Q3 2021 Masco Corp Earnings Call
Good morning, ladies and gentlemen, welcome to the Masco third quarter earnings call. My name is Tamara and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes.
Good question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press the pound key I will now turn the call over to David Chaika, Vice President Treasurer, and Investor Relations you may begin.
Thank you operator, and good morning, welcome to Masco Corporation's 2021 third quarter conference call.
With me today are Keith Allman, President and CEO of Masco, and John <unk>, Vice President and Chief Financial Officer.
Our third 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.
Please limit yourself to one question with one follow up.
You can't take your question now please call me directly at 31379 to 5500.
Our statements today will include our views about our future performance, which constitute forward looking statements.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements.
We've described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K, and our Form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics.
Our references to operating profit and earnings per share will be as adjusted unless otherwise noted.
We reconciled these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.
With that I'll now turn call over to Keith.
Thank you Dave.
Morning, everyone and thank you for joining us today.
I'm proud of the way our team continues to execute in these dynamic taxed.
In the third quarter sales increased 11%.
Our fifth consecutive quarter of double digit top line growth.
This was against a strong 16% comp from last year.
This growth came as we continued to face significant supply chain challenges.
Certain raw materials were hard to come by such as resins micro chips and even pallets.
Congestion at ports and lack of trucking capacity contributed to increased delays in shipping and receiving goods and <unk>.
Shortages continued to be a challenge.
I would like to thank both our employees and our tremendous supplier partners, who together have worked tirelessly to address the challenges they have kept our plants running and our customers supplied resulting in outstanding top line performance.
Operating margin for the quarter was 17, 5% as we executed our planned transition to a more normalized level of SG&A expense to support our brands innovation and new products.
Moving to our segment performance beginning with plumbing.
Sales increased 15% excluding currency.
Led by exceptional growth in North America, and international Faucets, and showers and our Spa business.
These results highlight the strength of our plumbing platform diversity across geographies and channels.
To support our continued international growth how did you grow your recently announced plans to invest in a new manufacturing facility in Serbia.
This additional capacity will enable further growth and further strengthen <unk> capabilities to serve its customers.
We plan to invest approximately $100 million in this project over the next three years.
And our decorative architectural segment sales grew 4% against a robust 19% comp from the third quarter of 2020.
Propane had an exceptional growth of over 45% in the quarter, helping to offset moderating demand in DIY paint.
DIY paint declined mid single digits against a tremendous comp of over 25% in the third quarter of 2020.
We continue to see indications of D. R. I Y paint demand stabilization as demand was fairly consistent throughout the quarter.
When compared to our third quarter 2019 sales.
Our DIY paint sales were up over 20%.
A clear indication of our re engaged homeowner and strong home improvement fundamentals.
Lastly.
Behr paint was recently recognized as the home depot partner of the year and the paint Department.
This recognition was a result of successfully keeping the home depot in stock during the DIY surge last year.
Our continued investment in our joint effort to grow the pro paint category.
And our commitment to bringing new and innovative products such as our recently launched bear dynasty to the home depot.
Each of these has contributed to tremendous growth for both behr paint and the home depot and this recognition is a testament to the strength of our partnership.
Moving on to capital allocation.
We continued our share buyback activity during the quarter by repurchasing $2 2 million shares for $128 million.
In addition, we anticipate deploying approximately $150 million in the fourth quarter.
Bringing our total share repurchases to over $1 billion for the year.
Now let me give you an update on what we are experiencing with inflation.
The second half of 2021 is largely unfolding as anticipated we.
We experienced low double digit inflation in the third quarter, and we expect mid teens inflation in the fourth quarter.
We have taken pricing actions across both segments and expect to achieve price cost neutrality by year end.
It has been an extremely dynamic year, and our supply chain and commercial teams have done an exceptional job managing through the many challenges.
It does have this outstanding execution.
And continued strong demand for our products.
We are maintaining the midpoint of our previous guide and expect to achieve earnings full year earnings per share in the range of $3 67.
The $3 73.
Lastly, before I turn the call over to John we are pleased to share with you that our comprehensive 2020 corporate sustainability report is now available on our website.
This report demonstrates our commitment to environmental social and governance responsibility.
During a year of unparalleled change our team members remains committed to maintaining our strong reputation for ethical business practices, reducing our environmental impact and enhancing our D. Eni efforts.
I'm proud of the hard work, we're doing every day to ensure that our employees feel a sense of inclusion belonging and support.
Our progress in ESG is a priority for our board.
And our executive leadership team.
I Hope you will take the time to read more about how our long term sustainability influences the way we run our business.
Our facilities and contribute to the community.
With that I'll now turn the call over to John for additional details on our third quarter results John.
Thank you Keith and good morning, everyone.
As Dave mentioned my comments today will focus on adjusted performance, excluding the impact of rationalization and other one time items.
Turning to slide seven.
Demand for our industry, leading brands remained strong.
And our teams executed exceptionally well in a dynamic environment.
This resulted in another strong quarter of double digit topline growth.
Sales increased 11% against an impressive 16% comp in the third quarter of last year.
Net acquisitions contributed 2% to growth and currency had a minimal impact.
