Q2 2021 Masco Corp Earnings Call
[music].
Good morning, ladies and gentlemen, welcome from Masco.
<unk> quarter Conference call. My name is Dorothy and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes to ask a question. Please press Star then the number 1 on your telephone keypad.
On your question. Please press the pound Keith I went.
Now I'll turn the call over.
Second attractive Vice President Treasurer, and Investor Relations you may begin.
Thank you Dorothy and good morning, welcome to Masco Corporation's 2021 second quarter Conference call.
With me today are Keith Allman, President and CEO of Masco, and Johnson device Masco, as Vice President and Chief Financial Officer.
Today, our second quarter earnings release from the presentation slides that we will refer to today are available on our website under Investor Relations.
Following our remarks, we will open the call for analyst questions. Please.
Please limit yourself to 1 question with 1 follow up.
If we can't take your question now please call me directly at 3.1 to 379 to <unk>.
500.
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 in our risk factors and other disclosures.
From 10-K on 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.
We reconciled these adjusted metrics to GAAP in our earnings release and presentation slides.
And therefore are available on our website under Investor Relations.
With that I'll now turn the call over to Keith Thank.
Thank you David.
Morning, everyone and thank you for joining us today I hope everyone is staying safe and healthy.
We performed exceptionally well on the second quarter and demand for our products was strong.
This resulted in fourth and on our fourth consecutive quarter of double digit sales growth and sixth consecutive quarter of both margin expansion and double digit earnings per share growth.
I am extremely proud of our entire team as we successfully navigated numerous supply chain.
<unk> challenges to enable this growth.
For the quarter sales increased 24%, excluding acquisitions divestitures and currency sales increased 18%.
Operating profit increased 27% and margins expanded 60 basis.
Points to 21% principally due to strong volume leverage.
Earnings per share increased an outstanding 34%.
Our overall performance demonstrates the strength of our portfolio of lower ticket repair and remodel products that are diversified across geography.
Geographies and channels, serving both the consumer and the professional.
Turning to our plumbing segment.
Sales increased 48% excluding currency led by exceptional growth from our North American and international Faucet, and shower businesses and our Spa business.
International plumbing.
It grew 50% in the quarter, excluding currency as Hans Roy sales rebounded sharply in nearly all of its markets.
Strong operational execution, and new products, such as <unk> <unk> shower systems led to share gains in many of these markets.
No.
Plumbing introductions will continue as we launch the award winning XR 1 collection in the second half of the year.
This collection was designed by Barbara <unk> and award winning internationally acclaimed London based industrial design studio.
This continues on <unk> legacy I'll.
<unk>, leading contemporary design with innovative functionality.
North American plumbing posted strong growth of 47% excluding currency in the second quarter led by approximately 75% growth at Watkins wellness and robust double digit growth at Delta.
Delta Faucet delivered another record quarter with growth across all channels and particular strength in the professionally oriented trade channel.
We continue to invest in new products in North American plumbing, as well and 2 days ago, We introduced a Frank Lloyd Wright collection by Brazeau.
That furthers the brand's commitment to distinctive design and innovative products.
Lastly in plumbing at the beginning of July we acquired scheme missed another bolt on acquisition for Delta.
Steam mist is a leading manufacturer of residential steam bath products that will complement.
Implement our strong trade and e-commerce product offering and is consistent with our bolt on acquisition strategy.
In our decorative architectural segment sales declined 5% against a healthy 8% comp for the second quarter of 2020.
While vas on cabinet hardware lighting and propane.
During the quarter demand moderated for DIY paint.
Material availability and other supply chain issues also impacted our overall coatings business as.
As nearly all of our resin suppliers were operating under a force majeure declaration during the second quarter.
Because.
Of these issues sell through on our coatings products was better than sell in and inventories in the channel were reduced during the quarter.
Due to lower than expected second quarter sales and our expectation that material availability issues will persist, but slowly improve we are lowering our DIY.
<unk> sales expectation from flat to down low single digits for the full year.
However.
With the acceleration we saw on our propane business in the quarter. We are incrementally more optimistic and are raising our expectations to low double digit growth from high single digit for the full year 4.
For our propane business.
For the decorative segment overall, we now expect growth to be in the range of 2% to 5% for the full year.
With respect to innovation in the decorative segment, we continue to invest in new products and are excited to launch a new high end line of paint in the third.
Quarter at the home depot called Bear dynasty for both DIY and pro painters.
Dynasty is our most durable stain resistant scuff resistance, 1 coat hide paint ever.
It's low VLC Greenguard and LEED certified fast drying.
And on the anti microbial mildew resistant paint finish.
This is yet another example of how our innovation teams continue to focus on the voice of the customer.
To deliver leading innovation and value for both the consumer and the professional.
Moving on to capital allocation.
<unk>, we continued our aggressive share buyback during the quarter by repurchasing $6.6 million shares for $447 million.
As part of the accelerated share repurchase agreement that we executed during the quarter. We will additionally receive approximately 900000 shares in July.
And had to complete that agreement.
Bringing our total shares repurchased year to date to $13.1 million shares for $750 million.
This is approximately 5% of our outstanding share count at the beginning of the year.
Underscoring our strong financial position.
My confidence in the future we.
We now anticipate deploying another $250 million in the second half of the year for share repurchases and acquisitions for a full year total of approximately $1 billion.
Finally.
Like I did last quarter.
Let me.
And an update on what we are experiencing with inflation and supply chain tightness.
We continue to see escalating inflation across most of our cost basket, including freight resins, tio too and packaging.
Inbound freight container cost nearly tripled during the quarter.
