into Q4.
Our next question comes from the line of Mike Dahl of RBC capital markets.
Hi, Thanks for taking my questions nice results.
Keith Johnson you mentioned.
In remarks, and in response to one of the questions.
Some of the input cost potentially creeping up and also free I think you know as well.
Little recovery and also potential vaccine distribution.
Next year Theres Theres, certainly some thought that we could see further acceleration in some of the freight pressures and.
And also some re acceleration inputs I guess can you give us any more color when you're thinking about that fourq margin, yes, how much of an impact or are you already seeing and what are your thoughts as we head into it.
When you on around inputs and freight.
Sure Mike It's John in terms of.
Because yeah and certainly in Q3, you did have some benefit so of all of the drivers of our margin expansion in Q3, I'd say volume and cost productivity. We're a much bigger drivers of our Q3 performance and obviously commodity inputs and looking forward.
I'm, just thinking of our plumbing and you think about the base metals copper and zinc. They did help us give us some provided us a little bit a tailwind in the third quarter.
But recall that you've seen copper and zinc start to increase particularly in the second quarter and I think.
As we've said before on other calls.
It takes about two quarters for raw material inflation to flow through particularly the base.
The copper and zinc before it hits, our piano and so there will be a little bit less of a tailwind a little bit more of a headwind as we go into Q4.
As it relates to the input costs for paid.
Our price commodity relationship, but it's a bit of a headwind in the quarter.
And we expect that to increase a little bit as we go into the fourth quarter. If resin prices have started to rise up a little bit because oil's risen over the course of the year.
So that's where we're looking T.I. are too I would say is remained relatively stable not a lot of up or down move ins. There. So if you're going into the fourth quarter, we expect that to continue to be stable.
He is part of your question I think Mike you also mentioned freight.
And we haven't seen a lot of free cost pressure yet and.
To remind everyone that.
Distribution and logistics costs as a percent of sales for us is relatively low so even though we saw.
Significant spikes in distribution logistics that wouldn't be much of an impact. So what we are seeing a little bit of tightness is on.
Just supply of freight in trucks and so that's something we're keeping an eye on that said you know I think you know we and our teams have always done a great job of handling inflation, whether it's you know general inflation that we experience or commodity based inflation.
So you know what we'll handle it accordingly, you know, we'll we'll do it like we've always done a.
Well, we'll continue to drive our cost productivity initiatives will continue to work with our suppliers to push back on them and we'll also.
Next pricing if that's required.
Great. Thanks, Thanks for that that's helpful. My second question is.
Clearly a great recovery in plumbing, both in North America.
And in international.
Just wondering you know I think with Europe. Some of the some of the rise in cases of probably.
Been at least a few weeks ahead of what we've seen in the U.S. and there have been some local restrictions that have probably gotten a little bit tighter. There can you talk about just whether you're seeing any of those.
Impact your European.
Plumbing business at this point in the fourth quarter relative to the recovery in the third quarter.
Well I'll take this one Mike, Germany, which as you know as Hansgrohe is largest market.
In China, which is also a very large market for us each drove low double digit growth in third quarter. So.
We did see good growth.
We also saw growth, but to a lesser extent in other European countries, Italy, The Netherlands for example, but as I said in my remarks. There were also other countries such as the UK and Spain that have been slower to recover so.
So when when we think about Europe in the third quarter. It was it was good it was robust for us as it relates to the fourth quarter were watching very closely what happens and yes, you're right. There has been some tightening.
And they're doing it in a little bit different way than we are here they tend to be more metropolitan area focused meaning they're they're being more pinpointed and the types of restrictions that they're employing whether it's cutting the time in certain cities that restaurants can be open or closing certain.
Types of venues like cinemas movie theatres et cetera on a city by city basis, so they're being more surgical and I think.
Just like around the world, there's more experience on how to how to work through this so it remains to be seen what the ultimate impact will be but I think what we've what we've demonstrated is that we have the ability to be agile. If you will and two very closely monitored the situations and pull the cost levers appropriately if needed so.
Right now, we're really watching particularly over in Europe.
Thanks, Keith good luck in the quarter.
Thank you.
Our next question comes from line of Adam Baumgarten of Credit Suisse.