In local currency, North American sales increased 9% or 6% excluding acquisitions.
This strong performance was driven by outstanding execution to achieve volume growth in propane.
<unk> showers spas.
And by increased selling prices.
In local currency international sales increased a robust 15%.
18%, excluding acquisitions and divestitures against a healthy 9% comp.
Gross margin of 34, 2% is impacted by higher commodity and logistics costs in the quarter.
We expect this inflation will have peak impact on our P&L in the fourth quarter.
We will offset these costs with additional pricing actions and productivity initiatives, we expect the exit this year price cost neutral.
Yeah.
SG&A as a percentage of sales was 16, 7%.
As planned during.
During the quarter, we increased certain expenses, such as head count advertising and marketing to a more normalized level to support our brands.
We expect this increase to continue into the fourth quarter as these costs continue to normalize.
Operating profit in the third quarter was $385 million.
And operating margin of 17, 5%.
Our EPS was <unk> 99.
Yeah.
Turning to slide eight.
Plumbing those continued to be strong with sales up 16% against the 13% comp in the third quarter of last year.
Acquisitions contributed 2% as growth.
Currency contributed another 1%.
North American sales increased 16% or 10% excluding acquisitions.
Delta led this outstanding performance delivering another quarter of robust double digit growth driven by strength in their e-commerce and trade channels.
With strong brand recognition in general relationships.
Also continues to drive consumer demand for its products.
Watkins wellness also contributed to growth in the quarter as both demand and our backlog remains strong.
International plumbing sales increased 15% in local currency grew 18% excluding net acquisitions.
Hans Gorilla delivered strong growth as demand continued to improve across Europe and numerous other countries.
Andrew its key markets of Germany, China, and the U K all grew double digits in the quarter.
Segment operating profit in the third quarter was $248 million and operating margin was 18, 7%.
Operating profit was impacted by the planned increases in SG&A that I mentioned earlier.
As well as an unfavorable price cost relationship.
This was partially offset by strong incremental volume.
We anticipate additional SG&A increases in commodity inflation will most significantly impact this segments operating margins in the fourth quarter.
Okay.
It will mitigate the commodity inflation with additional pricing and productivity actions.
Specs to be price cost neutral as we enter 2022.
For full year 2021, we continue to expect plumbing segment sales growth to be 22% to 24% with operating margins of approximately 18, 5%.
Yes.
Turning to slide nine decorative architectural sales increased 4% for the third quarter or 3% excluding acquisitions.
Our DIY paint business declined mid single digits in the quarter I guess, the more than 25% comp in the third quarter of last year.
Despite this decline.
Why paint demand appears to be stabilizing as we have seen relatively consistent demand since July.
When comparing to Q3 2019, our third quarter DIY sales are up over 20%.
Yeah.
Our propane business delivered exceptional growth of more than 45% in the quarter as paint contractors are applying top rated therapy to more commercial and residential projects.
We expect demand in this channel to remain strong as propane contractors report growing demand for their services.
When comparing to Q3 2019, our third quarter pro sales are up over 35%.
Okay.
Segment operating margin in the third quarter was 19% and operating profit was $166 million.
Operating profit was impacted by lower volume.
Increased commodity costs and higher marketing expense to support the new bear dynasty product launch.
Partially offset by higher net selling prices.
For full year 2021, we continue to expect decorative architectural sales growth will be in the range of 2% to 5% and operating margin to be approximately 19%.
Turning to slide 10.
Balance sheet is strong with net debt to EBITDA at one three times.
We ended the quarter with approximately $1 9 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percent of sales, including our recent acquisitions of.
17%.
Finally, we repurchased more than $15 2 million shares in 2021 for $878 million.
This is approximately 6% of our outstanding share count at the beginning of the year.
We expect to deploy approximately $150 million for share repurchases or acquisitions in the fourth quarter as we continue.
To aggressively return capital to shareholders.
Yeah.
And turning to our full year guidance, we have summarized our expectations for 2021 on slide 11.
We continue to anticipate overall sales growth of 14% to 16% and an operating margin of approximately 17, 5%.
Lastly, we are maintaining our 2021 EPS estimate mid point, but narrowing the range to $3 67 to.
To $3 73.
Representing approximately 19% EPS growth at the midpoint of the range.
This assumes a 252 million average diluted share count for the year.
Additional modeling assumptions for 2021 can be found on slide 14 earnings deck.
I'll now turn the call back over to Keith.
Thank you John.
Demand for our products and home renovation remains strong and at a much higher levels than experienced in 2019.
When you compare our third quarter performance to Q3 2019 Rev.
Revenue is 28% higher.
Operating profit is 29% higher.
Operating margin is 10 basis points higher and adjusted earnings per share is an outstanding 62% higher.
With our demonstrated supply chain excellence and our ability to offset inflation with price. We believe we are well positioned to carry this momentum into 2022.
And deliver margin expansion and double digit EPS growth consistent with our long term outlook.
We look forward to sharing our detailed 2022 outlook on our fourth quarter call in February.
With that I'll now open the call.
For questions operator.
In order to ensure that everyone has a chance to participate we would like to request that you limit yourself to asking one question and one follow up question. During the Q&A session to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press the pound key.