Give you and we now expect our all in cost inflation to be in the high single digit range for the full year for both our plumbing and decorative segments with low double digit inflation from the second half of the year.
Inflation on coatings will likely be in the mid teens later in the fourth quarter.
To mitigate this inflation, we have secured price increases across both segments and are taking further pricing actions across our business to address these continued cost escalations.
We're also working with our suppliers customers and internal teams to implement further productivity measures to help.
Offset these costs.
Despite the increased inflation.
We still expect to achieve price cost neutrality by year end.
While cost inflation has clearly been an issue material.
Availability has also impacted our business.
Our teams have done a tremendous job.
Job of qualifying new suppliers developing material substitutions and shifting production to adapt to this dynamic environment and to serve our customers.
However.
These raw material constraints have limited our ability to build inventory of many of our products and the channels that we serve.
We anticipate material availability to slowly improve in the second half of the year and we expect to replenish inventory to the appropriate levels over this time.
The demand for our products remains strong and with an improved outlook for plumbing based on the continued strength of both our North American and.
And international operations, we are increasing our full year expectations of earnings per share to be in the range of $3.65.
To $3.75 per share up from our previous expectations of $3.50 to $3.70.
With that I'll now turn the call over to John for additional detail on our second quarter results John.
Thank you Keith and good morning, everyone.
Dave mentioned on Kevin's today will focus on adjusted performance.
Excluding the impact of rationalization and other 1 time items.
Turning to slide 7 we delivered another exceptional quarter as we capitalized on strong consumer demand, resulting in continued growth and increased backlogs.
As a result sales increased 24% with currency and net acquisitions, each contributing 3% to growth.
In local currency north.
Sales increased 15% from 12% excluding acquisitions.
Strong volume growth in North American faucets showers and spas.
This outstanding performance.
In local currency international sales increased a robust 50%.
49%.
American excluding acquisitions and divestitures.
Gross margin was 36.3 percentage in the quarter up 50 basis points as we leveraged the strong volume growth.
On our SG&A as a percentage of sales improved 10 basis points to 16, 2% due to our operating leverage.
During the quarter certain expenses, such as headcount marketing and travel and entertainment increased as planned.
We expect SG&A as a percentage of sales to increase in the third and fourth quarters as these costs normalize.
We delivered strong second quarter operating profit of $438 million.
Up $94 million or 27% from last year with operating margins, expanding 60 basis points to 21%.
Our EPS was $1.14 in the quarter on <unk>.
34% increase compared to the second quarter of 2020 due to volume leverage lower interest expense.
Lower share count.
Turning to slide 8.
Plumbing growth accelerated in the quarter with sales up 53%.
Currency contributed 5% to this growth and acquisitions net of divestitures contributed another 4%.
North American sales increased 47% in local currency were 41% excluding acquisitions.
Delta led this outstanding performance delivering another quarter of robust double digit growth.
With its strong brand recognition and market leadership.
Delta continues to drive strong consumer.
And across all its product categories and channels.
Watkins wellness also significantly contributed to growth in the quarter as both demand and our backlog remains strong.
International plumbing sales increased 50% in local currency with 49% excluding the anchors.
Acquisitions and divestitures.
<unk> delivered robust growth as demand continues to improve across Europe and numerous other countries.
On the growth key markets of Germany, China, U K and France, all grew strong double digits in the quarter.
Segment.
Operating margins expanded 230 basis points to 26% in the quarter net operating profit of $274 million up a $115 million was 72%.
This strong performance was driven by incremental volume favorable mix and cost productivity.
Initiatives.
Partially offset by an unfavorable price cost relationship and higher spend on items, such as travel and entertainment marketing and growth initiatives.
During the quarter. We also completed the divestiture of Hooper, a small shower enclosure business based in Germany.
Cooper.
To approximately 70 million euros in 2020.
This transaction closed on May 31, and net proceeds were not material.
Given our second quarter results and current demand trends, we now expect plumbing segment sales growth for 2021 to be in the 22% to 24% range.
Net sales up from our previous guidance of 15% to 18%.
Finally, due to our improved sales outlook, we are increasing our full year margin expectations to approximately 18, 5%.
Up from our previous guide of approximately 18%.
Turning to slide 9.
On decorative architectural declined 5% for the second quarter from 6%, excluding the benefit from acquisitions.
DIY.
Paint business declined double digits in the quarter against a healthy high teens comp due to the moderating demand and raw material supply tightness.
On plants affected by storms in the Texas Gulf Coast region in the first quarter continue to face production challenges.
We expect these raw material headwinds to persist in the third quarter and now anticipate our DIY business to be down low single digits from a full year.
To help mitigate these challenges we are working with our existing.
Suppliers on qualifying new sources from materials to meet the demand of our customers which remains strong.
I want to thank our supply chain teams, which have done an outstanding job managing through these challenges.
Our propane business delivered strong double digit growth in the quarter as consumers are increasingly willing.
To allow professional painting contractors in their homes.
We expect demand in this channel to remain strong and now anticipate low double digit growth for the propane business for the full year.
From our previous expectation of high single digits.
Paint contractors order books continue to grow.
Our builders' hardware and lighting businesses each delivered growth in the quarter as they continue to capitalize on increased consumer demand.
Segment operating margins were 22, 1% and operating profit in the quarter was $188 million due to lower volume.
We offset by cost.
So many initiatives.
For full year 2021, we now expect decorative architectural segment sales growth will be in the range of 2% to 5%.
Alan from 4% to 9%.
Due to lower than expected second quarter sales and persistent raw material constraints.
We continue to expect.