Hey, guys. Good morning, Thanks for taking my questions can you give us a sense for how much customer restocking added to growth across across both both businesses you did mentioned that both segments.
Yeah, Adam as you as you might expect is a as we exited the second quarter because of the strong demand we were experiencing at the end of Q2.
Inventories were relatively low in the channels and so as you think about the growth drivers for this third quarter being volume.
And inventory restocking I would tell you that you know volume was by far the more much more significant driver of growth.
Inventory restocking was as it was it was a relatively light impact in the quarter.
Okay got it thanks, and then just looking at Fourq, you paint or decorative guidance. What are you assuming for for DIY and pro growth in that guidance.
You know as we look you know we think demand for people continue to be strong as we go into the fourth quarter.
You know.
You know we.
Indicator for Cathie to 10% sales growth in Q4, and again I think we are going to keep continued strong demand on the DIY side and muted, but more in improving demand on the pro side of our business.
So.
I would remind everyone, though we've got a a a bit of a tough comp going and pain as we go into the fourth quarter is as you may recall in our fourth quarter last year, we experienced about $20 million of sales pulled forward in the fourth quarter of last year.
And so that will be a bit of a comp headwind for us.
It is because.
As we go into Q4.
Great. Thanks, guys.
Our next question comes from one of Susan Maklari of Goldman Sachs.
Susan you may be having to you.
Susan are you there okay, operator, well. Thank you I thought about that it was that was my fault sorry. My first question is just talking about you, obviously mentioned you're restarting the share repo.
Purchase program, which I think is a good sign of your confidence in the outlook and what you're seeing can you talk a little bit about maybe any potential to exceed the $100 million or how we should think about this starting to kind of layer back in and you getting back to the levels that you've seen in last quarter in the past couple of years.
Sure Susan Yeah, as we indicated both Keith and I indicated in our prepared remarks.
Where we're right now we're targeting around $100 million for share repurchases in the quarter.
If you think it would be both indicated there's a lot of variables that go into the decision to drive what drives our share repurchase activity.
You know, it's going be subject to market conditions to the extent that we see a pullback.
Pullback in the shares will be probably a little bit more opportunistically. If we were earlier this year.
You know when we repurchase $600 million worth of our shares for less than $40 per.
Per share so to the extent, we see greater.
Sharon pullback will probably be a little bit more aggressive to the extent we see.
Now the share price run high and will probably continue to devote the $100 million, but probably not much more than that.
Again, it's going to be a bit of a judgment call as we work our way through the quarter.
Okay, all right that sounds good and then just following up there you can you can you give us a little color on catch LER and perhaps some of the trends that you're seeing there and especially given some of those cost cutting efforts, how we should expect that to start to come through as we look to 2021.
Lighting is a a relatively less.
Less expensive purchase that you can create some pop and a new look in your house so much like a.
Many of our products, which were in that spot that sweet spot of the price point and Bang for the Buck. If you will we also saw that in lighting. So we saw good.
Growth across our channels and kitchen that participated in that growth as we said kits to grow and as I mentioned before to an earlier question.
We're on plan, maybe even a little bit ahead of plan and I'm a I'm pleased with how the the team is performing at our objective was to position Kisler for growth next year, and we had growth this past quarter, so I like what I'm, saying.
Okay, great. Thank you both.
Our next question comes from the line of Truman Patterson of Wells Fargo.
Hi, good morning, everyone and thanks for taking my question first among the two segments. How did could you just go through how demand trended throughout the quarter and how it either ended in September.
Or October even.
And you know just for clarity the exit rate seems like all of your businesses were positive on a year over year basis in Threeq, you, but did they are they still trending that way.
As we spoke a little bit from it in the prepared remarks Delta had a record last couple of months of the quarter. So nice acceleration through the quarter and that's fairly consistent with the.
The plumbing segment in general had good good solid somewhat consistent growth over in Europe, and plumbing in the DIY space in excuse me in paint and then decorative in general pretty consistent it was a strong going in and remain strong going through so that.
That gives you a little bit of color on the in quarter kind of dynamics.
Okay. Thank you for that and then.
