Q1 2021 Masco Corp Earnings Call
Okay.
Good morning, ladies and gentlemen, welcome to the Masco Corporation first quarter 2020 Conference call. My name is Michelle and I will be your operator for today's call.
And a reminder, today's conference is being recorded for replay purposes. You asked the question. Please press star and the number one on your telephone keypad COVID-19 draw. Your question. Please press the pound key I will now turn the call over to David Chaika, Vice President Treasurer, and Investor of Relations you may begin.
Thank you Michelle and good morning, welcome to Masco Corporation's 2021 first quarter conference call.
With me today are Keith Allman, President and CEO of Masco, and John Snow and ice Masco, as Vice President and Chief Financial Officer.
Our first quarter earnings release, and the presentation slides, we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow up and.
Take your question now please call me directly at three one and three 792 5500.
Our statements today will include our views about our future performance, which constitute forward looking statements.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements.
We've described these risks and uncertainties and our risk factors and other disclosures and our form 10-K, and our form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics, our references to operating profit and earnings per share will be as adjusted unless otherwise noted.
We reconciled these adjusted metrics of the GAAP and the 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 everyone is staying safe and healthy.
Well, we are well over a year end of this pandemic the XP.
Facts are still being felt.
We are encouraged by the rollout of vaccines, but many areas around the globe continue to experience the surge in cases.
The safety of our employees remains our number one priority and I would like to thank all our employees for keeping each other safe and for serving our customers.
Through the efforts of our employees and the robust demand we continue to experience for our products, we delivered another outstanding quarter.
Please turn to slide five.
We had a strong start to 2021 and our ability to effectively navigate this highly dynamic environment resulted in exceptional top and bottom line growth.
For the quarter sales increased 25%, excluding acquisitions and currency sales increased 19%.
Operating profit increased 61% to $366 million, principally due to strong volume leverage and reduced spending in the form of lower travel and entertainment and marketing expenses across our segments.
Earnings per share increased and outstanding 89%.
Turning to our plumbing segment.
Sales grew 27% excluding currency driven by strong volume growth at Heinz growing Delta and Watkins.
Our two recent plumbing acquisitions performed well and the quarter and contributed 5% the plumbing is growth.
North American plumbing grew 28% led by our wellness business, which continued to experience strong demand and begin to comp their march shutdown of 2020.
Delta Faucet delivered another quarter of double digit growth with strength across all channels, particularly ecommerce, which showed exceptional strength as consumers continue to shift their buying patterns to online.
International plumbing grew 37% and the quarter as many of our markets returned to strong growth with particular strength and central Europe and China.
And our decorative architectural segment.
Sales grew 15% against the healthy 9% comp from Q1 of 2020.
Acquisitions contributed 2% to our decorative growth.
Our lighting Bath and cabinet hardware and paint businesses, each posted double digit growth during the quarter.
DIY paint grew high teens and the quarter, which is impressive considering it was facing a strong double digit comp and Q1 of 2020.
While the pro paint was down low single digits for the quarter as it faced the tough comp in Q1 of 2020, we did see of returned to positive growth and the back half of the quarter and we're encouraged by the momentum we are now seeing and this business as we move into Q2.
Lastly.
We actively continued our share repurchases during the quarter by repurchasing 5.5 million shares for $303 million.
We anticipate deploying approximately $800 million towards share repurchases or acquisitions for the full year as we guided on our fourth quarter call.
In addition, we anticipate receiving approximately $160 million for our preferred stock and cabinet works, resulting from their recently announced transaction assuming it closes as expected.
We intend to deploy these funds towards share repurchases or acquisitions, which would be in addition to the 800 million that I just mentioned.
Now let me discuss two issues that are top of mind, right now inflation and supply chain tightness.
We have seen significant inflation of raw materials, namely copper zinc and resin used and both our paint and plumbing businesses as well as increases and freight costs.
All in we expect our raw material and freight cost to be up and the mid single digit range for the full year for both of our plumbing and decorative segments with inflation likely reaching high single digit levels and both segments and the third and fourth quarters.
To mitigate these impacts we have secured price increases across both statement segments to begin offsetting these costs.
We have further actions planned, including additional price increases and productivity improvements, while continuing to work with our customers and suppliers to offset these rising costs.
Time, and again, we have demonstrated that our strong brands and innovation pipelines and channel relationships gives us the ability to offset rising costs.
We expect to continue this track record and achieved price cost neutrality by year end.
And we are maintaining our full year margin expectations in both segments that we provided on our fourth quarter call.
With respect to supply chain tightness.
In addition to the strain caused by robust demand, we have been impacted by significant disruption and the supply of resins and related products and both of our plumbing and paint businesses due to the severe weather that Texas experience and February.
Additionally.
And container availability and timeliness continues to be constrained.
This has temporarily reduced output of certain spot products. During the month of April and limited our ability to build certain to build inventory of certain architectural coatings and other products.
However.
The availability of resins is improving and.