First question will come from the line of Matthew Bouley with Barclays. Please proceed with your question.
Good morning, everyone.
Thanks for taking the questions and congrats on the results in a pretty tough environment here.
First question on the pro paint strength.
You know recognizing some of the drivers of broader.
Broader sort of do it for me strength here and the project demand John you just mentioned.
Just given how strong it was was there is there anything else REIT, where you think you may have had some sort of structural success in boosting awareness or market share.
Behr pro or or Conversely should.
Should we be aware of any more transitory benefits, perhaps as customers are sort of hustling to find paint where they can and you guys have done a great job of keeping their pro and stock how should we think about that balance. Thank you.
And Matt This is Keith I'll take this and John you can add in if you have other comments I think there are a few things that that really contributed to that.
45% growth that we saw in the quarter.
In pro first and foremost we had we had really outstanding supply chain execution.
I can't say enough about our supply chain teams are our research and development teams that we're able to move formulations and and our suppliers. We've been working with the supply base and have been pretty consistent in our supply Register for like 20 years. So those relationships really paid off and our hard work on supply chain and R&D.
So really good availability of product and supply chain execution in general we continue to invest in our brands, we've talked about that and we've talked about that last quarter and we continue to invest.
And our brands and having that leading brand, having the leading quality, having a leading service levels.
All contribute especially in tough and Dicey times like we've just gone through and we continue to execute and in terms of new product introductions and our innovation pipeline.
Such as bare dynasty, a new line of aerosol paint interior stains Cox and other adjacencies. So our ability to not only have that supply chain execution, but continue with the basics of the business of investing in the brands and executing new product introductions.
I'll pay it off and I think all of those all of those things are helping.
To drive demand and and we saw that in our performance in the 45% growth that we saw.
And <unk> and we think that's enabled us to to get new customers and now it's up to us to to develop the loyalty, which we've demonstrated an ability to do so it was a very challenging quarter for us and across paint, but both pro and DIY, but I'm very happy with the execution.
Yeah, Matt the only thing that I would add to Keith's comments is that I think it's also a reflection of investments that we've made over many years in this program with feet on the street.
Both calling you announce outsiders on paint contractors as well as the investment of people inside of home depot stores can also home depot's investment in this program. So it's the joint partnership that we developed to go after the pro and I think really helped drive the success, we experienced here in the third quarter.
Yeah.
Oh, that's great color there. Thank you both for that second.
Second one just on the <unk>.
Asian supply chain, where you guys have ever.
Relatively robust footprint. So just I guess, a two parter any quantification you could give maybe on sort of the near term cost impacts of everything going on with Ocean shipping and transportation from Asia, and then just longer term thoughts.
On any sort of supply chain repositioning.
That's sort of come about as a result of all these recent challenges. Thank you.
Sure Matthew.
Like everyone else that's reported so far this earnings season, as you know we faced supply chain challenges.
You know coming across the Pacific.
And we have seen elevated.
Costs to get to containers across.
To the United States and we can also as a result in delays in getting.
Product you know through the through the Port systems here in the United States, whether it's on the west coast or any of the other ports that we bring product in.
So the good news is even though we've experienced some of that we are also as a result, the pass through some of the price increase down because of the raw material inflation, but because of some of the logistics.
Inflation that we've experienced and so.
So we feel good about our ability to get that price and then that's a portion of which allows us to feel good about being price cost neutral as we exit here in 2021.
Just to add a little bit to John's comments I think.
Not strictly in the Asian supply chain, but overall when you look at inflation. We're experiencing are we experienced low double digit inflation in the third quarter and we're expecting in that mid teens region in.
In the fourth quarter and as John mentioned, a good work on our commercial teams and we will exit the year and price cost neutral.
Alright, well, thank you both and congrats on that hard work.
Thank you.
Your next question will come from the line of Susan Mcclary from Goldman Sachs. Please proceed with your question.
Thank you good morning, everyone.
My first question is just following up on some of the exposure in terms of inflation in inputs. There can you talk a bit to what youre seeing in terms of some of the core commodity exposure things like maybe copper brass.
He is the sort of chemical inputs on the paint side and I know you've talked about seeing that mid teens inflation in the fourth quarter, but just any more detail on how to think about where what those trends are.
Sure.
I think we.
We've all read and seen broadly across the industry Theres been.
Broad based inflation that we're experiencing that same thing we're seeing it in metals.
<unk> zinc and copper as you mentioned and that's across both both our cabinet both are our segments, particularly in the hardware and the decorative piece of architectural as well as obviously in bras in plumbing.
We're seeing that in polymers.
And again, that's across both our segments.
Resins and paint.
Plastics in our in our plumbing valve train for example, with our cross link polyethylene and our cartridges for the valves, we're saying it there and then again same sort of story across both segments and logistics container costs.
Continue to.
Escalate, even things like pallets and of course over the road trucking costs associated with some labor constraints that are broadly there in the in the trucking industry. So it's broad based inflation.
We expect to continue to see that in the fourth quarter and as we mentioned <unk> done some good work and we'll continue to do work in the fourth quarter as it relates to achieving price cost neutrality by the end of the year.
