Q2 2022 Masco Corp Earnings Call
Good morning, ladies and gentlemen.
Welcome to Masco Corporation's second quarter 2022 conference call. My name is Bailey and I will be your operator for today's call.
As a reminder, today's conference call is being recorded for replay purposes.
Can I ask a question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press Star then two.
I will now turn the call over to David Chaika, Vice President Treasurer, and Investor Relations you May now begin.
Thank you Billy and good morning, welcome to Masco Corporation's 2022 second quarter Conference call.
With me today are Keith Allman, President and CEO of Masco, and Johnson, Masco, as Vice President and Chief Financial Officer.
Our second quarter earnings release, and the presentation slides are available on our website under Investor Relations.
Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow up.
Can't take your question now please call me directly at 301, three 782 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 reconcile 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 the call over to Keith.
Thank you Dave Good morning, everyone and thank you for joining us today.
Please turn to slide five.
We continue to execute in this challenging environment and I am pleased with our performance in the first half of the year.
In the second quarter, our topline increased 8% with growth driven by pricing and to a lesser extent volume in both segments.
Our operating profit was impacted by higher supply chain costs.
Land marketing expense increases and unfavorable foreign currency.
Commodity and other inflation was mid teens in the quarter, but we expect this to be a peak level as we anniversary inflation that began last year and we are beginning to see declines in certain input costs in the spot market.
Importantly, with our continued pricing actions, we have begun to recover the price cost lag that we experienced in the back half of 2021.
Additionally, we continue to leverage our SG&A as SG&A as a percentage of sales improved 90 basis points to 15, 3%.
These actions contributed to sequential margin improvement of 140 basis points to 17, 6% for the quarter.
Our earnings per share for the quarter was $1 14, which matched prior year's earnings.
Turning to our segments.
Plumbing grew 7% in local currency against a 48% comp with.
With 7% growth in North American plumbing, and 8% growth in international plumbing.
North American growth was led by our Spa business that continues to capitalize on strong demand for its products.
International plumbing markets remained solid with strong growth across Europe , and then China during the quarter.
In our decorative architectural segment sale.
Sales grew 15%.
<unk> continued its strong performance with low teens growth in DIY paint.
Approximately 40% growth.
Propane.
Yes, why paint growth was mostly due to price as we continue to see DIY paint volumes normalizing.
We expect full year DIY paint volumes to be in the range of 2019 volumes.
Propane volumes remained strong as we continue to gain market share in this market.
Demonstrating the compelling offering that we have developed along with the home depot.
I'm also very pleased that for the ninth year in a row bear was named the number one rated interior paint by it.
A leading third party testing agency.
In addition to the top spot bear.
Bear took all of the top four rankings.
This is a testament to the quality and value proposition that behr paint brings to both the DIY and pro paint markets.
Quality.
<unk> ease of application durability coverage and value are extremely important selling points for both the DIY and pro customers.
Turning to capital allocation.
We repurchased $550 million of our stock during the quarter through open market purchases and an accelerated stock repurchase transaction.
This brought our total share repurchases to over $900 million for 2022, ordinarily 7% of our shares outstanding.
At the beginning of the year.
This likely completes our repurchases for the year as we will use our free cash flow to repay the $500 million term loan we used to fund the ASR.
Now let me address what we are seeing in terms of demand in our markets.
Largely as expected.
Demand or actual sellout for many of our products moderated during the second quarter.
Across most of our categories, we expect volumes to be down modestly in the second half of the year with growth driven by pricing.
On the cost side certain input costs, such as labor and freight remain elevated.
Additionally, labor and freight availability continues to be inconsistent, making a challenge.
<unk> to operate efficiently.
Lastly, the U S. Dollar continues to strengthen resulting in lower operating profit dollars than we forecasted.
With these considerations in mind, we are narrowing our earnings per share expectations for the year to be between $4 15 to $4 25 per share.
From our previous expectations of $4 15 to $4 35.
We are closely monitoring market dynamics, and we will take action if demand falls below our expectations that said.
We believe there are numerous positive structural factors related to housing that will be supportive of increased repair and remodel activity over the next few years, even if there is a short term economic slowdown.
We are on the edge of the law.
Large 75 million person millennial cohort forming households in entering the housing market.
$2 7 million more homes will reach the prime remodeling age of 20% to 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 consumers and homeowners have strong balance sheets with more than two trillion dollars in savings and home equity values at all time high.
All of these structural forces provide tailwind for our repair and remodel business.
Now I'll turn the call over to John for additional detail on how our second quarter on our second 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.
Other one time items.
Turning to slide seven.
Delivered another strong quarter with sales, increasing 8% against a robust 24% comp.
Net selling prices increased sales by 10%.
Higher volumes increased sales by 1%.
These were partially offset.
Currency impact of 3%.
Sales grew 11%, excluding the impact of currency.
In local currency North American sales increased 11%.
This performance was driven by strong growth in DIY and pro paint as.
As well as spas faucets and showers.
The main drivers of this growth were increased net selling prices, which increased sales by 10%.