And our teams have done an outstanding job utilizing masco size scale and agility. The countermeasure. These issues by working with our key suppliers to increase availability of certain materials by leveraging our purchasing power to increase container availability for our products and by working around the clock to adjust production.
Actions to meet the needs of our customers.
This once again shows the competitive advantage that comes from being part of Masco as portfolio.
With our strong first quarter performance the.
And the actions, we have taken and will take to offset persistent inflation.
The interest savings from our recent bond transaction and the continued.
<unk> strong demand for our products and innovative.
And the products brands and our products and brands excuse me.
We are increasing our full year expectations of earnings per share to be and the range of $3 50 to $3.70 per share.
And this is up from our previous expectations of $3.25 to $3.45.
With that I'll now turn it over to John for additional detail on our first quarter results John.
Thank you Keith and good morning, everyone.
And as Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other onetime items.
Turning to slide seven we delivered a very strong start to the year as first quarter sales increased 25%.
Currency increased sales by 2% and the quarter and the three recently completed acquisitions contributed an additional four per cent to growth.
The local currency North American sales increased 21%.
And were 17% excluding acquisitions.
This outstanding performance was driven by strong volume growth and North American faucets, showers, and spas as well as DIY paint.
And local currency international sales increased 27% of 23% excluding acquisitions.
Gross margin was 35, 6% of the quarter up 80 basis points as we leveraged the increased volume.
Our SG&A as a percentage of sales improved 340 basis points to 17% in the quarter.
This was primarily due to operating leverage decreases and certain costs, such as travel and entertainment and trade shows and the deferral of certain marketing and other spend.
We expect SG&A as a percent of sales to increase throughout the year to a more normalized 18% of certain costs come back along with additional investments and our brands service and innovation to fuel future growth.
We delivered outstanding first quarter operating profit of $366 million up.
$138 million or 61% from last year with operating margins, expanding 420 basis points to 18, 6%.
Our EPS was <unk> 89 cents and the quarter and increase of 89% compared to the first quarter of 2020.
Turning to slide eight plumbing grew 31% in the quarter.
Currency contributed 4% to this growth and acquisitions contributed another 5%.
North American sales increased 27% and local currency were 22% excluding acquisitions.
This was led by Delta is double digit growth of the quarter as they continued to drive strong consumer demand across all of their product categories and channels.
Watkins wellness business was also a significant contributor to growth and the quarter.
With demand and our backlog remains strong.
Mark and his performance also benefited from a softer comp and the first quarter of last year and as Gus.
<unk> mandated COVID-19 lockdowns resulted in two of their manufacturing plants being temporarily shut in 2020.
Yeah.
International plumbing sales increased 27% and local currency with 23% excluding acquisitions.
Hans growth delivered year over year increases across both of their markets.
With continued double digit growth in both Germany and China.
Demand remains strong and central Europe. Despite continued COVID-19 restrictions and we are starting to see improvement and the U K.
Operating profit was $253 million and the quarter.
Up $94 million or 59%.
With operating margins, expanding 370 basis points to 23%.
The strong performance was driven by incremental volume.
Cost productivity initiatives and lower spend on items, such as travel and entertainment trade shows and marketing.
The favorability was partially offset by an unfavorable price cost relationship.
We expect raw material inflation in this segment to peak in the third quarter.
During the quarter, we entered into an agreement to divest our Hooper business.
A small shower and closure business based in Germany as.
As we determined it did not align with our strategic direction.
<unk> sales and were approximately 70 million euros in 2020.
Net proceeds will not be material.
Given our first quarter results and the current demand trends, we now expect plumbing segment sales growth for 2021 to be and the 15% to 18% range.
With 10% to 13% organic growth and.
Another 3% net growth from the recent acquisitions and the divestiture of Hooper.
And given current exchange rates, we anticipate foreign currency to favorably benefit coming revenue by approximately 2% of $70 million.
We continue to anticipate full year margins will be approximately 18%.
Turning to slide nine jacketed.
And of architectural grew 15% for the first quarter of 13% excluding acquisitions.
This exceptional performance was driven by low teens growth and our paint business.
Our DIY paint business grew high teens against the strong double digit comp and the first quarter of 2020.
Our pro business also faced the strong kind of.
And low single digits and the quarter.
Despite this decline and our pro paint business, we delivered positive year over year pro growth and the back half of the first quarter and.
And anticipate high single digit growth for the pro paint business for the full year as consumers continue to become more comfortable with paint contractors and their homes.
Our builders' hardware and lighting businesses, each delivered double digit growth as their new products and programs capitalized and increased consumer demand.
Operating profit in the quarter was $142 million up $46 million of 48%.
This outstanding performance was driven by incremental volume.
The productivity initiatives and lower spend.
Partially offset by an unfavorable price cost relationship.
For 2021, we are raising our outlook and now expect decorative architectural segment sales growth will be and the range of 4% to 9%.
With 3% to 7% organic growth and Enel.
The one 5% from acquisitions.
We continue to expect segment operating margins of approximately 19%.