Segment operating margins of approximately 19%.
As productivity initiatives and pricing helped to offset higher input costs.
And turning to slide 10, our balance sheet is strong with net debt to EBITDA at 1.3 times.
We ended the quarter with approximately $1.8.
Productivity of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percentage of sales, including our recent acquisitions was 16, 9% an improvement of 120 basis points over prior year.
As we discussed last quarter.
<unk> terminated in annuities, our U S qualified defined benefit plans in the second quarter and had an approximate $100 million final cash contribution to the plans to complete this activity.
This removes approximately $140 million of pension liabilities from our balance sheet and on.
Will benefit our free cash flow by approximately.
$50 million.
To reduce cash contributions starting in 2022.
Also we received approximately $166 million from the redemption of our preferred stock related to the recent sale of our former cabinet business.
Finally, as Keith mentioned earlier.
Approximately for today, we repurchased $13.1 million shares in 2021 for $750 million.
We expect to deploy an additional $250 million for share repurchases or acquisitions and the remainder of this year.
Collectively these actions demonstrate our confidence in our business.
And our committee.
As it and ability to further strengthen our balance sheet, while aggressively returning capital to our shareholders.
Turning to our full year guidance, we have summarized our updated expectations for 2021 on slide 11.
Based on our second quarter performance and continued robust demand we now.
Commitment dissipate overall sales growth of 14% to 16% up.
Up from 10% to 14% with operating.
Operating margins of approximately 17, 5% up from 17%.
Lastly, as Keith mentioned earlier.
Our updated 2021, EPS estimate range of $3.65.
And $3.75.
Represents 19% EPS growth at the midpoint of the range.
This assumes a 252 million average diluted share count for the full year.
Additional modeling assumptions for 2021 can be found on slide 14, and on our earnings deck.
I'll now turn the call back over.
On to Keith.
Thank you John.
We had an outstanding second quarter, driven by our strong brands, our innovation pipelines and most of all our people as demonstrated by outstanding execution by our supply chain teams.
Our strong performance demonstrates the.
With masco is balanced and diversified business.
<unk> has a broad portfolio of our lower ticket repair and remodel oriented home improvement products.
Our products are broadly distributed across geographies and channels for both consumers and professionals.
Additionally.
Our markets remain strong and we expect home remodeling expenditures to drive growth in 2022.
The fundamentals of our repair and remodel business are strong with.
With year over year home price appreciation of over 15% in May.
In existing home sales up over 23%.
Both metrics have a strong correlation with our sales on a lag basis.
On the consumer is strong with nearly 2 trillion dollars in savings and an increased desire to invest in their homes.
Lastly.
We continue to invest in our business and are well positioned for long term growth.
We are bringing new innovative products to market.
Fueling our growth and expanding our leading market share.
And with our leading margins and strong free cash flow, we will continue to deploy capital to reinvesting in our business.
Acquiring complementary bolt on companies.
<unk> and returning cash to shareholders in the form of dividends and share repurchases.
All to drive long term shareholder value.
With that I'll now open up the call to questions operator.
In order to ensure that everyone has a chance to participate we would like to.
We request that you limit yourself to asking 1 question and 1 follow up question during the Q&A session.
Ask a question. Please press Star then the number 1 on your telephone keypad to the draw your question Paul.
Keith.
Your first question comes from the line of Matthew Bouley with Barclays.
Morning, everyone. Thank you for taking the questions I could start on I guess DIY coatings. It sounded like you're attributing the reduction in the revenue guide more so to our supply chain than to a real change in your demand outlook.
I think he said sell through was better than sell in.
If you could just provide a little more color on that I guess, you've found that demand DIY, specifically is really not that different than what you previously thought or or do you think the consumer is pulling back a little bit more than expected there as well. Thank you, Matt I would say I would say that demand did moderate a bit more than we expected, but certainly.
So material availability and other supply chain challenges.
Played a role on the decline in the quarter and of course, we had some tough comps.
The impact of the storms in Texas, Texas from our Gulf Coast region continue continue to limit resin supply.
This is an industry wide phenomenon in nearly all.
All of our resins as I mentioned.
Suppliers, who are operating under a force majeure declaration on the second quarter.
There was a plant explosion. In addition at a supplier that supplies, our alcohol RASM, but really for the industry, but that affected us. So we do expect while they're not over yet we do expect.
These material availability issues to persist in the third quarter and then slowly improve.
So we now expect as I mentioned, our sales growth to be in the range of 2% to 5% down from our previous expectation of 4 to 9.
I would like to reiterate that our supply chain teams have done an outstanding job on they will continue to do so.
Understood really helpful color there. Thank you for that.
Second 1 is on a similar topic, but just thinking about raw material constraints broadly it sounded like you know it.
It really did constrain your ability to build inventory beyond just paint if I heard you correctly.
Perhaps paint was most acute.
Curious if you could outline kind of where else beyond paint that you'd think demand may have been running ahead of what you were able to produce and maybe any color around the timing of when do you think you can catch up from a production perspective. Thank you.
It's been pretty broad based I think.
We'd like to have more inventory on our.
Our channel.
Put it very directly on when we think about spas.
We have never had a backlog of this size and spas on the demand continues to be robust.
We're doing a good job in our international front.
Front, but there's pockets in certain certain products where.
But on.
Afford to have some more inventory on the channel on the same is true.
In North American plumbing, and we're getting we're getting in better shape, we're not all the way there yet, but we do expect to throughout the back half of the year put our inventory positioned in the channel back to where they belong.
Great well, thank you for the color.
Our next question comes from the line of Susan Macquarie with Goldman Sachs.