Susan maybe to put a finer point on Keith's comments, you know I think.
For the fourth quarter, it will probably be the peak of inflation for the year I suspect, we'll appeal mid teens inflation in <unk>.
Total across the company.
So probably be low teens in the plumbing segment, and probably high teens in our paint business.
So you know pretty significant inflation, but as Keith mentioned the team has done a terrific job of working to offset those costs here as we exit 2021.
Okay. That's very helpful color and then.
As a follow up can you talk a little bit about what youre seeing across the various.
Channels within plumbing, I know that you've kind of highlighted some strength within the e-commerce as well as the trade channels. There can you just give us some commentary on how the various channels are moving and any implications as we think about the margin trajectory there and some of those maybe continue to strengthen.
We're really seeing again.
<unk> broad based growth in plumbing. So if you look geography geographically.
As we spoke in the prepared remarks international is strong we were very very good growth in China, and the U K and in Germany, which are our core markets for hogs growing and then good growth here in North America with regards to channel and slicing it up by channel.
Very strong performance in E Commerce, we've invested our best and brightest talent there we've invested our capital in terms of acquisitions to build and we've been working for a number of years in terms of our internal capabilities from logistics to pick and pack quantities of one to handling returns.
Marketing and generating more efficient search a better purchase journey for the consumers et cetera. So a lot of work has gone into that but we saw real strong growth, particularly in plumbing in E Commerce and also in the trade channel and then.
Strong as we mentioned strong strong pro growth and pain, so really good performance across multiple channels and multiple geographies and I think Susan.
Susan that that speaks to the work we've done.
In terms of the portfolio are driving.
Affordable smaller ticket items that are involved in quicker remodels, if you will and in smaller jobs as well as obviously being part of that bigger ticket job what executed so that diversity across geographies channels price points et cetera is really delivered for us a nice robust.
<unk> portfolio and I think that's a big part of it.
Excuse me, maybe give you a little bit more color on one specific channel I mean, let me talk a little bit about the ecommerce channel and the recent acquisition of Krauss and.
And how that aided our ecommerce growth.
So crouse the Crosby bought in the beginning really the tail end of last year and the.
The integration is going well and they continue.
Form above our expectations.
And we've made some good investments along.
With crosses.
Complimentary products and online presence and they have helped to actually strengthen some of delta's market, leading offerings to drive future growth one of the things, we specifically have done.
With the help of crowds, we've launched Delta branded things online.
Utilizing their offering and this is really a good contributor too.
Growth here in the back half of 2021.
Yeah.
E Commerce sales it was strong in e-commerce before we acquired crowds and the crowds acquisition is really.
Complimenting delta to strengthen their online channel.
To accelerate its growth.
Great. That's very helpful color. Thank you and good luck with everything.
Thank you.
Your next question will come from the line of Mike Dahl from RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
Hmm.
Really exceptional results.
Across the segments, particularly in paint in light of what some of your peers are saying so I have a couple of follow ups. Keith I know you've mentioned a couple of things around here.
Of your supply chain partners and how you.
Kind of successfully manage there, but it is striking.
In terms of your your ability to not just get product, but keep the inflation lower than what I think most of your public peers.
Talked about in that segment, so I'd love to hear.
You know just a little more detail or color on on exactly kind of how you've managed that sort of what you think you have done differently and.
And some of your peers over the last few months.
Oh.
At the risk of maybe being redundant to what what I've already talked about.
I can't.
Can't overstate, what our supply chain teams have been able to do and it's it's it's a product of a great partnership with home depot and the simplification and the focus that we have we we work hard to understand the the home depot consumer and we work hard to understand the home depot supply chain fundamentally.
Everything that we do is geared towards and focused on that customer and those consumers and because of that I think that makes us.
Our fleet of foot it makes us it helps us be able to do the sorts of things that we need to do and.
And react quickly when times when times get tough.
It's just it's mind boggling when you think about the types of formulations that we had to go through in our R&D Department in terms of changes in re validation to be able to move from one supplier to an X to be it colorant or resins and really that's across our entire business, but specifically.
I think when you look at our formulations at how what goes into our formulations and what was particularly tight in terms of capacity I think that gave us a little bit of advantage.
And it has not been easy we have changes the challenges and we continue to have challenges, but fundamentally I do think it has to do with the extreme focus and dedication we have on a specific customer that consumers and the ability to manage that versus say, having a more complex lineup.
Well, we have different types of coatings and different types of customers and those sorts of things. So it's an attribute to simplification 80 20, a focus on our teams and absolutely the highest quality workforce, particularly in supply chain and R&D.
That's great. Thank you and then just as a.
As a follow up.
Baird dynasty, specifically can you help us kind of size what the what the contribution was from a top line perspective in the quarter and you talked about some increased marketing costs around that.
How should we be thinking about that program and in the fourth quarter and on a go forward basis, and now is the adoption or the sell through.
Yes, Michael.
Mike It's John So I think the impact on the quarter is relatively light you know there was a small load in of about $20 million in the quarter.
So obviously it helped the top line growth number but it wasn't it wasn't a huge driver of the overhang.
Overall group.
Yeah, we're excited about dynasty.
It's going very well.
It's our best paint ever.