Turning to slide 10.
Our balance sheet remains strong with net debt to EBITDA and one three times and we ended the quarter with approximately $1 $8 billion of balance sheet liquidity.
Which includes the full availability of our $1 billion revolver.
Working capital as a percent of sales, including our recent acquisitions was 17, 5%.
During the first quarter, we continued our focus on shareholder value creation by deploying approximately $303 million to repurchase five 5 million shares.
And mid February we completed a significant bond refinancing in this transaction.
Called our 2020, two or 2025 in our 2026 debt maturities, which aggregated $1 $3 billion and.
The refinances with the combination of new seven year, 10 year, and 30 year notes totaling $1 5 billion.
This refinancing accomplished two things first it lowered our interest expense and secondly, and extended the duration of our maturities.
From an interest perspective, the net effect as of 35 million dollar annualized interest savings.
Due to the timing of this transaction interest expense will be approximately of $110 million compared to our previous guidance of $135 million for 2020 one and.
And there will be approximately $100 million and 2022.
From a maturity perspective. This transaction also means we've taken out all of our near term maturities and our next debt maturity is not until 2027.
And two reminders for everyone.
We will be terminating and of new <unk>, our U S defined benefit plans in the second quarter.
And we will have an approximate $140 million final cash contribution to these plans to complete this activity.
And second our board previously announced its intention to increase our annual dividend by 68% to 94 cents per share starting in the second quarter of 2021.
This will increase our targeted dividend payout ratio from 20% to 30%.
We have summarized our expect our updated expectations for 2021 on slide 13, and the earnings deck.
Based on Q1 performance and Kurt.
Robust demand for our products.
Now anticipate overall sales growth of 10% to 14%.
Up from 7% to 11%.
And with operating margins of approximately 17%.
Lastly, as Keith mentioned earlier, our updated 2021, EPS estimate of $3 50 to $3 70.
Represents 15% EPS growth at the midpoint of the range.
This assumes a 254 million average diluted share count for the year.
Additional modeling assumptions for 2021 can be found on slide 14 of our earnings deck.
With that I'll turn the call back over to Keith.
Thank you John.
Our markets remain strong and housing fundamentals are supportive of continued long term growth.
Year over year home price appreciation increased to over 17% in March and.
And existing home sales were up over 12%.
Both of these metrics have a strong correlation with our sales on a lag basis.
Furthermore, the U S. Consumer is healthy with estimated built up savings of nearly two trillion dollars, even before the new stimulus money and consumers continue to invest in their homes.
We believe these factors along with the increased demand from the large millennial demographic will lead to continued growth and the repair and remodel markets.
With our market, leading brands and history of innovation and strong management teams, we are well positioned to capitalize on these growth drivers.
Serve our customers and deliver value to the shareholders.
With that I'll now open up the call for questions operator.
Okay.
At this time, if anybody would like to ask the question.
Please press star one on your telephone keypad and audit to ensure that everyone has the chance to participate we would like to request you limit yourself to asking one question and one follow up.
And as a reminder of cubic draw. Your question. Please press the pound key.
The first question will come from Matthew Bouley from Barclays. Your line is open.
Good morning, Congrats on the results thanks for taking the questions.
Wanted to start out on the the full year margin guide.
Which is unchanged at 17%.
Would you say that I guess Q1 margins do they come and better than planned or was it in line.
I'm trying to understand if the tempered expectations for the balance of the year, reflecting all of that cost inflation, you mentioned I heard you say peak cost headwind.
I guess for plumbing and Q3, specifically.
Just trying to understand how the cadence of <unk> of <unk> may have changed versus your prior expectations.
Yeah, and Matthew J and good morning, it's John.
I think theres a couple of things that are.
We experienced through the year. So you know as you expect the first quarter of breakeven a little bit better than we initially expected, but as we look out into the back half of the year and think about margins.
Think about two things one.
And I do think because we raised our topline guidance.
We now are anticipating a little bit better volume and we anticipated.
And at the same time.
We are seeing is a little bit more inflation and so.
And what I think the two kind of offset each other and that's what's causing us to maintain our margin guidance at 17% as we called out on the Q4 call.
Okay. Thank you for that John.
And second one on the.
The lifting to your point the org.
Organic growth guidance for the year.
I guess, it's a similar question what was how much of that was driven by Q1 itself, but more broadly.
You guys had talked about.
North America and R&R for example, up low single digits. This year, you talked about tougher comps and the second half and <unk>.
My question is as we do get further into the year yet.
Late April now the is it becoming clear that the backlog of home improvement activity and what consumers are doing may not exactly shipped overnight and maybe the tough comps and the second half of you guys had previously spoken to.
Have a little bit better outlook, just similar kind of question there and the organic side. Thank you.
Yeah, Matthew Theres, a couple of things going on and one is the real strong continued strong demand that we've seen in Q1 and so the Q1 demand is certainly a factor when we look at how we exited the quarter and how things are starting this quarter, we continue to see.
