Q1 2022 Masco Corp Earnings Call
Slide five.
Moscow was off to a great start this year with our first quarter results.
Our top line increased 12% with growth driven by volume and pricing in both segments.
Our operating profit declined slightly due to higher commodity and freight costs as inflation reached mid teens for the quarter.
Despite these higher costs.
We achieved sequential margin improvement through pricing actions and expense controls as SG&A as a percentage of sales improved 110 basis points to 15, 9% of sales, even with higher marketing and growth initiative investments.
Our earnings per share for the quarter was <unk> 95.
A 7% increase compared to the very strong first quarter of 2021.
Turning to our segments.
Plumbing grew 11% in local currency was 10% growth in North American plumbing and.
12% growth in international plumbing.
This impressive performance was against a 27% comp.
Our plumbing business remains well positioned for growth with our market, leading brands, new product introductions and healthy backlogs.
Yeah.
Furthermore, <unk>.
International markets, including Europe remained strong and customers report continued pent up demand and a strong backlog of projects.
In regards to Russia, and Ukraine, Masco has very little exposure as we sold approximately $40 million of euro of product into those countries in 2021 and have ceased operations.
In our decorative architectural segment.
<unk> grew 17% as bear continued its tremendous performance with low double digit growth in DIY paint.
And then another quarter of over 50% growth in propane.
Our paint business is performing extremely well as evidenced by our strong results.
We continue to work very closely with our partner the home depot on our paint strategy and we are jointly investing with them to drive continued share gains in both our DIY and pro paint businesses.
We also continue to launch new products achieve industry, leading quality ratings.
And are pleased with the performance of our recently launched bear aerosols Cox and interior stain programs.
Turning to capital allocation, we repurchased $364 million of our stock during the quarter.
And an additional $50 million in April .
Based on our positive outlook for our business and current market conditions, we now expect to repurchase approximately $900 million of our stock this year.
An increase from our previous expectation of at least $600 million.
To assist with this we have secured an additional $500 million in short term funding that we will likely deploy in an accelerated share repurchase transaction.
Lastly, inflation has remained persistent and we now expect double digit cost inflation for the full year.
From our original view of high single digits as freight metals and paint input costs continue to face upward pressure.
This increase in our inflation expectation will pressure margins, even though we fully expect to recover the cost and maintain operating profit dollars.
Therefore.
As a result of our strong first quarter performance higher sales expectations and likely lower share count, we're raising our earnings per share expectation for the year to be between $4 15 to $4 35.
For sure.
An increase from our previous expectations of $4 10 to $4 30.
Finally, let's turn to our longer term view on our markets and our outlook.
We are clearly in a period of rising interest rates and inflation.
As we discussed last quarter and as indicated in our guidance last quarter and this quarter, we expect our sales growth to moderate from the rapid growth we have experienced over the past 18 months.
However.
Times like these are the very reason, we transformed the masco over the past several years to be a focus business model of low ticket.
Repair and remodel products with product.
End user and geographic diversification.
We believe this model will outperform even through rising interest rates and inflationary cycles.
We have a healthy mix of both pro and do it yourself oriented end users.
We estimate our end user mix to be approximately 50% professional and 50% DIY.
Our low ticket products are used in both normal weekend repair.
Projects as well as full home Remodels.
Our low ticket branded nature of products affords us the ability to raise prices to offset cost inflation.
And our shift away from new construction means that our business is much less sensitive to changes in interest rates and more aligned with the health of the consumer and home values.
We also believe in addition to the changes we've made to our portfolio.
There are numerous structural factors to housing such as demographics age of housing stock and how consumers view their homes that will be supportive of increased repair and remodel activity even in a rising interest rate environment.
We're on the leading edge of a large 75 million millennial cohort forming households in entering the housing market.
$2 7 million more homes will reach the prime remodeling ages of between 20 and 39 years old over the next three years.
The COVID-19 pandemic has clearly increased the desire for more enjoyable living spaces, which has led to increased home demand and remodeling expenditures.
And the consumer and homeowners have strong balance sheets with more than two trillion dollars in savings and home equity values at all time highs.
All of these structural forces provide tailwind for our business.
The changes we have made to our business and the structural factors supporting our markets give us the confidence to increase our earnings per share outlook and our share repurchases for the year.
Positioning us well to continue to drive long term shareholder value.
I'll now turn the call over to John for additional detail on our first quarter results.
And full year outlook 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 onetime items.
Turning to slide seven we capitalized on the continued healthy demand for our industry, leading brands delivered a solid start to the year.
Sales, increasing 12% in the quarter, because it's a robust 25% comp in the first quarter of last year.
Yes, selling prices increased sales by 9%.
Volumes increased sales by 5%.
This was partially offset by 1% each related to currency and divestitures.
Sales grew 14%, excluding the net impact of acquisitions divestitures and currency.
Okay.