Thank you good morning, everyone.
Good morning, Susan.
My first question is around you mentioned that as a result of some of the supply chain issues that you are seeing inventories that are obviously continuing to fall and are really lean in the channel.
Can you give us some sense of what this means in terms of your ability to get those inventories back up and is it something that potentially could kind of bleed into early 2022, now and as you think about on the headwinds that are out there.
Yeah.
It's difficult to prognosticate on the future we've seen.
More than just the Texas.
Golf issue that we had in RASM and so it was a plant explosion as I mentioned, but I would tell you that we intend over the back half of the year to get our inventory back in shape.
Okay. Alright. My next question is around the margins in the plumbing segment, you've delivered about twice.
Kidney and a half or so in the first half of the year. There the guidance still implies that the second half will come down relative to the first half and understanding that you've got some price cost headwinds in there on things, but can you just give us some more color on how we should be thinking about that relative to step down and any thoughts on third quarter versus fourth quarter in there.
And some of those trends.
Yes, Susan it's John maybe I'll take this 1 and so you're right.
Obviously delivered very strong margins here on this in the first half of the year and in the second quarter as well.
Given our guide it does imply a little bit of a step down on margins in the back half the year.
Yes.
1 we're pleased with how we've executed so far but as we mentioned on previous calls you do need to put some money back into the business in the form of investments.
And they'll take the formula of travel and entertainment as I mentioned, but then also take the form of from some growth initiatives.
You may recall some of our prior calls we.
We said that we thought in 2020 that we may have delayed as much as $40 million of investment spend.
Just to make sure we appropriately contain costs as we were going through the pandemic and so.
As we see things begin to improve here significantly we continue to expect some of that spend will return.
And as I mentioned in my remarks from Thats been actually started to return in the second quarter as we as we began to make some investments in marketing and growth initiatives. So we believe that a lot of that spend will start to come back in the second half of the year.
And then we will take additional investment in our leading brands.
Some of the innovation that Keith mentioned on in his prepared remarks and in service to ensure that our customers are in full supply of our products.
So we think that it will also contribute to future growth on.
On the business to better meet our.
Our customers' needs at the same time.
As we kind of alluded to on our prepared remarks.
Can be a little bit of a price cost headwind as we go into the back half of the year, we've always talked about a little bit of a lag in getting.
Price and cost flowing through our P&L and generally in the plumbing segment, it's about a 2 quarter lag.
So that's the second.
Piece it will impact.
Margins in the back half of the year. So those 2 a little bit of an incremental spend and then also that price cost lag that said, we are very confident that we'll be price cost neutral as we exit the year.
Okay. That's very helpful color. Thank you and good luck.
Thanks.
Your next.
It comes from the line of Ken <unk> with Keybanc.
Good morning, everybody.
Good morning, Tim.
So.
<unk>.
Environment.
You guys are operating in could you talk to.
Question on the larger coatings company that reported is there a way for you to talk to or quantify how supply.
Slash inventory.
Is it affecting your coatings business, whether it's DIY or pro.
And then are you seeing because.
Obviously the strength.
Are you seeing channel shifts at all within the pro perhaps because.
The other type of constraints.
From or limited availability of coatings.
Well I would say that.
Of those convert our inability to.
Our inventory position, where we want it to let's say first half compared to what we expect in the second half.
Was it wasn't on had an impact on revenue on that I'm going to fall short of going down specifically quantifying that's why my understood, but we think that what we think that inventory is going to help us on the back half.
In terms of channel shift.
We pride ourselves on having broad distribution across multiple channels. When you look at our Youre talking coatings now, but if we if we look at plumbing, we have very strong position in retail, which is both a flow and a consumer.
Channel we have.
Leading.
In addition in trade, which is principally more oriented towards the <unk> on that in E Commerce, which is mainly consumer we have a leading position there similar.
A similar story when we look at coatings, where we have a strong pro franchise as well as as we always talk about the strong DIY. So we like our positioning of where we are.
Moving to in terms of.
Broad channel distribution, so that if there are particular shifts via pro.
DIY or online.
Trade et cetera, we haven't covered and I think that.
Thats a good.
Significant reason why we are able to perform in this dynamic.
The environment. In addition to our strong teams that have been able to address these issues, we are where our customer wants to buy and were quite agnostic that these kind of shifts if they happen.
Yes, Ken on the only thing I would add I guess Keith.
Keith comments is.
Specifically on the program, we're continuing to invest in that pro initiative, we think.
NAMIC, they really strong growth driver for us over the course of the next several years and we and our channel partner the home depot look to continue to invest to grow the pro paint business.
Yes, just sticking with that on a simple question. It seems like there might be higher margins from pro versus DIY and could you kind of describe it seems like you've paid initiatives.
I know you're always having them, but this discussion I think is how you describe it.
I remember when Barry did that primary on paint 1 coding that was.
Hey, Matt.
Quite a leadership introduction do you think these latest.
They are discussing similar approach stuff is really able to pull in.
More demand on that pro due to the quality.
Compared to perhaps.
Other competitors. Thank you.
Yes.
We're really proud of the bear product development teams research and development.
We have been on the leading edge of development really expense that the company.
And paint and primer on 1 was the big 1 we also work on commercial.
Developments as it relates to the color selection center and being able to match colors and those sorts of things. So this dynasty introduction is 1 of another of our long line of things that we have demonstrated the ability to do and we'll continue.
<unk> to do.
Whether or not this is going to be is groundbreaking.
As paint and primer on 1 we will see but this is our best paint ever no question about it in terms of scuff resistance. The number of 1 coat highs that we have the the coatings that we have on it in terms of mildew and antibacterial on all those.