Strong demand.
A little bit more than what we had initially planned so nothing is going to move of those tough comps and the back half there are still there and we have to face them, but when we look at how the.
Demand is shaping up both in the quarter and then what we expect going forward and the fundamentals.
And that that really was the of the rationale for us of lifting our guide on the revenue side.
And your next question will come from Stephen Kim from Evercore. Your line is open.
Yes, thanks, very much guidance strong results just following up on Matt's question about the margin I just wanted to throw in that you also had the refinancing of debt.
And we added about nine times for the full year.
I just wanted to get an idea of whether that had previously been contemplated in your guide and then if I heard your answer John.
John It sounds like it's higher inputs, which is totally understandable, but you had said I think that you are expecting neutrality on input costs by year end, which I think is pretty much what you talked before.
So just to get a sense for the arc of margins through the quarter relative to your previous expectations are we looking at kind of maybe lower margins and <unk> than you had previously thought, but then higher and <unk> and should get the neutrality.
Back.
And then of course, you did better and <unk> as well as have the.
And the way, we should be thinking about the trajectory of margins relative to your previous expectation.
Yes, so a couple of questions there, Steve let me try to address those so first of all with respect to the interest savings.
I think for this year, given the timing of that transaction, it's probably about a $5.06 benefit.
In 2021.
That said.
And of hurting Keiths remarks, we talked about.
And receiving some proceeds from.
The sale of cabinet works.
And also then contemplates.
Need to update our guidance to reflect the fact that we will not be getting interest income.
From that investment so I think the net benefit there is call it two to three.
So well.
And I just want to make sure we're clear on that so you know as you think about our range.
The first quarter beat plus.
The net impact of interest.
For the for the year.
Now with respect to your second part of your question about price cost neutrality, Yes, Youre correct. Our what we've what we're committing to is exiting the year of it being price cost neutral.
In terms of how that actually plays out through the course of the year, we're having pricing conversations with our customers and so.
Can't really give.
Give you a good clear signal as to when those are all going to flow through and hit the P&L.
So I don't want to.
I'm not going to give we're not going to give clear guidance on Q2 Q3 of Q4 exactly of that flow through because those conversations are fluid.
Great No that's very helpful. Thanks, John.
Second question just relates to the massive the heat and plumbing sales it sounds like it was very broad based.
It certainly came as a welcome surprise to us and it sounded like it kind of came as a bit of a surprise to you I just wanted to make sure that that's correct does that mean that things really intensified in February and March and if you could just provide a little bit of color as you sort of look at it it sounds like strength is continuing here in April.
Exactly what would you attribute that to because it I'm inclined to think that it's probably going to persist.
So if you could just provide a little bit more context around that that'd be great.
Yes, good morning, Steve and this is Keith.
We are seeing demand stronger than we expected in the quarter and.
And we're also feeling better about the back half of the year and when you look across the.
The the plumbing segment, we have strong north American growth as we talked about and that really is across all channels.
We continue to do very well and retail.
Obviously, the DIY component is strong our trade plumbing business continues to be strong and we believe we're maintaining our leadership and growing quite nicely and.
E Commerce, so strong across the board growth.
In North America, and then we're seeing a nice recovery and in Europe, as we talked about particularly and central Europe and the U K.
He is starting to get better and China is really <unk>.
Performing nicely so its been very broad based yeah.
And it gives us confidence both of that now as we look at what we're seeing coming into the quarter, but also into the second half.
And your next question will come from John Lovallo from Bank of America. Your line is open.
Good morning, guys and thank you for taking my questions and the first one is I think the you had previously outlined about $40 million of delayed investments that kind of accumulated during COVID-19.
And I'm curious what your what are your sort of the cadence that youre expecting of the spend coming back and and if in fact this is contemplated to do that 18% SG&A that you're expecting through the remainder of the year.
Yes, John the $40 million still contemplated and its probably more back half loaded.
The only and again, it's all going to depend.
The rate of that investment will depend on what we're seeing out in the market. If all of the sudden and the market start to contract, we'll be we'll temper that investment to ensure that and aligns with the growth that were that we expect to see.
Understood. Okay, and then maybe just on the raw mats create headwind I think you guys talked about mid single digit range for the full year and high single digits and three Q4 and for Q can you just help kind of parse out the the difference between the freight inflation versus the actual raw mat inflation.
So.
Yes, and maybe maybe I'll start John and and you can get into some of the specifics.
In terms of.
While we don't normally see this kind of significant commodity changes.
Occurring this quickly we certainly are no strangers to commodity changes and this is really part of our business and we've consistently communicated John and more importantly, I think <unk> demonstrated our ability to reach price cost neutrality through cycles and this is.
Included garden variety of sort of changes in costs related to the relationship between supply and demand. It's included force majeure kind of spikes in and cost and as well as tariffs, which was quite a spike that we were able to cover so our price and cost neutrality capability is really underpinned by this consistent.