Best Gus Scuff resistance, most one color high colors fast drying LEED certified Greenguard. It's just it's just extremely good paint.
Highest price point, yet, but when you match it with those attributes.
It's a good value.
My father bought some of it and let me tell you he's decided as they get and while that's only one point, it's it's indicative of what.
What kind of value. This can bring and it's an example of how our deep and extended relationship with it with the with depot can really help we consistently bring that innovative new products and market, leading attributes and we do that you know I like to.
Think of our teams fighting above their weight class.
We are focused and to your earlier question.
On supply chain, it's it kind of shows itself here with dynasty very happy with dynasty in the March.
Yeah, great. Okay. Thank you.
Your next question comes from the line of Bill Inc. From Jefferies. Please proceed with your question.
Hey, guys, congrats on a really impressive quarter and a challenging backdrop.
And great to see demand being really strong here any color on how you're thinking about organic growth as we look out to 2022 since your comps do get a little tougher in the first half.
How much line of sight do you have.
Yeah, Phil it's John.
You're right the comps as we go into the first part of 2022, what it'll be tough.
Tough you know obviously you know we when we post.
31% growth in the Q1 and 53% growth in <unk>.
In Q2.
In plumbing as I should say, 25% overall, 24% in Q1, 24% in Q2.
What kind of has to go up against.
As I mentioned in my prepared remarks, we've got continued good backlogs and a number of our.
Our businesses, you've got visibility into we mentioned the fact that <unk>.
<unk> is our wellness business continues to have very strong backlog.
Probably several hundred million dollars.
Our plumbing businesses bolt ons growing delta to the extent that we are we look at their backlogs they are.
Bigger than they would historically be.
At this time of the year, given the seasonality of things generally slowing down. So we do think that the first part of growth going into the first part of 'twenty two will be good, but obviously, we're up against some pretty tough comps.
Beyond that Keith I don't know pain is getting a little bit less visibility into the backlog of paint other than in the pro business, where we see some of that the commercial projects coming through.
Yeah, I'd add at our international markets are also recovering nicely and we'll have more detail on 2022, and our fourth quarter call, Phil but you know I would say that if you think about.
The macro trends, where we stand right now the macro trend is really set up for a good 2022.
The two the two big ones that we watch because it really does impact our low ticket repair remodel portfolio of products that we have our existing home turnover and home price appreciation.
You know.
Those two have been very good and you layer those too.
The fact that <unk>.
Tumors balance sheet is very good.
All statistics say that isn't two trillion dollars of more savings as a result of the pandemic that the consumers are sitting on now.
The fact that the home is Laurent for the vast majority of consumers, it's their largest investment.
We think this environment bodes well for continued investment in homes. We're hearing about backlogs are big ticket projects with contractors.
So we think that you know the supply chain tightness that consumers have experienced a contributor to that backlog of big ticket projects and so going into 'twenty. Two we think the environment is set up for good growth.
That's really helpful.
Any color on how you're thinking about when supply chain kind of normalizes and I. Appreciate some of these challenges.
I think there was an expectation for maybe restocking inventory in the channel in the fourth quarter any color on how that has kind of progressed is that more of an opportunity. When we think about 2022 as well. Thanks a lot guys.
It's very difficult to predict or supply chain in this environment.
Some things will have a little bit more lasting.
Impact I think logistics will probably remain tight well into 'twenty two.
If you will the blood pressure metric that we look at is our our fill rates coming from our supply base and our timeliness and accuracy of delivery dates versus promise and those are starting to improve now we have a long way to go we're not back to where we need to be but I would say in terms of our supply and incoming we are we are starting to see some.
Some improvement in a little bit of stabilization as we look at those two key metrics.
Tomorrow I think we can go to the next question.
Next question will come from the line of Adam Baumgarten from Zelman. Please proceed with your question.
Hey, guys. Thanks for taking my questions. Good morning, just looking at decorative on the implied <unk> guidance somewhat similar revenue growth compared to <unk> do you expect a similar pro outperformance to continue through the end of the year.
Yeah, I think and when we would expect protein remains strong.
As we go through the balance of the year.
Well theres going to be the same 45 plus percent growth we realized in Q3 is yet to be determined but.
Based on what we're hearing from pro contractors based on the projects that that's.
We're hearing in terms of contractor backlogs, we do think the pro demand we will continue to be quite good.
Okay got it thanks, and then just on the SG&A spend kind of normalizing when do you expect to reach that full normalized run rate is it by the end of this year, we will drag into next year.
It probably drag into next year, Adam you know if you think about our SG&A spend you know we've talked since.
Since the beginning of the year of about $40 million of spend that we pulled out of the system last year during the height of the pandemic and will slowly later that back in over the course of the next several quarters. Keith mentioned earlier, you know we're investing in our brands we are investing in innovation investing in head count.
It's all reflecting itself in some of the topline growth that you witnessed today.
We reported today so.
You know some of that investment will be we'll be mindful of it you know we were not going to just unilaterally let it all flow back in.
So suffice it to say that our businesses have their fingers on the dials and are.
Actively managing that cost as it comes back in.
Thank you.
Your next question will come from the line of Garik <unk> from loop capital. Please proceed with your question.