Startups of things. So this is a very big deal for us on Im extremely proud of it and I am also is what we expect organic what we're going to continue to do.
Thank you.
Your next question comes from the line of Mike Dahl with RBC capital markets.
Good morning. Thanks.
For taking my questions.
Keith John I, just wanted to first a quick follow up.
Along the same lines of kind of the cadence that was asked about margins I guess.
Side, specifically with respect to Dec arc.
Is the thought given.
Some of the supply.
Constraints Youre talking about the <unk> ends up looking.
On a little similar to <unk>, and then a bit of growth.
Of a rebound in <unk>.
On <unk> or should we expect.
More even performance between <unk> and <unk>, because it seems like overall the back half as expected.
We're minus flat in that segment.
Yeah, Mike.
Good question so.
As we look at the back half of the year, we think it can be a pretty even performance across the last 6 months.
Based on what we're seeing out in the marketplace based on supply that Keith was just talking about and.
Understanding how seasonally.
Plus growth flow through in terms of demand.
It looks like to us right now.
Pretty even back half.
Sure.
Okay. Thanks, My second question is on capital allocation, it's great to see the buyback.
The increase guide.
It does seem like just broadly speaking.
Only things in an uptick in M&A I was wondering if you could comment about just.
Specifically in your segments there it.
It seems like there may be some assets that shake loose what are you seeing in the pipeline and what are you seeing in terms of competition for deals.
Because it seems like right now on your guide is still predicate.
<unk>, mostly on on buybacks.
Really not a whole lot of change in terms of what we're seeing it's been pretty similar to what we've seen now for better part of the year.
What we have on what we're doing here at Masco is we have a new deal team that we have a new business development team.
Then moved under John's leadership.
<unk>.
And they are building momentum clearly and doing a good job both in terms of cultivation as well as <unk>.
Executing the deals.
On the valuations I would say is broadly understood and same is still quite high compared to historical averages and that really I think in.
A shift from centers.
Was the key driver of our strategy of focusing on bolt ons, where we need to have synergies so the debt.
The pipeline is robust we're moving.
Various assets through that pipeline in terms of the evaluation that.
We continue to do that and it continues to.
Look.
Robust, having said that we're patient and we will make sure that these acquisitions are the right strategic fit for US like you see with work tools internationals are with Krauss on plumbing on the E.
E Commerce side that bolsters, our leadership in that channel. So we're going to continue with our strategy.
We've got an outstanding team that's working it and we expect to continue with this type of deal flow.
Mike maybe just a couple of extra comments to supplement Keith.
I would say that the 3 acquisitions that we did at the end of last year, they're on.
So they're working with teams that integration has gone well.
The interaction with our existing business is going very well and so they are.
Right on the business case, and so we're very very pleased with those results.
And maybe some of them as Keith was talking about you know theres a lot of activity. The pipeline is robust and part of the reason we've been playing in the lower.
Is it bolt ons as we see better value down there at this point as Keith mentioned.
Very very robust pricing at.
Some of the larger transactions that have been.
<unk> seen in the industry and so we just think theres better value at the lower end of the middle market right now and.
So we're going to continue to play down there I think.
Okay, great good to hear thank you.
Your next question comes from.
Phil <unk> with Jefferies Jefferies.
Hey, good morning, everyone.
I guess, a bigger picture looking out to 2022, you do have tougher comps certainly a lot of favorable secular drivers do you see your growth algorithm returning back to that mid single digit range for the overall comp of next year and how.
On the like about growth in your DIY paint business next year.
There is no really returning to the growth algorithm, we haven't changed it our long term growth algorithm is the same that's 3% to 5% organic growth.
On the 3% acquisition growth, we're committed to buy back in that range of 2 to 4.
How do you think of our shares and that.
Puts us into that 10% EPS growth through cycles on average plus the.
Dividend yield of 1% to 2%, so 11% 12% return.
On our name so that Hasnt changed and we believe strongly in that we believe that we will do that and execute.
<unk> percent from 2021 levels.
We will do it in a way that we continue to expand our margins and as we've talked before we're not talking multiple hundreds of basis points of margin improvement, but we continue to have very solid dropdown.
And.
And both of.
Our business is call it in that 25% to 30% range and we don't see that changing.
And we're going to continue to generate strong free cash flow and reinvest that in our business and return it to the shareholder in a very.
Careful manner that drive shareholder value so no real change on our algorithm and we expect growth to continue.
What we're seeing in our product demand continues to be strong and as I have talked about consistently and continue to believe it and we're seeing at the millennial.
Entry into into the home market moving out of the more congested cities into larger homes as families farm et.
It was a real deal and that's a tailwind for us.
Any color on the outlook for DIY next year.
Yes, Phil I guess from my perspective, I think more volume as a low single digit growth for DIY because of the trends that Keith just said it I mean, I do think that Theres a good fundamental underlying demand out there driven by these trends.
And so returning to that kind of pre pandemic, which we've been getting.
Low single digit growth for DIY was.
It probably is what we expect from next year.
Super helpful and then.
Any color on how your channel is performing we've seen some.
On data points out there that suggest retail.
Et cetera are you seeing some normalization of trends after a pretty strong year and perhaps a pickup in wholesale so just curious what youre seeing out there in terms of the channels and what that means for masco appreciating you are very diversified.
Yes.
That's probably a good question for our channel partners, but I will tell you that in general we're seeing strong.
Strong demand across the board certainly in <unk>.
We maintain our leadership in the retail space very strong position and strong growth in trade international we've seen broad pick up across our our international businesses, particularly.