Higher sales volumes, which increased sales by 1%.
Local currency international sales increased 8%.
11% excluding divestitures.
Net selling prices increased sales by 7%.
Higher volumes increased sales by 4%.
Gross margin of 33% was impacted by higher year over year commodity and logistics costs in the quarter.
We anticipate that gross margin will continue to face pressure in the third quarter.
With year over year improvement expected in the fourth quarter.
Our SG&A as a percentage of sales improved 90 basis points to 15, 3% due to operating leverage and continued cost discipline across their businesses.
Operating profit in the second quarter was $414 million and operating margin was 17, 6%.
Sequential improvement of 140 basis points.
Operating profit was impacted by higher supply chain costs marketing and currency.
Partially offset by higher net selling prices and the incremental volume.
Our EPS of <unk> 14 in the quarter matched the second quarter of 2021.
Turning to slide eight plumbing growth was 7% in local currency I guess, a robust 48% comp in the second quarter of last year.
Segment sales grew 8%, excluding the net impact of currency acquisitions and divestitures.
Pricing contributed 7% to growth and volume contributed 1%.
North American sales increased 7% in local currency.
This performance was led by Watkins wellness as they continue to capitalize on the trends towards wellness.
We are living.
Delta also contributed to the increased sales in the quarter.
Livery growth against the double digit comp.
International plumbing sales increased 8% in local currency, 11% excluding divestitures.
Hans grew grew sales across almost all of their markets. The key markets of Germany, China, France, and the UK continuing to drive exceptional results.
Segment operating profit in the second quarter was $238 million.
Margin was 17, 3%.
Operating profit was impacted by higher supply chain costs marketing and currency.
Partially offset by higher net selling prices.
Turning to slide nine.
Decorative architectural sales increased 15% in the second quarter.
Our propane business delivered another outstanding quarter.
With growth of approximately 40% propane offering high quality products continue to gain share the pro customer.
The strong operational execution and continued investments we are demonstrating our ability to retain and grow our penetration with the pro customer.
Our DIY business sales grew low teens.
However, DIY volumes normalize in the second quarter, we now anticipate second half DIY paint sales declined modestly.
Operating profit was $198 million in the quarter up $10 million or 5% in <unk>.
Operating margin was 22%.
This performance was driven by higher net selling prices the incremental volume.
We offset by higher commodity and supply chain costs and marketing.
Turning to slide 10.
Sheet is strong with net debt to EBITDA at one nine times, even with the additional $500 million borrowed.
We borrowed to fund the accelerated share repurchase transaction, we executed during the quarter.
We ended the quarter with approximately $1 $4 billion of balance sheet liquidity.
Working capital as a percent of sales was 18, 9%.
Working capital was impacted by higher inventory levels to meet demands of our customers cost inflation.
Ladies and receipt and delivery of material.
Through focused execution, we continue to balance our inventory levels with demand you 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 $550 million share.
Share repurchases during the second quarter.
Year to date, we have deployed approximately $914 million to share repurchases returning to approximately $16 6 million shares.
Were almost 7% of our shares outstanding at the beginning of the year.
Do not expect further share repurchases this year.
We used our free cash flow in the second half to repay the $500 million term loan.
Finally, turning to slide 11, let's review our outlook for 2022.
Given moderating demand and additional foreign currency headwinds.
Now expect full year sales growth for <unk>, which would be in the range of 5% to 7%.
Versus our previous guidance of 6% to 10%.
Due to lower sales volume and higher supply chain costs, we now anticipate full year operating margins to be seven approximately 17%.
While we do anticipate margin expansion in the second half of the year.
This will be weighted to the fourth quarter.
In our plumbing segment, we now expect 2022 sales growth to be in the range of 3% to 5%, including foreign currency.
Our previous guidance of 3% to 7%.
Given the current exchange rate.
Currency is expected to unfavorably impact plumbing revenue.
Approximately 3% from $165 million.
We now anticipate full year plumbing margins will be approximately 18%.
Lower from previous guidance due to higher supply chain inefficiencies.
Slightly lower volume assumptions.
In our decorative architectural segment.
We expect 2022 sales to grow in the range of 9% to 11%.
Versus our previous guidance of 10% to 14%.
Looking specifically at peak growth for 2022.
We currently anticipate our DIY paint sales to increase mid single digits.
Propane sales increased strong double digits.
We now expect full year decorative architectural margin to be approximately 18%.
As we previously discussed in this segment pricing actions typically only recover the dollar amount of inflation.
And as a result.
Else equal operating profit dollars remained neutral from cost recovery pricing actions will result in margin compression.
Finally, as Keith mentioned earlier, our updated 2022 EPS estimate is $4 15.
To $4 25.
Which represents 14% EPS growth at the midpoint of the range.
This assumes a 233 million average diluted share count for the year.
Additional modeling assumptions for 2022 can be found on slide 14 of our earnings deck.
With that I would like to open the call for Q&A.
Operator.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
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.