In local currency North American sales increased 14%.
This outstanding performance was driven by strong growth in both DIY and propane.
As well as faucets showers and spas.
The main drivers of this growth were increased net selling prices, which increased sales by 9%.
Higher sales volumes, which increased sales by 3%.
In local currency international sales increased 12%.
Our 18% excluding divestitures.
Higher volumes increased sales by 9%.
Net selling prices increased sales by 7%.
Favorable mix and 1%.
Gross margin of 32, 1% was impacted by higher commodity and logistics costs in the quarter.
As we discussed in our previous earnings call price cost hit a peak impact on our P&L in the fourth quarter of 2021.
Here's the 140 basis point sequential improvement in the first quarter of 2022.
Our SG&A as a percentage of sales improved 110 basis points to 15, 9%.
Operating leverage and continued cost containment activities across our businesses.
Operating profit in the first quarter was $356 million and operating margin of 16, 2%.
Our EPS was <unk> 95 cents in the quarter an.
An increase of 7% compared to the first quarter of 2021.
Turning to slide eight plumbing growth was 9%.
12%, excluding the net impact of currency acquisitions and divestitures.
This strong performance was achieved against a healthy 22% comp in the first quarter of last year.
Pricing and volume contributed approximately equally to segment growth.
North American sales increased 10% in local currency.
This performance was led by Delta.
Drove strong growth across our wholesale retail and e-commerce channels.
Watkins wellness was also contributed to growth as it continued to capitalize on increasing demand.
The increasing trend towards outdoor living.
International plumbing sales increased 12% in local currency grew 18% excluding divestitures.
Hi.
<unk> grew and grew across their markets with particular strength key.
Key markets of Germany.
China, France, and the U K.
Okay.
Segment operating profit in the first quarter was $228 million and operating margin was 16, 8%.
410 basis point sequential improvement in margin.
Operating profit was impacted by inflation and higher variable costs.
Ms such as personnel and marketing expenses.
Which was partially offset by higher net selling prices and incremental volume.
Turning to slide nine.
Sort of architectural sales increased 17% for the first quarter.
Our propane business delivered another quarter of more than 50% growth.
Given by ongoing momentum with pro customers as we continue to deliver value to these customers to our service capabilities.
<unk> high quality products.
This coupled with our strong operational execution resulted in further share gains in our pro business.
We expect propane demand to remain strong and we continue to invest in the pro along with our partner the home depot and new services to retain and grow our penetration with the pro customer.
Our DIY business also performed well in the quarter.
Sales grew low double digits against a strong comp in the first quarter of last year.
Operating profit was $158 million in the quarter up $16 million or 11% now.
Operating margin was 18, 8%.
This performance was driven by higher net selling prices and incremental volume parse.
Partially offset by higher commodity costs and variable expenses, along with investments to drive future growth.
Turning to slide 10.
Our balance sheet is strong.
Net debt to EBITDA at one seven times.
We ended the quarter with approximately $1 2 billion of balance sheet liquidity.
Working capital as a percent of sales was 21%.
This percentage was elevated in the first quarter largely due to higher inventory levels to meet the demand of our customers.
Cost inflation and delays in receipt and delivery of materials.
Despite these challenges through focused execution, we continue to refine our inventory levels, we expect working capital as a percent of sales to be approximately 16, 5% at year end.
We also continued our focus on shareholder value creation by deploying $414 million to share repurchases. During the first four months of the year.
With our aggressive repurchase of stock in Q1 in our current outlook, we now anticipate repurchasing approximately $900 million for the full year.
The increase from our previous guidance of approximately $600 million.
To facilitate this yes.
Yesterday, we executed a $500 million one year term loan from a group of banks to provide additional liquidity for share repurchases.
We anticipate deploying this $500 million shortly the form of an accelerated share repurchase transaction.
Concurrently we extended the maturity of our $1 billion revolving credit facility by three years to April of 2027.
Finally, let's turn to slide 11, and review our outlook for 2022.
Our strong first quarter performance additional pricing actions.
<unk> outlook for our markets. We now expect full year sales growth for <unk> in the range of 7% to 11%.
Excluding foreign currency up.
Up from our previous guidance of 4% to 8%.
We anticipate full year operating margins to be in the range of 17% to 17, 5%.
Our plumbing segment, we now expect 2022 sales growth to be in the range of 5% to 9% excluding foreign currency.
Up from our previous guidance of 3% to 7%.
Given current exchange rates foreign currency is expected to unfavorably impact plumbing revenue by approximately 2%.
$90 million.
We anticipate the full year plumbing margins will be in the range of 18 five to 19.
Percent.
In our decorative architectural segment.
We expect 2022 sales to grow in the range of 10% to 14% up from our previous guidance of 6% to 10%.
Looking specifically at <unk> growth for 2022.
We currently anticipate our DIY business to increase low double digits.
Up from our previous guidance of high single digits.