And that we've had and our brands and innovation and customer programs and the like as well as our well developed ability to drive total cost productivity and to ultimately deliver value to our customers and consumers that they recognize so we're going to continue with this commitment and we will reach price cost neutrality as we exit this year now in terms of spa.
<unk>, John and maybe you want to hit a little bit on some of the commodities and and the relative spikes that were saying yeah sure. So so John as you referenced we are seeing both inflation and in our raw material baskets.
Really across the enterprise as well as transportation and logistics and <unk>.
If you think about the.
And how were being impacted obviously copper zinc and the resins it.
They go into paint and packaging.
And had been up pretty significantly.
Yes.
To get to your question, specifically as you break apart.
The impacts on the financial statements from the raw materials and transportation and logistics the.
Vast majority of the impact comes from the raw material basket.
If you think about distribution and logistics with the relatively small part of our overall cost structure.
And said.
And I guess I get repeat your statement, yes, we do continue to expect.
Inflation to be up kind of mid single digits for the full year and both segments and of high single digits and the second half the year and.
As Keith alluded to we've secured price increases across our product categories and we do have plans for further price increases to offset the persistent inflation that we've been experiencing.
That said, we're not going to shy away, we're going to continue to implement cost productivity improvements across the enterprise as well and then work with both of our customers and suppliers to continue to try to to offset the.
Inflation so.
Yes.
We said earlier day in response to Steven's question, we do expect the price cost neutral as we exit 2021.
Okay. Thank you guys.
The next question will come from Michael Rehaut from Jpmorgan. Your line is open.
Hi, Thanks, Good morning, everyone. Thanks for taking my question.
I just wanted to make sure we're thinking about the and I'm sorry to beat the dead horse here, but I think it's top of mind with the investors and just trying to appreciate.
The timing differences around price cost.
Yeah and.
Make sure we're thinking about it right.
So the same because earlier you said okay. The.
Higher volume from the margin side, you have higher volumes that are offset by higher inflation.
Or we could take that as kind of net inflation net of your incrementally expected.
The cost increase I'm, sorry of price increases and other words.
Seems like it.
And the perfect World, if you had higher inflation.
But you are putting through price increases to offset that.
It should be awash and so are we.
Hey, Pat.
Can you lag and.
Price cost that you know you're still.
You may be chasing of the wrong word.
And then potentially to the extent that you get a fuller benefit of.
And the price increases in 'twenty two.
That in and of itself the extent that the inflation backdrop remains stable.
Actually turned into a incremental tailwind as you fully catch up to the inflation is that the right way to think about it.
Yeah, Mike I think if you're thinking about it the right way.
Alright, perfect and there.
And just more on the overall top line environment.
If you could probably go into a little bit of around point of sale and.
The level.
And what we've heard so far is that.
And from competitors are broadly and the industry that.
The demand backdrop is being so robust and we're continuing to be so robust that inventory levels have remained constrained.
Has that been the case for your businesses and the first quarter.
Yeah.
And that you haven't been able to and that some restock.
The restock and then.
And then the point and is this something that you would expect to perhaps.
Happened and.
Coming quarters.
Yeah.
And that you were able to to.
<unk> continued to increase production.
Yeah, Michael the Pos is strong and it's as I mentioned, it's a strong through the quarter and exiting the quarter and we feel real strong and we feel real good about the Pos and that's across.
And really most of that all of our categories.
With regards to the inventory position the.
The supply chain has been tight and there's no question about it and we've had disruptions and.
And hats off frankly to our to our operations team and and teams are really across the world to be able to.
The leverage our strengths and also the relationships to be of and to work around the clock Tim to move production around and to match production to specific demand and those sorts of things. So they've done a phenomenal job, having said that we're still working through some tightness and I would say probably and think about it from from a Q3 sort of perspective that we will catch up.
And then start to replenish the inventories because of our inventories and the channel aren't where we'd like them to be so yes I think.
Outside of some inventory fell and the back half of the right way to think about it.
Okay. Thank you.
Your next question will come from Ken Zenner from Keybanc. Your line is open.
Good morning, everybody.
Good morning, Ken Good morning, Ken.
And.
Wonder if we could talk about demand a little bit.
And the plumbing business.
Relative to what you're seeing at retail first.
First the wholesale versus the new construction, if you could kind of parse that out.
Trying to think about.
DIY plumbing as opposed to the me.
And the for the U S. Please.
Trying to think about DIY plumbing and price points as opposed to the pro.
Which I think of all.
And if it more as people are able and professionals able to get into the house and do larger renovation projects.
And you know when you think about.
Teasing out the market in terms of DIY and pro of our two segments.
It's hardest to do and plumbing because of the nature of the channels and the fact that plumbing wholesale.
Does have some DIY component to it and that we just it's not possible to get that kind of accurate data in terms of that but we do know that we have a strong mix of DIY, Oh excuse me of of call it retail and wholesale and plumbing.
Over half of our businesses and wholesale and wholesale certainly skews more towards the pro and DIY. So we feel real good about.