You know not necessarily in pain tour phosphates, but in other building product categories, we've heard of some supply chain issues or or capacity issues and feeling that the robust demand are you all seeing that in pain and fossett, specifically or do you have any <unk> any capacity issues and then on the.
Flip side, you know it seems like there's a little bit of inventory build in your channels. Do you think that you know there's more to come there that you know your retailers, especially need to build additional inventory and how are you thinking about you know your own inventory levels over the winter or are you looking to build up a little bit more.
More than you normally do.
Right now the Truman we're managing through with our current capacity.
Typically we would use the slower months in the beginning of the year and early Q2 to build inventory we.
We didnt have that luxury due to restrictions and uncertainty and everything that was going on at that at that point now we do have plans to selectively add some capacity.
Where we need it where we need it we talked a little bit about the the resurgence and the increase in demand of one gallon.
Selling a one gallon paint.
Due to the tremendous shift over to D. I why would they DIY or tend to buy more ones and fives. So we have had to buy.
Purchase some additional capacity on one gallon filling lines that sort of thing. So there is some spot capacity in certain certain types of machinery, where we've had to add but really there's.
Ben No significant capacity issues at some point, we're likely going to increase capacity in certain areas, but not in the immediate horizon in terms of the inventory position and the channels.
I would say that inventory is probably a little bit light.
For where we would like to see it and where our channel partners would like to see it so.
I see a little bit of inventory or Phil as we move through the year.
Yes, Tim one thing I'd add to Keith's comments is that you know I always like to take this time to acknowledge our supply chain teams. They have done just a fantastic job of reacting to the increased a robust demand that we've been experiencing in the third quarter and whether it's ours, our supply chain teams internally, our our folks in our plants across the portfolio.
Well, there's our suppliers everyone has acted coordinated and according to fashion to really drive this growth and so we're really pleased with how the team has responded this quarter.
Thank you all and good luck on the upcoming quarter.
Okay.
Our next question comes from line of Keith Hughes of Chess.
Thank you question on Watkins up sounds like you're still having some production issues do you have any sort of feel for when that we'll get back to full production and alleviate some of the backlog you discussed earlier.
Yeah, Keith again, why you know Watkins team is working day and night to to deliver and fulfill on demand.
When the Mexican government releases. The restrictions is it's tough to tell I mean, we don't have any good insight as to when that's going to take place.
But the Watkins team is running hard and.
Fulfilling as best they can and.
They like I said in my prepared remarks, they drove growth in the quarter. Despite some of these restrictions and so we're really pleased with how the liking the team is delivering here in Q3 and Q4.
And second question on propane you would you talked about sounds like in the fourth quarter, you expected to get a little bit better than what we saw the third.
Why is that is that something to do with your retail partners, that's something more on the market.
I think Keith it's just continued progress in the trends that we've been seeing.
As you might expect in Q2, we saw a lot of pull back on consumers alarming.
Paint contractors are coming in their home and we've seen.
A steady improvement.
Since Q2 and actually through Q3, we saw sequential improvement each month through the quarter.
Propane sales and so.
Based on what we're experiencing you know we think that that trend could continue here as we go into Q4 lot of Variabilities. There Keith you know the the what happens to the virus and what happens to the consumer psyche as it relates to pros being allowed in your home. The fact that into late year. It moves more towards interior. So there's a there's a lot of variables that would.
I have to think about.
Okay. Thank you.
Our next question comes from the line of Michael Rehaut of JP Morgan.
Thanks, Good morning, everyone and congrats on the results.
Thank you first question I, just wanted to circle back a little bit to understanding some of the sequential trends that you're expecting in the businesses on the on the on the top line on the sales side in plumbing and decorative and when you think about the.
Expected.
Is still very strong growth rates were a little bit of a de sell in plumbing from roughly 13% to eight to nine just trying to get a sense of what's driving that if it's if all of that is perhaps the absence of the inventory restocking that you referred to earlier or if there's other.
Things at hand, and similarly.
Decorative I believe you had said earlier that you observed relatively consistent.
Trends during Threeq you. So again just trying to understand.
The d. so into Fourq, you and I know God.
John you had referred to somewhat of a tougher comp but.
I'm also looking at Threeq, you 19 growing it.