Our pro business to increase high teens.
From our previous guidance of mid teens.
Do you anticipate the full year decorative architectural margin to be approximately 17, 5% to 18%.
As we have previously discussed in this segment pricing actions typically only recover the dollar amount of inflation.
As a result.
All else equal operating dollars remained neutral from cost recovery pricing action results in margin compression.
Finally, as Keith mentioned earlier, our updated 2022 EPS estimate is $4 15.
To $4 35.
Which represents 15% EPS growth at the midpoint of the range.
This assumes a 236 million average diluted share count for the full year.
Additional modeling assumptions for 2022 can be found on slide 14 in our earnings deck.
With that I would like to open the call for Q&A operator.
Mary we'd like to open up the call for Q&A.
Thank you.
In order to ensure that everyone has a chance to participate we would like to request that you limit yourself to asking one question and one follow up question. During the Q&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.
Our first question comes from the line of Stephen Kim from Evercore ISI. Your line is now open.
Okay.
Thanks, very much guys, yeah, good results and.
Exciting times out there. So we appreciate the the guidance here.
I wanted to see if we could get a little bit more in the way of specifics around what you're doing with the pro business that you're you said you're up 50% again.
Rates in your guide for the year in terms of the pro side of the business you alluded to programs and services to retain those new customers. I was wondering if you could give us a little bit more granularity around that so that we can frame. How this business is going to comp. So strongly later this year.
Thanks for the question Stephens Keith Good morning.
Our business, our <unk> business is doing very well and I think it's important to highlight that it begins.
With the strength of the brand with the achievements, we've made with regards to the quality in the can and how the consumer perceives it as well as the overall customer satisfaction on the consumer side. So there continues to be real strong.
Consumer pull through through the channel based on the investments that we've made for a long long time and the strength of those investments. So it begins with what we have to sell and we're selling very good paint and the consumers and the pros appreciate that.
I think with the <unk>.
Strong.
Execution that we've had in our supply chain and kudos not only to the behr team and RMB and the folks in the factory, but our supply base has been with us for decades, and we're very loyal and they are very loyal to us and they've done an outstanding job through very difficult circumstances. So that is really the core of <unk>.
What's driven our success and strong execution and strong brand service and <unk>.
Innovation in.
In terms of our programs that we're developing at our launching too.
Continue to drive the growth and to give us confidence in the in the raised that we've made in our guidance.
I'm not going to get into the details for obvious reasons.
But theyre focused on.
Rewarding customers who.
Continue to give us more share of their wallet and Thats really what were.
What we're targeting with.
We've had the opportunity to get behr paint into a lot more pros hands and frankly, they like that and we are developing programs to continue to do that to get our painted more pros hands and then two to add to the stickiness into.
Help us maintain as much share of wallet of those new customers as we can.
And just in terms of timing on that keep can you give us a sense for are those are those programs, which you are currently rolling out now or are these.
When should we expect these to really be at full force.
I would.
This year like second quarter or third quarter.
Mhm.
Yes.
As we've talked about frequently I think.
Best indication of our future performance is what we've done in the past and look at what we've been able to do in this this steady growth in pro has been an evolution, where we continually launch new programs be it on.
Execution side of delivery and job site delivery and high speed tenting and those types of advantages too.
Programs that we developed jointly with the home depot to make the in store experience better to how we service with regards to our technical representation that are in the field reps.
What we do for loyalty programs and the like so it will be a combination of.
Things that are happening now and will continue to rollout there'll be new things that happen.
And we plan on continuing that as we've had really since the start of the program.
Okay, great. Thanks, very much best of luck.
Thank you.
Our next question comes from the line of Matthew Bouley.
From Barclays. Your line is now open.
Hey, good morning, everyone. Thank you for taking the questions.
So it sounded like your direct exposure to Russia, and Ukraine is relatively small, but I think the investor concern is probably more.
Related to the knock on effects to sort of the rest of European demand.
How are you guys thinking about sort of the rest of the impacts to the <unk> business in Europe , just as a result of.
Everything that's going on there. Thank you.
Okay.
As we said in the prepared remarks relatively low level of exposure as it relates to demand in both those countries call it $40 million Euro and we've ceased operations there.
Our supply chain and our supply.
Base, if you will.
It does not have anything.
Inbound are interrelated with those two countries. So really I would say there is no direct impact.
Certainly we're watching very carefully with regards to the indirect impact we have seen we believe some.
Fuel oil increases in price that were indirectly related obviously to the conflict.
As it stands now in Europe as John highlighted in the detailed remarks, we continue to see strong demand really across our.
Our main.
Our countries of Germany, France, U K, where we do a significant amount of our volume and that's continued to be robust and the consumer traffic.
Health of the consumer and our demand patterns continue to be strong. So at this point, we have not seen any indoor.
Indirect knock on effect of the conflict, but obviously, we're watching that very carefully and we'll continue to do so.