The mix of that business in terms of being there too.
Catch improvements and demand be that out and the pro side or on the of the DIY side. We all know about the strength of the DIY and we expect the pro to start to come back as people are more comfortable having pros and their homes as vaccinations rollout specifically to your question of of demand and it really has been broad based across all channels real good strength.
And and.
And E Commerce and continued strength and in both of the plumbing wholesale as well as the retail where we lead in terms of share of shelf position. So that's been really that's been really good force and international is a nice story international we talked about the strong growth rate there are positioned and central Europe, China is doing very well understanding that there was a relative.
Easy comp there, but all in it's been pretty broad based and that all feeds into why we've raised our confidence level in our guidance.
Right, Yeah, which is nice and the.
To me you know you guys mentioned the home prices, which is really homeowners' equity it seems as though your sales are tracking with the very.
High rate of appreciation of homes.
Strong correlation of a strong real strong correlation between home price and existing home sales no question about it.
And it seems to me that could you maybe give us a little context Keith for.
Demand is high because prices are up.
Assuming your guidance holds which is that youll be cost neutral by the end of the year.
It certainly seems as.
Some of these input costs related to the Texas storm might be abating next year, yet prices are high and we all know theres a lag of on demand from prices what happens usually what you.
When this type of context sets out because it seems like it could be bullish for not asking for FY 'twenty, two but if youre able to pass through the costs do you usually give back costs otherwise it seems the higher volume growth.
Perhaps lead to a margin adjustment as we look down the road.
Higher yes.
And when you look longer term through cycles of commodity increases and commodity decreases and and it varies depending on the nature.
Of the of the cost and we have inventory that needs the.
Needs to flow through before we get any sort of price change up or down.
To hit the to.
And to hit the P&L, but fundamentally we've maintained and demonstrated neutrality as it relates to those fluctuations and raw material cost inputs and that neutrality comes from real solid total cost productivity improvements it comes from us really.
Watching our spend very closely and of course price is part of that now in terms of the impact of of of how this could play out.
And in future quarters or into into next year, It's a real volatile environment. What we're focused on is delivering on what we say, we're going to deliver on and ensuring that we continue to drive.
And the exit of next year of this year, rather to price cost neutrality, and that's what we're committing to.
And Mark Ken one of the thing I would point out is given our international business.
Yes, I'd say over time that we're probably slightly price favorable and plumbing.
And just because you know Hans grew out of does a good job of of going out of annually with price increases.
Thank you.
The next question will come from Keith Hughes from curious your line is open.
Thank you our question was on propane and it was weak and the quarter. If you could talk about what you think of what's going on and what's caused in the <unk>.
Acceleration of that business and any kind of April view on that would be helpful as well.
Yes.
Yes, so Keith sorry about that it's John so yeah, you're right propane.
A little bit weak and the first part of the quarter.
Talk about the difficult comp and faced and.
And the fact that we saw some positive growth and the back half of net new.
<unk>.
I'm getting a little feedback.
And so we do believe there is.
Kind of a little bit of pent up demand.
Yeah.
And the fact that people are getting more comfortable with pro contract. So we do think there was probably a little bit of of weather impacts as well and the quarter.
As the debt storm.
Store and move through.
Texas and much of the country in mid February and so you know as soon as we saw that passed we started to see better growth in that business and so as we look to the full.
Back half of the year reduced and continue to believe that we should see high single digit growth as the consumers arent really getting more and more comfortable and having these contractors come in the home and do larger paint jobs.
Okay. Thank you.
And then final question, we've talked a lot about cost if we look at price cost you're talking about the cost, peaking in the third quarter. If we look at price cost when do you think that negative peak as you head towards parity.
The second quarter third quarter fourth quarter.
Yes.
Yes.
I guess, Keith and again and it all it depends on some of the pricing conversations that we have.
Probably peaks in the third quarter.
And we'll continue to update it dead on our subsequent calls.
Okay. Thank you.
Yeah.
And your next question will come from Phil <unk> from Jefferies. Your line is open.
Hey, good morning, everyone. Congrats on a very strong quarter.
Given some of the supply chain dynamics, you've called out great to see that it really didn't impact the much at all from a revenue perspective from <unk>, but while that had more of an impact and the second quarter as you kind of work down some of that inventory you have I'm, particularly curious on any of the your exposure, where you can pinpoint and product from Asia and any of the impact that you may be seeing on shortages.
The ryzen.
Put and comps aside and just talking about output and disruptions in terms of of what we expect we think its getting better it really feels like it's getting better we're not through through at all yet in terms of the hard work that we need to do in terms of matching inventory to demand matching production to demand and those sorts of things.
Still a little bit of tightness, and timeliness and containers as we talked about but.
It is getting better.
Okay, that's great and then from a pricing standpoint, and you know we all are and.
Depreciation and with the pricing power you have and your core plumbing and paint business, but curious if youre seeing price traction for your kitchen of the product and if your competitors of matches Pks and the and 18 and there was a little more challenge and that fried and.