In our main markets in Central Europe and in China.
So that strong so it's really broad based in terms of demand drivers channels geographies good spot.
So maybe a little bit more color to keith's comments.
Strong growth strength within a little bit stronger on our trade side of our business, partly because if you think about the second quarter of last year. Most of those outlets were closed and so.
Anna Bank growth is here in the second quarter has been quite strong.
Maybe just a little bit more color for you Okay Super helpful guys.
Your next question comes from the line of Deepa Raghavan with Wells Fargo Securities.
Hi, Good morning, everyone. Thanks for taking my question.
I'll start off with a broad question.
As things start to return to normalcy post COVID-19, especially in the last month on a half or so but any trends or end market that surprised you David the positive.
Or perhaps underpaid expectation you can start there.
Thank you.
On the on the positive of our international growth is really solid debt.
That was nice to see and probably I would say, even a little more robust.
Than we expected so that was broadly speaking that where that was positive.
In terms of the.
Overall.
Yes.
Okay, any any trends that underpins your expectations.
I'd say you detailing on is a couple of things that continue to I think trended favorably for us on demand response has been.
Incidentally strong over the course of the last several quarters on that debt.
Demand continued here into Q2 and.
And so we've got good luck for the balance of the year in that business and then even like we just mentioned on North American trade plumbing business was extremely strong in e-commerce as well.
Those trends continued to remain very strong force. So we're very pleased with how the businesses are performing.
Pretty much across the board here on the second quarter in terms of.
Downside.
Yes, I think it was a little lower than we had thought.
Some significant supply chain consider.
Constrictions that we didn't anticipate.
Our propane.
Was stronger than we expected so when we look at.
Say, where we're going to we're going to finish 'twenty, 1 compared to <unk> 19 in paint we're.
Still up mid teens.
The demands are the maths wrong, but honestly DIY paint was a little later on I thought it would be.
Got it my follow up is on your price cost equation.
How much of inflation that you are talking about in 2021, you are going to take into 2022, given the lag.
Should we think about.
On the price cost heading into 2022 would turn positive like early 2022, probably tons tons positive price cost on the right in thinking that weigh into how much is there a quantification of how much inflation you're carrying into 2022, if you snap the line here on inflation.
Yes, but we probably won't go into that level of specificity that you're requesting on.
How much we carry into 2022, but.
Your general.
As we look going into 'twenty, 2 so you're a little bit of tailwind.
Because we got price and costs have moderated.
Randy just stay at that.
Current levels, yes.
That's definitely a possibility as we go into the first part of next year.
The main point, we'd like to make and lead with price cost neutrality at the end of the year.
And by that I mean that we will have actions in place productivity.
Productivity improvements working with our suppliers.
To drive costs down materially so institutions and of course price, we will have that in place at the end of the year that matches. The inflation that we're currently seeing so to your point about snapping the line at the end of the year will be price cost neutral.
Got it Thats very helpful. Thanks, so much.
Your next question comes from the line of Keith Hughes with <unk>.
Thank you.
Within decorative architectural products.
Could you just comment on the performance of kits or Liberty hardware and kind.
The growth number you are seeing from them on the quarter and expectations for the second half.
Yes, Keith.
Both Liberty and tissue grew in.
In the second quarter, continuing the trend in June as we laid out at our Investor day in 2019, particularly for Kessler.
We kind of identified 2020 is the year for it to return to growth and that's exactly what's going on in that business.
The second end of the second quarter. So we feel we feel good about how kitchen there Jay.
In that business.
So we're pleased with that.
As we look on the back half of the year.
Recall on our third quarter call last year, we did cite the fact that Liberty day, a very very strong quarter.
So they're going to be up against some tough comps as they go into the back half of the year.
Ed.
Team down at Liberty is looking to continue to drive that business and were pushing them for growth. So we're continuing to see how that plays out but we do know that they've got a very tough comp here in the third quarter coming up.
Okay and the final question I know, we've talked about inflation a lot but.
<unk> and 'twenty based on your expectations.
<unk> are down 21, if we add up all the price and you've got all the raw material price and you're saying well price cost some dollars in 'twenty, 1 day be negative another run rate it sounds like it's going to be.
At parity on the ear, but what about for the full year.
Yeah, Keith I would guide you to think that we will be negative because.
As we've been saying, we think there'll be price.
On the right official toward the end of the year. So.
I think we've got a little bit of price cost to absorb here in the back half of the year before we get to that neutral position and so because of that and because of what we've experienced in the second quarter.
We will be price cost negative for the full year.
Okay. Thank you.
Price call. Our next question comes from the line of David David Macgregor with Longbow Research.
Good morning, everyone.
You mentioned.
The investments back into the products into the marketing and I am just wondering on DIY as we head into a period of tougher compares.
Retailer expectations evolving if at all with regard.
Your level of promotional channel support.
Well.
Again that that's a decision that's made by our channel partner on.
So we support that and we.
Develop that strategy together, but ultimately it's their decision I would say that our promotional activity is about the same and we will finish out this year at about the.
The same as it was last year.
And we.
Generally speaking our channel partner likes to compete on.
On quality and service.
And brand because we're leaders in all 3 of those categories.
I don't see that changing much.
Okay.
Second question, just with respect to pricing how much pricing should be should commodity.
Should be achievable I guess through just new product introductions. It sounds like you've got a pretty substantial new product introduction calendar lined up here and I'm just wondering how much pricing you should be able to get.
From that as opposed to price increases on legacy products.
Yeah, you know it varies.
So cross category.
It really is from a <unk>.