Got it. Thank you for that Keith and then second one just to press on the pro paint business in another way.
Obviously competitors have spoken to.
Gaining access to raw material supply again.
The specific question is just if we should think about any sort of competitive dynamics emerging as you've got multiple industry participants talking about market share specifically is there anything on the pricing side that we should be aware of on that front. Thank you.
Yeah, I don't have anything.
Particularly.
To add more color to with regards to pricing.
Other than what we've made in our <unk>.
Comments, when we look at our competition I respect them.
What we have we have great competition, there's no question about it and I think.
To a large degree where we are as good as we are because of the pressure that they put on us. So I welcome the competition and their strong I respect them.
With regards to.
How is this market share shakes out as capacity becomes more realigned.
You see our confidence in the guide that we've changed and.
We certainly wouldn't do that if we didn't have that kind of confidence and fundamentally that confidence is based on the fact that we have.
A incredibly strong brand, we've got outstanding quality, and we have a reputation for.
Outstanding customer service and this is reports from third parties. This isn't just a.
Just <unk> our own paint business. So we have strong pain to begin with we've demonstrated the strength of our supply chain and our team at bear at our team and our suppliers. So we've got a strong team with a great product product and great recognition and when we have the opportunity to get that into more.
Those hands.
We continue to see that kind of feedback is very positive.
And.
Thanks to our supply chain for being able to put us in that position and our intent is to <unk>.
Continue to work hard to keep as much of the share of wallet of those.
New painters that have tried us and so far it is working pretty good so very much respect the competition, but also extremely confident in our paint business as reflected in our guide.
Great Great well, thank you for that Keith and good luck.
Our next question comes from the line of John <unk> from UBS. Your line is open.
Good morning, guys. Thank you for taking my questions as well the first one on the ASR, which I think is very positive and I think it sends a very strong message just wanted to be clear it sounds like that's fairly definitive or theyre going to go forward with that timing could be near term, but I guess the question is what was sort of the factors that led you to that decision to go.
Forward with that.
Yeah, John Hey, good morning, it's John .
You're right, yes, we are looking at this ASR and obviously by the fact, we entered into the one year term loan yesterday.
Is it a pretty good indication of that.
The way we're looking at this is we've seen.
And when it comes down to value creation right I mean, we've seen the share price retreat, a little bit this year end.
As we look forward, we're just the way we're looking at this is we're simply pulling forward our future cash flows with a term loan to buy back these shares.
Because we've repurchased $400 million.
To date.
And we've got this heavy working capital at this time of year.
That was the reason we took out the additional alone just for the liquidity needed for the transaction.
So you know because of where we see the share price.
The strength were continuing to see in our business and we think as are we.
A pretty realistic view as to how we see the repair remodel market.
Developing even in this rising rate environment, we feel it's the appropriate time in the right time.
To put our balance sheet to use to be a little bit more aggressive on share repurchases and further enhance shareholder value.
<unk> always said that our.
Share repurchase program would be programmatic.
We also said that we would be opportunistic.
We saw a little bit of a dislocation and we think this is one of those times and so that's why we've really pursued this transaction at this time.
Yeah that makes it makes lot of sense, we would agree.
Okay, and then on the plumbing supply chain, we've seen a lot of the componentry coming out of China.
Curious what the Shanghai shutdowns have done and what you see going forward in relation to the supply chain.
It's an important thing that we're watching for sure.
As we.
Both in terms of.
Demand in China, we do roughly about $300 million of demand in China as well as the source of products coming out of China.
We've Ah.
First and foremost concerned with our employees and ensuring their safety and really we feel good about that aspect of it and I'm happy to say that but.
But we're.
Currently our supply chain, while it continues in general.
Tough and to require.
Extra special effort to manage.
The challenges that are going on for some time.
We're going to do Okay, and we expect as is Shanghai and Beijing come out of the lockouts.
That with the underlying growth in the market in China that will be able to do okay. There.
To date, we haven't had while it is still a challenge we haven't had significant issues.
Coming out due to the shutdown of those two cities and we expect it to stay that way.
Great. Thank you guys.
Our next question comes from the line of Mike Dahl from RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions.
The first question I mean, obviously alluded to.
Some of the potential puts and takes with.
With housing and how home improvement involved so im wondering if youre seeing anything.
Other in something more discretionary like your your spot business or anything in sellout trends could you talk about how your.
How you are looking at some of your kind of leading edge.
Positions in terms of evaluating whether or not you're seeing consumer softening come through and maybe what else you're you're watching most closely in this environment.
I'd point to a couple of things Mike.
We.
As expected our seeing some tempering of the.
Call It White hot demand we've seen in the last 18 months, we've talked about that last quarter end.
While demand this quarter was a little bit better than we expected.
There is a little bit of tempering from what we've seen in the past 18 months. However, it's still strong.