Hi, Thanks, good morning.
Just given the rising price points and installation just wondering if you could speak to any change in mix that you might be seeing in plumbing and paint.
Being impacted at all.
Yeah.
Garik mixed really wasn't that big of an issue in the quarter. There may have been a little bit of slack.
Slightly favorable mix in plumbing is we've seen a little bit greater strength in Europe, which can tend to be.
We get more projects, which means our actual brand, there's a little bit better than maybe some of our spa business is trended to a little bit more of a favorable mix, but beyond that.
Was it all that impactful in the quarter.
Okay. Thanks, and then to the extent you can provide a little bit more color on your expectations for margin expansion in 2022, recognizing here and provide more guidance after next quarter, but.
Youre going to be likely exiting this year or price cost neutrality would you anticipate margin expansion.
Across your businesses to begin early in the year.
You know when we've talked about this and what were we havent changed our.
Outlook and that is that we have nice drop down on incremental volume will exit the year at price cost neutrality.
There still is.
Questions about where commodities will will move if at all in 2022 and a commitment that if they do we will handle that as we have in the past with productivity and further price if needed. So when we we roll that altogether as we've talked in the past we're looking at margin expansion not the one hundreds of basis points more in the tens of basis points, but.
Our commitment and how we drive our leadership teams and how we structure our variable compensation for those teams is growth above market and margin expansion. That's fundamentally a part of our culture and how we drive our businesses and that's what we will achieve in 'twenty two.
Great. Thank you.
Yeah.
Your next question will come from the line of Deepa <unk> from Wells Fargo Securities. Please proceed with your question.
Hi, Good morning, all thanks for taking my question.
Let me start with some October trends I'm, just curious how that has trended. So far are you seeing any seasonality of rebounding.
Anything that you are able to talk to unencumber so for PS.
Yes, I think we've really moved to talking about.
Our quarter and how we exited the quarter and we're not we're not going to get into slicing and dicing that up on a monthly basis and the reason is because there's there's ebbs and flows as different parts of our businesses launch products have fell and different things happen. So its just its more productive and a better indicator.
Okay understood.
How about the quarter and then any surprises either positive or negative given Q3 and anything that you would point us out as we look into 2022 to be aware of that we shouldn't probably carryforward.
In terms of surprises not you know it's.
It's playing out as we expected as I said in our opening comments I will say that.
While I have a high expectation of our supply chain team I was pleasantly surprised and happy to see how well, we really performed we talked about it and paying the same could be said in plumbing and that that had a real impact on our business and how we fared competitively so that that was a while maybe not a surprise that certainly it was nice to see and I'm proud of the teams.
<unk>.
Great.
A nice quarter. Thanks, so much.
Thank you.
Your next question will come from the line of Keith Hughes. Please proceed with your question.
Thank you questions in plumbing.
I guess looking at the growth in North America, and Europe can you give us some sort of a feel how much of that growth.
And how much of that growth.
Price and mix.
Keith as we look at it we did see good volume growth in plumbing.
Both domestically and internationally, so and don't forget in acquisitions contributed to the growth as well, but if you factor out the acquisitions.
Say, if he had to weight the two.
<unk> volume.
Volume mix versus price and say you tell me you'd more or much more heavily weighted on volume than you would on price in the quarter.
Okay.
The difference in growth rates, excluding acquisitions between North America, and international International to give that.
I get that higher.
Was there certain regions internationally, but really stood out that pushed it higher than the U S.
Yes, so internationally.
We mentioned that grew double digits, where Germany, China, and the U K and as you might expect to Germany, and China had a relatively easy counts compared to.
Given the third quarter of last year, China was actually growing nicely in the third quarter of last year and continue to grow so that was a bit of a positive surprise for us just the strength of the Chinese market.
Over there.
But other than that.
If you factor out those those three large markets, but if you look broadly across the 140 markets then homeschool themselves into nearly all experienced some form of growth I mean, there were a couple of small very small margin that we sell into that.
Didn't grow but boy I'd say 135 of the 140 countries, we sell sell into grew in the third quarter.
Okay. Thank you.
Your next question will come from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Yeah. Thanks, a lot guys a couple of questions on Dec arc App, specifically paint you know Keith I'm reminded about how bear has this long standing history of just excellent fulfillment and it was good to see that I guess that really was a standout again this quarter.
In the DIY segment of the business. If we look at things kind of Oh in terms of a kind of a two year stack in your commentary it kind of suggested that there might have been a modest volume acceleration in <unk>, but I'm assuming that I'm. Just wondering was that all just price did you actually see any kind of volume acceleration.
In <unk> and then on the pro side of the business.
Builders scrambling around sending guy at the home depot to go get go get paint to get homes closed I'm wondering how much of a benefit do you think that was to be up 45% and do you think that business can be sticky.
So a couple of parts to your question Firstly, Yeah, we did see some positivity in terms of gallonage. When you look at DIY Q3, 'twenty, one versus Q3 and 19. So we did see some slight positive gallonage there in terms of overall volume and obviously with the price. We saw some very nice revenue volume when you do that compare.
<unk> stack over 19.
In terms of Ah.
Was our.