Segment or from a.
Channel on the channel there's differences, but I think if you think about it in terms of general price increases across.
All of our categories for the year on the high single digit range for the full year I think that's where we'll be.
And then in terms of new products.
Really not so much a price increase that's really pricing for value on it depends on the new products. Some of the some of the new stuff that were coming out on the high end with XR that I talked about in my prepared remarks, and in Brazeau and a high end plumbing that has a very high price segment.
That has good margin with it and other cases, where we're launching in a leaner maybe lower price point segment that wouldn't be as much let's say.
<unk> if you will.
It varies.
But clearly.
The lifeblood of our system here is innovation and we continue to drive that.
As you heard from all of our new product introductions that we have in play at the moment and that will continue.
Thanks Keith.
Mhm.
Your next question comes from the line of Garik <unk> with loop capital.
Great. Thanks for taking my question I was just curious on debt.
You hear a beep side.
Maybe a little bit more qualitative but.
Is your sense that that segment is back to a quote unquote normal levels given the constraints of the patent on the quest year in homeowners hesitancy anybody contractors enter their home.
Yes.
Sales to us.
Is that.
At normal levels and is continuing to grow.
We'd like to see out of that business and so we feel like we're in really good position to continue to the growth of that business.
As we continue to invest in feet on the street and relationships with contractors and getting more share of wallet with existing contractors. So we feel really.
Really good about how that growth is developing here.
Okay. Thanks, and then just Watkins just given the strength that you saw on the quarter. So you had headwinds last year given.
The production issues in Mexico on the regulation from the government is putting in place there due to COVID-19.
Just any color on if you're back to normal it seems like you are and just the capacity volume loss.
<unk> on what the plan is there just given the strength in the business.
Yes, we're definitely starting to get back on our feet.
On the production system is dialed in and will continue to increase our output, but boy demand is strong.
And our backlog continues to be at record levels. So I think as we have the aging population in America and a clearly a more tuned in population as it relates to overall overall wellness, both physical emotional and mental health.
This is a tool that really.
Hates debt, so we think theres some fundamental tailwind here.
As we do across our entire business, we look at capacity and capacity expansion that I would expect that we'll be adding capacity here.
Thanks again.
Our next question comes from the line of Adam Baumgarten with Zelman.
Hey, good morning, Thanks for taking my questions.
I'm just curious on the on the paint side with raw materials. It wasn't a major call out this quarter.
How impactful were higher raw materials in <unk> and is the way to think about it that the back half is going to be where you feel the brunt of the increases.
Yes, there is.
Headwind into Q2, but more impactful.
The price cost relationship will be felt on the back half of the year Adam on that 1.
I think Keith mentioned was continuing to see escalation in costs.
<unk>.
Not only in the resin side.
Minus on Tio to packaging and transportation and logistics has been going up so there's a lot of cost pressures that we're seeing there, but as we continue to say we do think they will continue on pricing conversations and we do believe we can exit the year.
This cost neutral level.
Got it thanks, and then just sticking with paint.
Last quarter on <unk> DIY was up in the teens.
<unk> talked about double digit declines in <unk> can you give us what that looks like year to date, just so we can kind of.
Forecast for the back half.
And year to date I don't know if ive got those numbers.
Yes.
At my Fingertips, we're thinking about downloading single digits for the year.
Okay. Thanks.
Your next question comes from the line of Erik bass hard with Cleveland Research.
In the decorative arts.
Architectural segment curious.
On the sell in expectations in the back half of the year I know <unk> commented you'd make progress on.
On inventory in the back half, but do you expect to ship in more and is that how does that link between your ability and the demand from your retail customers to bring them on inventory.
That's.
It's the relationship between that.
On the retail demand and the Pos and our production capabilities.
As we.
Believe these challenges will get.
Relieved over the course of the year that we'll be able to build build build inventory on the channel.
We also have.
I'll, just add a little bit of benefit from the dynasty loaded.
So the net of that means that your you commented debt.
And what's left on the sell through on the second quarter.
And then on path for that to reverse in the back half of the year or for you to make that up on the back half of the year on what should we expect in terms of the relationship.
Okay.
Yes, that's right, we do expect to build inventory on the back half.
Okay. That's helpful. And then secondly in terms of the sell through momentum.
And paint for.
For the back half of the year is the expectation that it will look similar to the experience on <unk>.
It improves relative to <unk>.
Should we think about that.
Yes, I think it would be similar to Q2, Eric from what we're seeing right now in the market.
Perhaps up a little bit.
Maybe even a little bit better from the second half.
Okay. Thank you.
Our next question comes from the line of Stephen Kim.
With Evercore ISI.
Yes. Thanks, guys just wanted to clarify 1 thing with respect to your comment about sell through being a little bit better than sell in.
You know typically when you've got supply shortages.
The lack of inventory on the shelves there was a sense that.
NAND is materially better than.
What you were able to provide but you actually said that you thought that demand had weekend in DIY more than you had thought and so I was curious as to how you know that how did.
And the demand moderated if you didn't have actually enough product to sell and so you actually you feel like you could have sold more if you have more products I'm trying to reconcile those 2.
Was it that you had an inventory decline, particularly severe in like your most popular categories. But then some other skus you just simply undersold your expectations.
I'm, just trying to understand that a little bit better and where you think the customers actually bought if they didn't buy your product.
Because it seems like.
These are industry wide supply chain challenges.
Yes.
There was a slight impact of lost sales due to inventory due.
2 lower inventories, but I don't think we are missing on kind of sales do.
Due to.
Stockout conditions, So my point on the inventory.