We are not seeing really any sort of evidence there is a little bit of a mix shift but nothing material.
The consumer continues.
<unk> be willing to spend.
As driven by the overall change in the view of the housing.
The home and our view driven by Covid.
And we're seeing strong sales in our spas that backlog of our spas like very expensive discretionary.
Item, but in the right spot as it relates to the whole wellness trends and that that backlog continues to be in that 30 week range. So that strong <unk> at our higher end.
Shower systems continued to sell well.
Seeing our shower doors, which are relatively expensive continue to.
To sell well so no real mixdown strong traffic good backlogs and.
And again this all feeds into why we have decided to change our guide in the first quarter, which typically we don't do.
Because we are we like what we're seeing in the strength of the consumer.
Mike what I would just add to Keith's comment as you know in terms of sell in sell through I think it's pretty balanced during the quarter across all product categories.
<unk>.
Any significant change in that whatsoever through the quarter.
Okay. That's very helpful. Thank you for those comments my second question.
Just wanted to ask for clarification on price costs certainly understand.
Your comments around Dec arc, and that's always been dollar recovery not margin percentage recovery, but when we look at the new full year guide for margin both on a consolidated and segment basis.
Is there an expectation for price cost neutrality price cost favorability and how should we be thinking about that in terms of cadence.
Are there incremental headwinds in the second quarter because of what you've seen but then you catch back up in the second half just a little more color on that would be great.
We exited the quarter price cost neutral and we expect that to continue in the second quarter.
Now, we don't have a crystal ball for where commodities are going to go but our intention and our strategy Hasnt changed we think we have the right.
Two.
Drive price increases as needed obviously, our first choices is to work with productivity and with our supply base and our customers to minimize the impact.
But to take price.
We need to as we see inflation and we don't know where that's going to go but we continue to monitor and maybe John you could give a little bit of color on it yes, Mike maybe give you a little bit more color just on what we're seeing in terms of inflation across the portfolio. We continue to see.
See some inflation across the cosmetics and precision, particularly empiricism freight inflation.
In terms of the raw materials.
Copper has been pretty stable over the course of the last quarter or so but zinc has increased since the start of the year.
<unk> costs, including resins and anti IL two continue to escalate.
Hey.
That inflation is kind of in the <unk>.
The range of 20, 20% plus.
And then like I mentioned freight packaging pallets and fuel continued to remain high.
That inflation continues and so that net impact.
Little bit of.
Our our margin guide that we gave for the year.
So we think we've got cost recovery coming, but then will mainly in the back half it will see particularly in the plumbing segment, let's see margin expansion in the back half of the year.
But that will.
Incremental inflation will weigh a little bit on because of cost recovery and the pain weigh a little bit on our margins.
Okay got it got it alright, thanks, Keith Thanks, Sean.
Our next question comes from the line of Michael Rehaut from Jpmorgan. Your line is open.
Okay.
Thanks, Good morning, everyone. Thanks for taking my questions.
First I just wanted to dial back.
The demand backdrop, and I believe you said earlier.
That sell through is kind of consistent with sell in which is always a good sign.
I was curious about during the quarter I mean, we've heard different noise that part at points over the past couple of months around.
Either demand remaining robust or maybe slowing a little bit different chatter out there or anecdotal.
Wanted to kind of get your take on your experience.
Round demand trend.
January February March.
And if there's been any differences in April .
Across plumbing and Deca.
Well.
Sure.
Not keen on talking about in the months changes in April I will tell you that.
We exited the quarter strong and that remains.
In terms of.
Different channel breakdowns.
Where we saw demand.
Broad based and strong demand in North America, and international and International we saw growth across really most of our most of our geographies, but particularly in China and Germany.
And we've talked about our pro demand being very strong and that continues.
Continued strength in propane in the quarter and.
Feel that thats, while we consistently say it's difficult to pin down the size of the market in any one quarter, we think thats indicative of those high growth rates of share gain and our outdoor spas and fitness systems remaining historically strong so.
The demand was pretty steady through through the quarter that we just finished.
Exited strong that that continues.
Yes, Mike the wanted additional color point that I'd give you on the quarters.
Think about how the quarter evolved just from a COVID-19 perspective juniors.
A little bit more impacted by Covid and as people are coming out of that.
Year end holidays, so, perhaps a little bit less activity in January but things got stronger.
As the quarter developed so into <unk>.
February .
Tomorrow so.
That might help you out a little bit in terms of color.
No that is very helpful. I appreciate that.
I guess just secondly.
Yeah.
With the different moving pieces.
Shifting to the margin front here and.
Kind of appreciate that.
Obviously, you're offsetting incremental inflation with with more pricing dollars keeping the price cost neutral on a dollar basis.
Broadly speaking.
Sequentially.
Any type of.
Thoughts when you think about plumbing and Dec arc.
<unk> versus <unk> should we think about perhaps.