The supply chain performance versus competition or factor in getting a look for some from some problems I would say yes.
And it's incumbent on us to make that as sticky as we can and we will see I'll tell you I feel good about it.
This new dynasty brand is is is being applied and install by some professionals who are obviously seeing our pro line of of bank debt continues to be installed by professionals and it's working well and the brand has pull with consumers and so when you think about.
The pro in the resi repaint as well as some of the.
Commercial and multifamily.
Looks that we're getting I think we fare well, but it's incumbent on us to start to develop that kind of loyalty and those flows like we have in other products. So I think it was at <unk>.
Certainly a factor and we'll work with borrowers who can't make it sticky.
Yeah, certainly you have the opportunity so that's good.
If you look at I just wanted to clarify one thing about your many comments on cost inflation.
Were there any sub segments are worth calling out, let's say lighting or hardware, Hans grocery or whatever where you actually where price cost neutral already in three Q or where you are where you expect to be price cost neutral in for Q I don't just mean by year end, but I mean actually.
<unk> in <unk>.
And could you comment specifically on labor inflation in your outlook.
Yeah, I'm not going to get into slicing and dicing, it by individual commodities or products or segments in that sort of thing as it relates to price cost, but in terms of labor.
Continues to be a challenge as we talked about and that's a one.
One of the things that we're working very hard to do as it relates to programs, whether it's white collar or blue collar as it relates to safety in our factories and programs.
Four different work.
Engagements, if you will or different work methodologies as it relates to work from home or a hybrid or come into the office sort of thing too to appeal to as much of the labors as we can and that includes in some cases some.
A wage increase in wage inflation. So labor is an issue and I think that's globally across industry, but we're also seeing that.
Okay makes sense thanks, guys.
Thanks, Steve.
Your next question will come from the line of David Macgregor from Longbow Research. Please proceed with your question.
Yes, good morning, everyone.
Keith Congratulations on a great quarter.
A lot of great execution.
I wanted to just you talked about trying to achieve price or you will choose price cost neutrality by the end of the year.
And I.
I guess I'm just wondering if you can about the extent to which would that push on pricing here in the second half how much carryover pricing you would have into 2022 and then also if I could just get some clarification around that price cost comment.
You noted that you'd be price cost neutral in plumbing, but if you. If you mentioned it for decorative architecture I may have missed that.
Are you expecting with the higher inflation in decorative architecture to be price cost neutral by year end, there as well.
Yes, we are across across masco.
Okay.
Okay, and carryover pricing for 2022.
What are your thoughts there.
Yeah, David if there'll be some carryover pricing into 2022.
We'll get into more color on that on our fourth quarter call.
In February.
Okay Alright.
Question, just obviously, a very strong market share performance in our pro paint, but could you just talk about where else within.
Product mix you may have gained share in the quarter.
Right.
We had a very very solid performance in plumbing plumbing trade in particular E. Commerce continues to be a we believe we're a leader in ecommerce and we continue do we believe gain share I'll tell you that.
It's very difficult to <unk>.
Accurately pin down overall market volume in a particular quarter.
So that.
We'll see.
As we end the year and we go through our models that we use to estimate total market size, but I believe where we're gaining share in trade plumbing and E. Commerce, certainly would think we're gaining share in our spa business and our wellness business and Watkins that continues to perform quite well and when I look at our growth in Europe versus what our competition is doing I believe.
We're gaining share.
It has to grow as well, but again, it's difficult I like to speak with absolute numbers and run it through our market model and it's very difficult to see the actual market size quarter to quarter, but we're doing well in Watkins doing well in Europe with Hans growing certainly in plumbing in the pro paint you talked about.
Great. Thanks very much.
Your next question will come from the line of Ken Zenner from key. Please proceed with your question.
Good morning, everybody.
Good morning, Ken.
Page.
Up 4% headline.
As noted the volumes were down which contributed to that operating margin could you may be discriminate. If you look at the paint PPI index. It says.
<unk> was up about 10% in the third quarter could you maybe give us a sense of that pricing magnitude and then for those three buckets that hit operating margins.
The volume commodity costs and marketing expenses could you may be.
Give us a sense of magnitude of those buckets. That's it thank you.
Yeah, Ken so in terms of our.
Paint paint in places that we felt in the quarter.
We were up.
Mid teens.
Inflation in pain.
So that was the inflation that we felt and that obviously had an impact on.
On the.
The margin that will be developed in terms of.
Yes.
Not familiar with the PPI index or.
But I think yes, I think that addresses your question.
Right and then the impact for the volume.
The other the commodity cost for the margin impact.
Oh, yes.
So if you think about yes, so you know obviously with volumes being down.
Yes.
A pretty negative impact on the margins.
No.
Well some of the investment that we put back into the business during the quarter I think those are the two probably bigger impacts.
With pricing being a small offset to those.
Thank you very much.
Your next question will come from the line of Steven Ramsey from Thompson Research Group. Please proceed with your question.
Good morning.
Recent channel checks point to some companies reducing skus.
To focus on better margins better volume products given the supply chain issues are you doing this in any product categories and and if so would it be on near term or long term basis.
Part of.
Our ability to perform as well as we did with respect to supply chain and it.