Sell through mismatches that there is there is an opportunity for us to build inventory and to have better service, but I'm not so sure I wouldn't.
Tag a whole lot of lost sales on until the inventory position, it's more of an inventory being lower than we want certainly there was some of that.
Not a whole lot.
Okay. That's clear thank you for that.
And then secondly.
Keith you talked about how there is a.
<unk> historically.
To palm price appreciation into R&R demand.
But clearly if there is any 1 particular metric and the housing market that is has completely blown away on a historical comp. It is the home price appreciation the rapidity of it I mean, the abruptness of it and the magnitude that.
We've seen on already.
And I'm curious as to how you think.
The impact on R&R, maybe different as a result of this abruptness of magnitude do you think debt.
It may manifest itself a little bit more quickly do you think it may manifest itself more at the high end or certain large ticket.
It versus smaller ticket just wondering if you could give us some color on how youre thinking about that now.
Well I think a couple of things.
For sure.
Net.
Families asset on their home is worth more they're more likely to spend it.
To remodel it.
And when you look at you look at the effect of Covid.
And I think that while certainly there are some waning.
Impacts impacts that will go away there are some impacts here that are saying and that is really how our.
We believe the consumer is viewing their home.
That there will not be a 100% returned to work in the environment of the home is different people are doing more things in their home, they're doing them differently and they're spending more time in their home. So we think there is a couple last thing things here and that these are catalysts and part of the reason why we are so robust.
And.
And so we're happy with how we positioned our.
Portfolio with regards to our price point, where we enjoy small projects do it yourself and we're clearly part of the large projects that are done by the professional where in markets in Europe that are better pulling up and were obviously well penetrated here in North America. So.
The home price appreciation.
<unk> is a very strong indicator.
The robust DIY market as is the changing view on the consumer as it relates to the purpose of their home.
Great I appreciate it thanks guys.
Your last question comes from the line of Michael Rehaut with Jpmorgan.
Hi, Thanks, I appreciate you squeezing me in.
Literally.
On an interesting quarter I was curious a lot of focus on the paint side.
I was hoping to get a little bit more breakout of the north American plumbing business.
And if you could talk to and from others.
I missed this earlier in the call.
Talk to the trends that you've seen in retail.
Maybe things closer to the DIY spectrum.
Versus the wholesale channel and how the trends progressed there.
Are you comparing it.
It might be the DIY and pro and.
In paint.
Well real strong.
Trade business for us in the past quarter on weekends.
Expect that to continue.
People are more comfortable with clothes coming into their home for longer time. So it's we're on.
We're in the throes of it.
Pandemic, maybe you'd let on appliance repair person and for a quick quick repair, but you certainly wouldn't want someone in from a major remodel that's changing.
And that principally not totally but principally flow through our trade channel. So we're seeing a nice pickup in the trade channel, having said that the.
The dynamic.
More and more pros buying and retail is very real.
Certainly seeing good foot traffic in retail and our E. Commerce business continues to do very well with our acquisition as John spoke about it.
Crouse.
It is really going well.
<unk> continued to invest in that.
For example, we just launched a delta branded sinks online utilizing the crouse was offering with the Delta brand, that's real leverage and Thats going well. So as I said in my prepared remarks, we are seeing broad based.
Solid market demand and growth international domestic trade retail.
L e-commerce.
We're really hitting on all cylinders.
Okay I appreciate that.
Maybe just the second question you could take a step back.
Maybe you could just.
Give us a sense of.
The e-commerce as possible, even as a percentage.
Revenue across your 2 different segments.
Obviously.
It lends itself a lot more to the plumbing side.
Decorative and in particular paint.
Heavier products, maybe more difficult to ship.
But maybe just give it to.
State of where.
<unk> in both segments, and where you think you might be able to take the business over the next 2 or 3 years.
Yes, Mike it's John.
E Commerce has been a good growth vehicle for us over the course of on several years actually is growing quite significantly and so if you think about 2019 our ecommerce.
<unk> sales as a percentage of our total sales of roughly 5%.
And in 2020 day it.
<unk> grew nicely it's now.
Finished we finished 2020 is about 9%.
Breaking it down by segment.
Our plumbing products sales were roughly 12% on ecommerce.
<unk> platform or channel and as you might expect I know you kind of alluded to on your question a little bit lower than that.
In our decorative architectural segment about 4% because of all the things you cited.
Color selections that challenge for people still to order paint on online. So we do have I would say that the payer team has done a nice job of investing in shipping.
Shipping and.
Cash and fulfillment and so that's not going to be a limit or 2 to our ability to transact online.
It's more of a consumer choosing to select.
Color online than anything else.
As we look forward we think.
We are well positioned to continue to grow our e-commerce presence.
Because if you consider plumbing products they are packaged perfectly the ship onesies twosies to consumers.
What are their faucets and shower heads on line. So we think we're in a great position to do that the folks on a delta have done a great job of adding the capability to Jackson distribution centers. It fulfill online so we feel really good about.
We're theft to serve plumbing growth going forward and to the extent that the.
Paint continues to become.
More socket online, we are well positioned to continue to fulfill their as well. So we really like how we're set up is this is this trend continues to grow here in North America.
Great. Thank you.
Okay.
I would like to thank all of you for joining us on the call today and for your continued interest in Masco. This concludes today's call. Thank you.
Yeah.
Ladies and gentlemen, you may now disconnect.
Okay.
John.
Good day.
Good morning.
On the net.
Okay.
Thanks, David.
Okay.
Thank you.
Thank you John.
No.
John.
Thanks, David.
On slide 11.
Thanks, John.
Barry.
John.