I would think all else equal given theres typically that lag in price.
Again.
Against cost inflation, so we've been thinking perhaps of <unk> margins.
Across both segments being slightly lower than <unk> <unk>.
Sequentially and then obviously the catch up in the back half or.
I know you don't want to get too much into the weeds on the quarters, but I think given the environment it would be helpful.
Yeah, Let me give you a little bit of color on plumbing I think that that would be most helpful.
As expected.
We saw significant sequential improvement in our plumbing margin in the first quarter.
In the first quarter, we did see higher commodity and supply chain costs.
Flow through the P&L and a call it a more.
More normalized spending level of investment and such things marketing head count growth initiatives et cetera, and this was partially offset.
By our pricing actions. So as a result, as we expected our price cost relationship improved nicely in the first quarter of talk on plumbing here and that will continue to improve.
For the rest of the year.
In terms of how we see the year playing out going forward in plumbing.
The relationship year over year in plumbing will improve each quarter going forward and we do expect to see margin expansion in the back half of the year, implying and hence the guide for 18 five to 19.
When you look at decorative architecture.
The main story there is the relationship between.
Pricing for dollar increases and the margin impact on that.
And Mike the other thing to think about.
If you think about sequential Q1 to Q2, it's certainly Q2 was our strongest volume quarter.
While we may be facing some.
Headwinds in terms of margin from the price cost, we do generate a lot more volume in Q2, which should help.
On the margin side as well.
Great. Thanks, guys I appreciate it.
Our next question comes from the line of Susan Mcclary from Goldman Sachs. Your line is open.
Thank you good morning, everyone.
My first question is just kind of building off of your last comment when you think about the year and the sequence of the upcoming quarters across both the segments do you expect that we will see normal seasonality, even though it sounds like we came into this year with quite a bit of strength across your business.
Yeah, I would expect that there would be.
The traditional seasonality as Susan with Q1.
I'm, sorry, Q2 will probably be our softest quarter, and then Q2 Q3 being seasonally stronger seasonal selling that said, obviously, we're up against a comp issue.
And so we.
We face a pretty tough comp the first quarter of this year.
A pretty strong comp in the second quarter of last year, and then obviously the back half of the year, we were up against the tough comps of 20, the second half of 2020, which reduced our.
Our sales growth in the back half of 'twenty one.
Factoring out kind of the anomalies of how the pandemic plays through the financials over the course of the last couple of years.
I would expect the traditional seasonality to our clients.
Okay. Okay. That's helpful. And then my second question is on the DIY paint side. You know you also increased your guide there too I think low double digits from high single digit growth for the year.
You sort of look out and you think because thats coming off of a much more established mature kind of business there, but as we think about the underlying housing trends that are coming through people, especially younger people continuing to enter homeownership does that suggest that that is a business that can sustainably operate at just a much higher volume level.
And what does that mean that in terms of the pricing and the margin trajectory across paint.
We definitely believe that.
Particular with the point you mentioned as it relates to the millennial cohort coming in and being first time homebuyers in entering that market and knowing and seeing with our research that they are.
DIY Ers and Thats an.
And extremely helpful component to this DIY business.
We think that it's stabilized and we think it stabilized at a very.
Good number for us as it relates to the overall size of the market and the demand.
With regards to your question looking forward on margin.
It really that Hasnt changed with regards to our approach to margin then.
Escalating commodity cost environment that puts pressure on our margins and we've discussed it thoroughly.
Conversely, as we are.
As well as commodities begin to abate that would help our margins. So I think if you look at our guide for margin.
It really is right in the range of how this business is expected to perform with those dynamics of the pricing.
Okay, great. Thank you very much good luck with everything.
Thank you.
Our next question comes from the line of Deepa Raghavan from Wells Fargo Securities. Your line is open.
Hi, Good morning, everyone. Thanks for taking my question.
Nice increase to the volume guide just curious whats.
Driving the full year.
Volume higher is that mostly price or is there some.
Sign up.
The full year organic growth higher is it is it is most of it price at this point in time is it also some volume in built in there.
And if you can provide us with the split of volume versus price in that full year guide that would be helpful.
Yes, Deepa, it's John I know you know in terms of your question Youre, absolutely. It's both a combination of price and volume that's driving.
Our organic growth for.
For the year.
Terms of the breakdown of price and volume.
You might expect in this inflationary environment. This year is going to be more more price than volume.
We do expect volume growth across both our segments for the for the year at this point, we're not going to get into the specifics.
<unk>.
The breakdown of the two components.
Price and volume.
Okay.
That's fine.
In terms of <unk>.
Margin guide just just to clarify youre baking in only the inflation youre seeing so far correct.
Or is there any future inflation also that you are assuming.
Just trying to square that lowered margin guidance and see if.
If inflation continues is there further risk to the margin.
Or are you baking in some cushion with them.
Yeah, I would say.