This was in plumbing.
Simplifying our assortment for a limited period of time. It was for a couple of months I believe in that range to allow our suppliers to do less changeovers have longer runs and ultimately.
Do a better job of supplying our customers. So there was a little bit of that but it was.
Short lived it helped out as I said of our supply base with with longer run.
But that that was that was.
Basically it simplification.
And an 80 20 thinking as part of the Masco operating system and we apply that in this case.
During this.
Tough issue around supply chain, but that's over for the most part those skus are back in line.
Again part of what gives me confidence that we're starting to get.
Some relief on some of these issues as it relates to supply chain, particularly from our great supplier partners.
Great and then maybe taking that topic thinking broader.
The supply chain and labor issues or at least forcing you to make changes to fill demand and support margins in the near term debt.
We'll have to be kind of reversed or changed in a major way as the supply chain environment normalizes over the next one year plus.
Could you could you restate that question format I wasn't tracking with you I apologize.
I guess, what I'm getting at is the near term changes to manage this environment that you're having to make will those have to be reversed in a major way as the supply chain and labor market normalizes over the next three to six quarters.
No.
Oh no no no no reversing of any kind of things that was just indicating that we did take some of our lower volume complexity offline for a couple of months to give our suppliers a breather to lengthen their runs that's all.
Great. Thank you.
We do have a question in queue from a participant that did not record their name or their firm name, but they are calling from a 216 area code caller. Please state your name and firm and provide for your question.
It sounds like me, it's the Eric Bob <unk> Cleveland Research.
Two things first of all.
The incremental pricing do you have to take incremental pricing.
Now or in <unk> to offset the incremental inflation.
Yes, we will be implementing price in the fourth quarter or two to help offset inflation yes.
And both is that in both businesses.
Across the company.
Okay, Okay and then.
Secondly in terms of.
That's our plumbing Im curious if youre seeing within the business.
Any change in mix in terms of what.
Consumers are buying.
As you've raised price or as you're managing the product offering if you've seen any notable change in behavior from consumers.
Not really no the mix changes change as John talked about was relatively small item, but more associated with <unk>.
Different regions growing that tend to be higher mix like Europe, growing quite well and that tends to be higher mix in our spas continue to grow ROE, which has a higher price point, but no. We're not seeing any mix shift is as it relates to pricing changes.
Okay. Thank you.
Thank you.
And we do have time for one final question, which will come from the line of Truman Patterson with Wolfe Wolfe Research. Please proceed with your question.
Hey, good morning, everyone. Just wanted to hop off for a couple of items that I don't think have been touched on yet.
Clearly very strong growth in the propane business.
Just wanted to understand you know in order to.
It makes us stickier have you all started targeting I don't know local or regional builders for exclusive contracts.
Or any other kind of sales strategies to make sure that this momentum continues moving forward.
We're not going to get into that.
Competitive nature in terms of our sales force execution, and what we're going after but fundamentally it's about understanding the value that we bring and then targeting that customers that would appreciate that value them. All so we're not going after all of our every pro that's out there we definitely are segmenting and that's part of it.
Again about 80, 20 simplification, where we believe we have the best chance, that's where we'll put our sales effort. So we are targeting our sales approach and we are looking at different attributes for those specific customers I won't go in say specific long term contracts or anything of that sort I won't get into specifics, but along those lines of targeting <unk>.
Or to what the what the customer values. The most is exactly what our culture is about.
Okay, and then on the M&A strategy, you know you're generating strong free cash flow $850 million of cash on the balance sheet could you just give an update of your overall strategy. There the pipeline of deals and valuations you know we've been hearing.
They're fairly elevated.
Yeah Truman.
It's John I think a good way to think about our M&A strategy is taking a look at the four recent acquisitions, we've done in the last year. So we did four.
For each of them.
Our very.
Aligned with our strategy of one of our business units. So in the case of crowds.
Delta is looking to grow their ecommerce strategy and causes a great complement to delta is already strong presence in the ecommerce channel and it's going to enhance that.
Similarly in <unk>, we bought steam it's one of the leading steam shower businesses.
That focuses on delta's strength with the trade the trade business with that with the steam shower businesses is up demand.
It's having a hand in glove there obviously, the applicator business that we've built.
Bought earlier in the year complements bears paint paint offering and then the dream. This the high style Dream business, we bought in Europe complements Honduras high style showers in process and so as you think about where we're focusing our efforts.
John.
These smaller bolt on tuck in type businesses.
Have an alignment with our strategy of one of our business units.
It's really focusing on both paint and plumbing.
So our team that we've got in place is doing a great job of the cultivation of.
These smaller businesses.
We anticipate there will be future acquisitions, obviously, we can't foreshadow the timing of those but.
The team's working hard.
Part of the reason that we're focusing on these trim and also it was to your point the valley.
<unk>.
As you move up in terms of the size are quite high and so we see better value in the lower middle market and.
And so that's where we're focusing our efforts at this time and then I think it will continue to focusing our efforts in.
And that lower middle market over the coming months and quarters.
Alright, Thank you all.
I'd like to thank everyone for joining us today and for your interest in Masco that concludes today's call.
[music].
Yeah.