Do you anticipate price cost neutrality as well as you kind of exit 2021 and <unk>.
Yes, yes, we were driving that and that's something that we believe and across the board of Masco and yeah that would be true of kitchen of the as well and so there is doing well with the team as we committed to working that business and positioning and the positioning it to return to growth to 21.
And we're ahead of that plan. The team is doing well, we're seeing good continued solid demand and our new products are doing well the structural cost of alignments that we've talked about on past calls.
And are bearing fruit and the team's doing a nice job.
Okay Super Thats really helpful.
And your next question will come from Susan Mcclary from Goldman Sachs. Your line is open and thank you.
Good morning.
And my first question is you highlighted the strength that you saw on your e-commerce channels and plumbing and the quarter can you give us a little more color on what exactly you're seeing there and how youre positioned there and anything that you are taking to kind of increase your exposure to that channel and and kind of drive those sales going forward.
Sure.
We expect to continue to grow obviously as consumers become more and more comfortable with the online purchases and our space and we also continue to expect rather the continued to gain share and we believe that we're the leader in plumbing and E comm market and we've worked on a number of things too.
Build and maintain that leadership Susan <unk>.
Product offering obviously is one.
We have put our our best and brightest talent on this we're working very hard across our business unit to leverage learnings quickly to leverage platform like product data management and the space to leverage the sharing of ratings and reviews to really understand what it takes to be on that first page.
And to get that second and third click.
We're working hard to understand how to drive digital content and 360 degree spends we're doing a ton of stuff there.
And and also we're investing capital and we made a and acquisition of one of the leading digitally native brands and Krauss and Kraus is a company that makes I would say more.
The modern design and sinks and faucets and the like and we're learning a lot from them and we're helping them be all it can be as well. So a combination of capital deployment, our talent products and leverage et cetera. This is important for us and its paying off and we've been working at this hard now for five.
Years.
Okay.
For color.
The next question is when we think about the business.
The operating at margins that are ahead of those targets that you gave us at the Investor Day can you talk to just the longer term sustainability of some of these trends that youre seeing and how you think about the longer term margin potential of the business.
Yes, we're really not changed and our margin outlook for the for the long term.
There's a lot of of.
Variability and these dynamic times.
And we think of that.
Normal SG&A spend of around 18, and 19% of where this business should be from maximizing value creation and continuing to invest in growth and our brands.
Et cetera, so no.
No change.
To our margin outlook at this point, but certainly we have.
<unk> demonstrated and will continue to demonstrate solid drop down on our incremental volume.
Susan and I would remind you that debt.
The information that we gave out and our 2019 Investor day.
And a lot of very different assumptions of related to it. It is a very different environment, we assumed much slower growth.
For the period, so I would not consider those as our current guide for the long term of the business.
Okay, I'm, sorry, if I missed that Susan and I was talking about our margin guidance here.
I think the way, we think about it now Susan.
And again.
This and our Q4 call is that continue to challenge our businesses to grow above market and.
And continue to have our businesses expand margin every year and again, it's not hundreds of basis points of margin expansion, but rather tens of basis points of margin expansion.
Yeah, Okay I got you John Thank you that's helpful. Good luck.
And your next question will come from Truman Patterson from Wolfe Research. Your line is open.
Hi, good morning, everyone and.
Thanks for taking my questions.
The first I just wanted to dig in on on the decorative architectural side, especially the DIY demand.
Could you give and April update or are you seeing any deceleration or pretty much in line with what you'd expect seasonally and if I'm kind of parsing out the guidance.
It looks like you all are expecting DIY to be down the remainder of the year.
But you know the commentary on the call. So far has been I'll just put it pretty optimistic just trying to understand.
Some of the moving parts, there and whether or not there maybe.
A little bit of conservatism built in.
Well the the DIY demand continues to be strong obviously, we've got tough comps coming up and the back half of the year, but in terms of the demand the actual demand that we're seeing.
It continues to be and continues to be strong there's no question about it.
Certainly the.
And the pandemic has increased the interest in People's homes, and we don't view.
The vaccine and the rollout as being a necessarily a switch that has flipped as it relates from the work from home relates to the work from home environment or the.
The amount of time that people are spending and their homes and clearly the millennial.
Demographic and cohort has shown interest as we look at first time.
And the Diyer and we look at that.
And that cohort and we expect that to continue so yes, we have we have some tough comps coming up no question about it but the demand remains strong.
Okay. Okay. Thanks for that and then.
Also and the Spa business I believe you all said it was growing double digits. So so nice improvement there, but could you just discuss how the backlog of the order backlog is looking and you all.
All of mentioned supply chain.
Key strength throughout Mexico could you just give us a timeline when you somewhat expect that to be operating.
Close or at full capacity.
Yes.
We're getting we're getting better and we're starting to approach of that that capacity that full capacity. If you will as we were bringing in our Mexican labor force.
Two of greater degree and getting more output from that but then we had these issues around resin and then theres there theres tightness, there and we've missed some production and some selected.