A question in terms of inflation I'd say the guidance contemplates that the inflation, we've seen here in the first quarter.
And.
And what the foreseeable inflation as it were.
We are experiencing if theres something that materially changes beyond where we're kind of current market conditions change that is not contemplated in our guidance.
Thanks, very much for the color good luck.
Okay.
Our next question comes from the line of Keith Hughes.
I'm curious securities your line is open.
Questions on inventory the inventory count.
A good bit year over year, if you could talk about.
What's how much of that inflation what units look like year over year. This changing any point of view with Watson schedules.
For the remainder of the year.
Yes, Keith in terms of inventory here or there are number of things that were touched upon the inventory you're right you hit on one of them inflation is clearly a component of what drove the inventory levels.
Julian we're carrying higher levels of safety stock at this point because of some of the changes we've seen in raw materials.
Particularly on the input side to paint for instance.
If we could procure secure more product we were.
We took advantage of the opportunity to buy.
More inventory.
And there has still been a little bit of supply chain.
Cause our inventory some more time on the waterfront our products. So we.
We feel.
We feel like we're in a good position from an inventory level in terms of how we're producing.
Does it change caused any changes in our production no not really.
Not at all.
As I mentioned on our prepared remarks.
While inventory is high at this stage of the year.
We do anticipate driving that inventory down further as the year progresses, and we do think we can get that to a much more normal level as we exit 2022.
Thank you.
Our next question comes from the line of Cai.
From loop capital your line is open.
Oh, hi, Thanks, just to follow up on the inventory question do you think there is any opportunity for you to participate.
A channel fill in with your customers so about material supplier.
As we've talked earlier, there we see the sell in.
Roughly matching the sellout the Pos.
We think the inventories have been relatively stable in the channel now in spots, we've been able to catch up and others are frankly, I think we'd like to have a little bit more inventory in the channel. So.
It's getting slightly better.
And I would say that that represents maybe a little bit of upside for channel fill.
Going forward as we're not quite where we would like to be.
Got it and then just a clarification on the ASR.
Separate from the $900 million.
For buybacks and M&A in the guidance are exactly within the guidance.
No thats included in the guidance Garrick so.
The if you kind of if you think about the $400 million or so that we purchased we repurchased year to date.
And then you contemplate the $500 million ASR that comprises the $900 million total.
When you were talking about.
Got it thank you.
Our next question comes from the line of Adam Baumgarten from Zelman and Associates. Your line is open.
Hey, good morning, everyone.
Just a question you mentioned a little bit of a mix impact earlier in the call I think it may have been a comment around potential trade down can you just elaborate on that.
And perhaps we misspoken, if anything we've seen a little bit of a mix up in the quarter.
And I'd say the mix was perhaps those favorable isn't in our plumbing segment, we've seen pretty good growth.
So Mohan score is higher in lines over in Europe , and some of that has to do with the fact that as you may recall.
Fair amount of international projects and some of those projects.
Back in higher.
<unk> products and so.
That's one area, we did see some some favorable mix also I think in the decorative architectural segment as some of our other businesses outside.
Outside of pains Liberty hardware saw some improved mix they were selling some more shower doors and things like that which drove some favorable mix.
Adam just to add and to be a little.
To be clear, we really don't expect a significant impact either way with regards to mix as we look forward to the 2022.
Got it good to hear and then just switching gears to plumbing on the margin side, just curious how much of a margin headwind some of that variable spend was in the quarter and what that should look like for the full year.
It wasn't much of a headwind.
Adam.
Terms of that.
Incremental spend some of that just with the.
The growth that we've been experiencing we're just putting some investment into to sustain at current levels.
Invest in the future for future growth.
I don't think that it'll be a significant impact either in the quarter or for the full year.
Got it.
Our next question comes from the line of Phil <unk> from Jefferies. Your line is open.
Hey, guys. Congrats on a really strong quarter I appreciate the update on the guidance.
I mean your business certainly smaller ticket in nature should be far more resilient, but just given all the inflation, we're seeing in potentially lower housing turnover, how do you kind of see the demand profile shaping up in the year pretty steady I know theres, some comp nuances, but at.
At least we are hearing maybe some softness with some of the consumers out there.
As we've consistently said through this call and last quarter demand remains solid and strong and that is broad based across our geographies across our channels.
It across as we've talked about with regards to mix our price points. So continued steady confidence as it relates to your comment.
Existing home sales.
It's still a strong number and that's that's a number that's a very productive for us and when we look.
Through this year.
Our backlogs remain strong international markets are performing well spot backlogs at 30 weeks.
Propane or propane is doing.
Extremely well and we've been able to do that while getting price to offset inflation and driving productivity and managing.
Complicated supply chain.
The set of issues.
Home price appreciation the consumers.
Balance sheet.
All of those things really are.
We would call cyclical factors that are tailwind to us and then you add onto that the structural factors around age of the housing stock.