Five 6% in Fourq, you 19 down three so just wanted to try and better understand what's driving that as well.
Yes, Mike It is.
As you think about the transition of the growth from Q3 to capture that sequential.
Yeah first of all we had extremely strong demand in Q3, which drove really good result.
Yeah, and as you said, we expect demand to continue to be good as we go into Q4, but as you know.
Forecasting in this current environment is a little bit of a challenge.
And it's hard to say what impact the virus might have on our Q4 results and.
There may be a little bit of a dose of conservatism in that guide as well as we know is we're trying to dial things into the third quarter or the fourth quarter I should say.
No.
So from my perspective, we had 12% growth in plumbing in the third quarter.
We're looking at 8% to 10% gross I'm not I don't view that is significant.
Deceleration as we go into.
The fourth quarter that said you know the.
Third quarter did have some inventory restocking in it.
Yeah. So we're probably thinking there's probably a little less inventory restocking as we go into Q4.
That plays out.
On on the decorative architectural side.
To the point the point you made in your question you know.
The pull forward definitely has an impact we think.
On our Q4.
Revenue.
Growth rates.
Because we're currently not expecting that type of activity to recur here in the fourth quarter of 2020.
I'd also say that you know liberty hardware, which is a smaller one of the smaller businesses in the segment had a terrific quarter full stop I mean, you know they had one of the really really strong quarter.
And as we go and they also had a load in a.
Here in the third quarter due to the program when they had at one of their retail customers and so.
We don't expect that activity to recur.
And similarly.
The plumbing segment, you know Michael you talked about a little bit of inventory restocking in Q3, we don't expect that same level of inventory restocking to take place in Q4. So you know as we pull it all together.
Yeah, you know the transition or the growth rates from Q3 to Q4, a little bit more muted in Q4 that said, we think its a 10% growth in this environment is still quite strong and gradually with 150 boys basis points of margin expansion. That's that we think it represents a very good quarter.
No no absolutely and no I appreciate that thank you.
I guess secondly.
On the margin side, obviously, it's great to see the reinvestment in the business and you know when you're talking about the the margins that you are generating that strategy makes perfect sense in terms of trying to you know maintain those high margins and reinvest for the topline.
Yeah, obviously, that's baked into your Fourq guidance.
How should we think about 21 in this regard in you know.
When when Keith you talked about before perhaps being able to maintain a margin above your long term targets.
Is that with reinvestment spend kind of kicking up or.
How do you see that factor.
Impacting or you know profitability how high you know is definitely where it could be a you know.
50, or 100 that type of.
You know investment or.
You know the levels could still stay above you know those long term targets with a higher reinvestment rate.
Oh My comment again, it's too early to call 2021, and we'll talk more about that next quarter. We do expect growth in 2021, we think that the fundamentals of the consumer when you look at what really drives our business at this it's configured now it it significantly swings on.
Home price appreciation.
Housing turnover and you look at those numbers.
We're looking at let's call it 5% on.
Home price appreciation and you know six and a half million of existing home sales. So that's those are those are big numbers now that those aren't sustainable numbers, but that's certainly gives us a lot of confidence going into 2021, So we <unk>.
My comments about continuing to grow and driving margin expansion. We all that that's that's that's why we think here you know we always want to grow above market, we want to continue to to expand margins. So.
Our increased investments were factored into my thinking on my comments that I made there now I will say that when you think about.
The optimum spend for value creation, I'm not going to sit here and say that 16.5% S. DNA is the optimum it's more than that and we're going to continue to drive a long term mid and long term value creation. So there will be an increase in SGN day, it's not sustainable at 16 five cents EPS, because that's not the right thing to do to drive value creation. So.
We're going to increase those investments, but we also are very carefully watching these cost reduction levers we have at how much we increase because we don't know no one knows what's where this virus is going to go over the coming months, but as we learned more we're going to we're going to we're going to maintain our commitment to the future.
Our next question comes from the line of Stephen Kim of Evercore ISI.
Thanks, very much guys. Yeah, I have two questions for you both kind of related to the virus.
You're getting a lot of good information in other areas and obviously I'm not asking you to predict the future, but if we take it from a negative perspective I'm curious as to.