Units debt that require a certain type of of.
Blended resins.
But the demand and there continues to be extremely robust and we have a very solid backlog that has not changed and you know.
As we get through this a short term blip here from the polar vortex, and Texas and the resin type of tightness. This business will start to quickly approach state.
The state of production.
Alright, Thank you all and good luck on the upcoming quarter.
Thank you John.
The next question.
Tim will come from Steven Ramsey from Thompson Research Your line is open.
Hi, Good morning, one quick follow up on the small business in the full year Guide do you have spas operating at full production and generating.
Quote full margins for the year.
We're expecting strong double digit growth for Watkins and 'twenty one.
Okay, Great and then thinking about price cost and getting to neutral.
I guess, our surcharges of part of that is that being contemplated for pricing such as resins and then for price cost by product you expect to the price cost neutral on all products.
So we have a number of of levers that we can and do Paul to drive cost improvements and price cost neutrality, we view surcharges and the past and we were certainly contemplating.
And and using some of those here as we sit today.
In terms of saying that every call every product will be price the price cost neutral, there's just such variability and cost inputs, depending on the type of specific product that I won't I won't say that but when you look across our our business. We will exit this year of price cost neutrality.
Excellent. Thank you.
And your next question will come from Eric <unk> from Cleveland Research. Your line is open.
Good morning.
Good morning, Eric two things.
Two things first of all can you give us a little bit more insight the the deferred marketing spend.
I think $40 million, you've talked about what what is that made up of and.
And also curious related to that or maybe a part of that is.
Promotional investment on your part and what Youre seeing go on this year of what Youre doing across your business or the retailers are asking for and the.
And regards to promotional activity.
Yes, Eric.
Basket of things that go into marketing and so it seems as if the.
Things like trade shows debt.
Obviously, you had been pulled back and some of and are now beginning to.
I'm going.
Come back online and as people get back and some of it is advertising.
Some of it is personnel.
Some of it is investment and e-commerce, and Keith referenced and response to an earlier question.
So there's a variety of things that go into it and Theres also some growth initiatives too to your point of some promotional activity.
And it goes into that bucket as well so it's a big basket of things that go across.
The entire segment.
Okay.
And then just a follow up.
And you have clarity on the propane.
Paths from here was helpful. On DIY I appreciate the the the businesses continuing to be very strong and which is great to hear but in terms of the growth of the DIY business now that youre running against these tough comparisons what what should we be expecting in terms of.
The growth out of that business as we move forward.
And I, probably think of it and that flattish range for the last year.
And then.
For the year is helpful.
For the for the perfect day.
Thank you.
And your final question for the day.
Mike Dahl of.
The macro health capital markets. Your line is open.
Hi, Thanks for squeezing me in.
One more question on price productivity and.
Appreciate the sensitivity around the pricing side, but anything around just qualitatively at a high level. When you think about covering the costs and.
How much is price versus productivity and of the pretty balances of skewed more towards price just any color there and the second part would be you've already talked about some of the.
And you continue to generate cost productivity, but.
And yes. Some costs are also eventually go into the returns are just that.
And the levers that are left.
Could you elaborate a little bit more on.
You've obviously done a great job on productivity, just where is the incremental productivity coming from.
Sure. So Mike couple of questions and you think about.
The weighting of price versus productivity and offsetting inflation, just given the nature of the rapid increase in the amount of inflation and we're seeing it.
It's naturally going to be more price and productivity to offset that or to get to the price cost neutrality.
In terms of our productivity measures and I'll start and maybe take it over to Keith to clarify, but our teams have done a great job over multiple years of driving productivity within our operations and and.
It's not just on the plant floor, it's also and the administrative part of the operations.
And we challenge our teams every year to get more efficient and a variety of ways and.
So we do have TCP goals for every total cost productivity goals for each of our businesses.
Keith you want to give some examples and I think from of dollars and cents perspective, the the the greatest productivity comes from volume leverage and when you look at our consistent and steady and repeatable dropdown and say, it's 30% ish and incremental volume for plumbing and maybe closer to 25 and the Deco segment.
We get that that conversion efficiency is very helpful to us obviously, there's direct labor productivity, we have hired a lot of people and as those people become more familiar with our systems and how to work that naturally drives productivity the way.
And we're consistently and constantly looking for material substitution and value engineering, and where we can take a four part of assembly and make it a two part machine or injection molding that sort of thing. So it's really a combination of shop floor and labor productivity working with our customer with our suppliers and making sure that we have the most cost effective.
Way to meet customer requirements, and we don't we don't want to mess or Miss any customer requirements. So it's really all part and parcel of the masco operating system with the good dose of volume leverage.
That's great very helpful I'll leave it there thanks.
That concludes today's call we'd like to thank all of you for joining US This morning and for your continued interest and Masco as always please feel free to contact me at three one and three 792 5500, if you of any further questions. Thank you.
Thank you everyone for joining us today and this will conclude today's conference call you may now disconnect.
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