The millennials coming into the market. We think this is set up for a very strong.
Several years of demand for us. So we're looking good through 'twenty, two and we like the backdrop.
That's great color, Keith and then from a raw material standpoint.
Just curious, perhaps Sean how that kind of ripples through your P&L, just appreciating that some of this move.
And commodity there might be a lag because you're buying components. So help us understand perhaps that ripple effect through your P&L and then when we think longer term your ability.
Call. It in 2023 24, getting your margins back to where it's been the last few years appreciating theres some noise right now with inflation.
Yeah, maybe I'll give you just to refresh everyone's memory in terms of how commodities flow through and hit our P&L, there's a little bit of difference between the two segments. So.
Even the length of our supply chain in the plumbing segment. It takes about two quarters for any inflation to kind of ripple through and directly impact our P&L.
So all of that in 2021.
It is particularly copper and zinc completed last year.
A little bit more of a margin.
The headwind in the back half of the year.
Terms of the decorative architectural segment because.
Supply chains are a little bit shorter.
The timing for that to flow through and hit our P&L is a little bit shorter as well. So I'd say, that's kind of in the order of magnitude of 90 to 120 days or so.
So we feel good about that as we as we look forward and get beyond this inflationary period.
As Keith alluded to earlier, there's a dynamic in our paint business, it's a bit unique.
See commodities rollover.
Could potentially see some margin expansion in that segment because of just the way the math works.
On the plumbing segment I would say longer term there has been the ability.
Two two.
Recoup margin on.
On inflation.
Perhaps a little bit different only because of the amount of inflation.
We're seeing right now and in particular some of our bigger businesses.
In Europe .
Put through pricing on a regular basis and they contemplate.
Maintaining margin on that so we might be able to see some of that take place.
We get out of this deflationary environment.
Okay. Thanks, a lot I appreciate the color.
Yeah.
Our last question comes from the line of Truman Patterson from Wolfe Research. Your line is open.
Keith John Good morning, and thanks for taking my questions.
First.
John I was hoping you could just give an update.
Or a state of the union on the supply chain in the United States, specifically I realize.
There are some moving parts with the China shutdowns, but hoping you can give an update of the supply chain versus either late 'twenty. One early 2022 in the U S regarding labor raw material availability transportation et cetera.
Sure. Some of you know in terms of those various aspects of the supply chain I would say, let's say this.
Things on the margin in terms of supply of material.
We're starting to see we're seeing improvement.
Again, it's on the margin and its not anywhere near back to where it was pre pri.
Some of these supply chain issues taking place.
Labor is depending on location.
Either we're seeing tightness or good supply of labor, so depending on which werent playing it happened to be.
It's a little bit variable, but it's something that we're continuing.
Ops teams are continuing to drive very closely.
We're looking at very closely but we think we're in pretty good shape from a labor position.
Position.
I would still say that it.
Shipping and freight is tight.
In North America.
Maybe we have seen very modest changes but.
Overall.
The one area that we're probably watching most closely is both inbound and outbound freight.
Okay. Thanks for that and then a final one you all I imagine you have a pretty long history of Delta plumbing operating margins.
I'm just hoping you can maybe compare and contrast 2021 are your expectations of 2022.
Compared to prior periods of elevated inflation and how margin has performed.
Have there been any notable structural shifts that maybe make the current period relatively outperform prior periods.
In terms of historical periods, obviously, we haven't seen in a deflationary environment like this in.
In base metals.
A long long time right.
Yes.
A true apples to apples comparison.
Ed.
What I would tell you is the team that we've got noted delta.
<unk> is a terrific team there on top of this.
They are driving their business both from a volume perspective as well as they are taking the necessary pricing actions, while all while balancing the supply chain issues, we talked about it on your prior question.
At the same time, driving innovation and driving the brand.
And so you know Ken and the team down there are just doing an absolutely terrific job.
Feltus tradition.
Leading the company in terms of driving both sales profits and future growth. So Keith I know, if there's anything else you're going to do I think it's.
This is a unique situation for sure.
In terms of the magnitude of the cost increase in the speed at which the cost increase hit us.
And our strategy to deal with this remains consistent which is to first.
First and foremost focus on.
Our safety of our employees and then work together with our customers and our suppliers to make sure. We're delivering the best product, we can at the best price and sometimes in particularly in situations like this it requires.
Obviously some significant.
This increases and we're going to continue to operate in that <unk>.
As we have in the past and continue to drive above market growth and the team is as John said set up to do that.
But I guess, what I would tell you is that once we get outside of this inflationary environment.
I would expect it.
The team will drive margin expansion through volume growth.
Our typical productivity initiatives that we're driving across our businesses. So this might be a little bit of an anomalous period, but once we get outside of it and I think we'll return to.
Normal cadence of activity.
Alright, Thank you too and good luck on the upcoming year.
Thanks, Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.