What do you think what you're anticipating the effects might be on your business. If we were to go through another wave of shutdowns kind of like what we did earlier on I would imagine it's going to be a little bit different this time.
And you talked about some differences between the U.S. and Europe in the terms of the way that we handle the first time.
What do you imagine the how do you imagine the effects and maybe a little different in particular as it relates to your business I'm thinking do you think inventories would hold more stable through a shutdown waived for instance, and are there other impacts that that are important for us to consider for your business. If we were to tighten up again.
You know that's that's a uh huh.
That's a crystal ball kind of question I wish I had one.
The way, we the way, we think about what could happen either positive or negative.
Kind of turns out a couple of things one is the discretionary spend so is the discretionary spend of the consumer going to.
Continue to be at a rather high level now as it relates to reduction in spend in other areas like entertainment and and going out et cetera, and what could potentially happen. If there was a reduction or no stimulus if the virus got worse those sorts of more down.
On side.
Scenarios, so where does the discretionary spend go is there more or less discretionary spend and then the second component.
Is what share of wallet of the consumer is going to be spent on the home.
Obviously, we've seen a significant spike in that share of wallet being spent on the home that will that continue I don't think it's probably prudent to think that.
This is going to stay at these elevated levels in perpetuity I, probably would revert back to the mean, but at the same time, we do believe that there has been some structural changes.
To the DIY market and we talked about last quarter some of our own research I've certainly talk to.
Other people in the industry and our channel partners in terms of some of their research.
And you simply can't deny that the millennials have entered in entered in big ended the Iwai and you know that is earlier than we expected we expected it but its earlier so that could be could represent a structural expanding of the D. I Y pie. If you will so I don't have a crystal ball answer for you but.
So those are three things that we're thinking about as we evaluate a positive and potentially negative scenarios and Stephen I guess, maybe then I own my own color on that I mean I think.
I think like Keith, adding consumer demand will be there I mean, you know is we saw what happened in the spring as we work through the pandemic.
Yes.
The consumer was there and they were spending they are investing in their home and like he said given the trends that we're seeing and given the research that we've seen and we think consumer demand will be there.
The thing that we've got to keep our eye on like because we're still contending with it with our Watkins operation is what happens to production.
And you know if the shutdown affects any of our facilities and so that's that's the one thing we got to keep in the back of our mind as well.
Yeah.
Fair point next.
Next question relates actually it's kind of a flip scenario lets say.
In in sometime in the next foreseeable future, we actually get a vaccine and we get more rapid reopening.
Or reopening that's more wrap on a more rapid side lets say a more positive like bullish outcome.
One of the foreseeable things that a lot of folks are talking about now for your business and of course, you've addressed it before is that that you might see a slowdown in D.I. white paper, because you had a little bit of pull forward, maybe and so in particular I suppose with duck arc I'm curious if you could address what areas.
Do you think you might are there areas, where you're doing some contingency planning today ahead of a potential slowdown in the event of a vaccine and what are the operational challenges that you could reasonably foresee and what would your action plan look like I'm not asking for a lot of specifics here, but just generally what are the areas.
Your business that you're anticipating you may need to pull a lever for if you could give us some insight into how you're thinking about that.
I think it would probably be mainly on discretionary spending I really wouldn't see significant structural cost reductions.
When you think about where our brick and mortar capacity is and how it is lined up to where we are in pretty good shape. There. We were we had good utilization going into the pandemic and we have outstanding utilization now up. So I think you know either on the upside scenario or we could see a potential.
Investment in some capacity down the road, we obviously work very hard to get more out of the assets that we have do better with what we have sort of thing in terms of efficiency, yet are and how we use our assets and then the downside we would flex down on the discretionary that's kind of how I would see it yes, even though maybe the way I would appreciate it.
You know, we've got a great investment in our pro franchise and if if if a vaccine to your your little description where to come true or come through faster I.
I think we could double down on our pro investment and grow that business faster than weve been growing it in the last several years I mean, weve experienced double digit growth in our propane business historically and.
If the consumer decides not to paint it paint their homes anymore and they they want pros through it will be right there with our channel partners to meet to meet that demand and so I think that's.
That's the way I would position the business going forward.
If that were to if your scenario were to emerge.
Great. Thanks, a lot guys appreciate it.
Our next question comes from the line of Garik Shmois of.
Capital.
Hi, Thanks, just wanted to follow up on a comment you just made just around capacity just with the step up in demand.
Sounds like a pretty solid outlook into 2021, and how far away are you from having to perhaps add some capacity, whether it's public or paid.
Yes.
Yeah, we got it.
Oh, It I'll talk first maybe Keith can add some color afterward.
So you know we don't seem to have done a great job of driving efficiency within our facilities such that Garrick, we don't we don't need to add any brick and mortar capacity in the near term.
Yes, we are as Keith mentioned earlier, we are investing a little bit in our one gallon capacity on the paint side, because that's where the demand has been the strongest over the course of the last couple of quarters that.
That said if demand continues to go into their current pace said it is you know I.
I I would get estimate that we might need to expand some of our facilities probably in the mid 22 or 23 timeframe you. It's not can definitely be a 21 investment.
But that might be the soonest that we'd have to do with what we'll have to see how demand plays out over the course of the next couple of quarters.
Okay. Thanks, just had a quick question on plumbing, you called out good growth across the board retail E Commerce sounded.
Particularly bullish to us on what you're seeing in trade in August and September. So just kind of wondering what was driving the acceleration.
In the trade channel and what the outlook is there thanks and congratulations.
Yeah, I think you know consumers, who are becoming more comfortable and go and feeling more safe to go into plumbing showrooms and to go into those areas of the of the trade channel that they really shut down for a while but literally shut down and then shut down in the sense of not being comfortable going in them. So I think I think.
The consumer engaging with that part of the channel as it relates to showrooms was a big plus and we're very strong in the showroom. So that that said right into our sweet spot. So I think that that was a big component of that also but to a degree the consumer is a little bit more comfortable with having plumbers in their in their home and there's a.
A component of repair where when something like that breaks it has to be fixed so whether it's a washer dryer or in our case.
Fossett saw or shower system. So I think those are the dynamics that drove the trade.
Our next question comes from the line of Tim most of Baird.
Hey, guys nice job. Thanks for thanks for squeezing me in.
I just had one question really about promotions and you know just just curious kind of what you're hearing.
As your customers think about 21 around promotions at this point do you think.
Things revert back to maybe a normal promotional type environment or do you think there's some incremental kind of investment or catch up investment that your customers might ask if next year.
You know Tim. It is you know this is Tony you were were typically working through the promotional cadence.
For the subsequent year and and as we think about it right now and its promotional cadence is driven by a retail partners. We don't necessarily try that we work with them and how our participation will will play out.
But you know I guess at this point is you know they're gonna be thoughtful about it like they were this year to the extent that.
The virus is more muted I would <unk> to your point and we expect to see more normal cadence of promotional activity to the extent that there is a more aggressive virus out there and they want to limit consumers going into their stores. They may pull back on that so it's.
It's hard to determine right now exactly I was going to play out for 21, but we're.
Yeah, we're going to work very closely with our channel partners to figure out how we can best.
Best and most effectively participate in whatever promotion they decide to run.
Okay. Okay, great. Good luck on your guys. Thanks.
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Okay. Operator is there one more question.
Okay.
And ladies and gentlemen, my final question will come from the line of Selman of Jefferies.
Hey, guys John Thanks for the CES squeezing me in here I, just one really quick one yeah. Good to see a propane recover when we look out to 2021, you've got some pretty tough comps on the DIY side. So I'm. Just curious do you have enough momentum on the pro side and kitchell or maybe we have just stronger growth across the board and DIY, where do you see.
Deco actually being up next year from a growth standpoint.
Yeah, Phil the keys here.
It's too early to call 21, as I said we.
We do expect growth and 21, and we have a strong consumer we have a strong brand. We have the best service when you talk about or D. I y. paying we have a great channel partner, So we would and we always do invest.
Invest and drive our teams for growth and that's how we're thinking about it.
So I think that's okay yep. Thank you Phil.
Thank you. Thank you everyone for participating in the call I really appreciate it.
These days and we will talk to you next quarter.
Okay.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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