Our first question today comes from the line of Stephen Kim from Evercore ISI. Please go ahead. Your line is now open.
Thanks, very much guys. Appreciate it was.
Was curious if you could talk a little bit about the I know you gave a lot of info there.
Hopefully I got it all down right, but when you talked about in the Dec arc segment I believe pain.
You said you expected second half volume to decline modestly.
I just wanted to see if you could give us a sense for was that inclusive of the pro business. Maybe you could just re review that what Youre volume specific outlook is within paint.
And maybe breaking out DIY versus pro just so we're clear.
Sure Steve.
As you think about demand.
We saw strong demand in the quarter as we think about.
Going.
Forward DIY versus pro as you might expect we've had some strong comps in the pro side of the business.
We're starting to see some pretty significant comps in Q3, I think our pro comp against Q3 of last year's like 45% growth. So while we still anticipate growth in the pro and the back half of the year, obviously, we won't be posting the strong comps that we posted the last three or four quarters.
Thinking about our <unk>.
Our DIY business, we do think our DIY.
Business will be up in the back half of the year.
Ed.
It's driven by.
Rice with volumes declining in the back half of the year.
Yeah.
Okay.
Yes.
Volume will be.
It will be down.
Yes down probably double digits low double digit Steve.
What would be down double digits, sorry, I spoke over here.
Yeah, DIY paint volumes will be down low double digits in the second half of the year.
Okay.
That's what I needed okay, great. Thank you for that I appreciate it.
And then when you look at the plumbing business can you give us a sense just housekeeping wise, what was the FX and the acquisition divestiture impact on sales in the quarter.
And when Youre looking forward.
And that business do you anticipate that you will be able to.
More than cover.
Your cost inflation in that business.
Or should we simply be looking for.
Just recovering the cost dollar for dollar in the back half of the plumbing business and as we look into 2023, I know, we're not giving guidance on that however would it be reasonable to think that with the movements, we're seeing in commodities.
And perhaps a little stickiness in price that we might actually see some positive carryover effects.
In 2023.
Steven It's Keith typically we do.
Recover.
With price in this segment, we do recover margin as well.
You're exactly right if there is.
Back in commodities, we would expect that to be a tailwind for us.
Yes, Stephen maybe to get a question in the beginning.
I think the first part of your question had to do with revenue and the impact of.
Acquisitions and FX.
Roughly speaking these are kind of rough numbers FX, roughly 2% of the acquisitions of 1%.
Perfect. Thank you so much.
Thank you.
The next question today comes from the line of Matthew Bouley from Barclays. Please go ahead. Your line is now open.
Hey, good morning, everyone. Thank you for taking the questions.
You mentioned that the top.
Speaking around sellout sellout moderated in the quarter I guess.
One could you kind of speak to the comparison of.
Sort of sell in and sell through there through the quarter and part to really what I'm getting at is we think about the second half.
Died.
Is that basically your view of sell out or is there any assumption around additional inventory destocking there. Thank you.
But we did we did.
Catch up on our channel inventory, a little bit here year to date through the second quarter.
I think that was.
That was planned and we did that.
Help improve our service to the customer and to the consumer.
In terms of the forward look as it relates to our guide, we're really not anticipating inventory fluctuations to have much impact.
On that.
Got it okay. Thank you for that case.
Second one it sounded like on the on the international business and Hans growing.
Strong trends there.
Divestitures and currency I guess looking forward clearly a lot of concern around energy costs in Europe and in Germany, specifically, I guess could you sort of speak to your assumptions around the second half in the international business, both on the energy side and sort of the knock on effects to the European consumer.
Hi, there thank you.
Okay.
Well, we certainly are in no position to make an overall crystal ball I'll call. It a.
Economic call in Europe .
But I will tell you that we continue to see strong demand, particularly in key markets.
Forehands growing central Germany, China continues to perform very well for us France, the UK et cetera. So we're counting on continued good solid growth.
From Europe , and our performance is quite strong.
With regard to the overall energy.
The team has done a really good job and we've secured the majority of our energy requirements from renewable energy for.
This year and going into next year.
We're working hard to convert and have converted the majority of our equipment from natural gas to other sources of energy.
In terms of powering that equipment that said if there was a significant.
Set down or a constriction of energy flow into it that would be an issue that we have to manage and that would be challenge, but challenging in terms of the proactive actions that we're taking I feel confident about the work.
Is that and they've done a good job.
Maybe just a couple of other comments. In addition to Keith's comments, we are assuming higher energy input costs in the back half of the year, just given what let's take has taken place.
So we feel we can make sure thats baked into the guide.
Great well thanks, John Thanks, guys. Good luck guys.
Thank you.
The next question today comes from Mike Dahl from RBC capital. Please go ahead.
Line is now open.
Thanks, Good morning, just a couple of follow ups here.
In terms of the second half guide in my comments of the implant volumes for the second half. This relates a little to Matt's question, but can you talk about how those volume expectations compare to where you exited <unk> I know you talked about moderation through the quarter are you assuming.
Similar levels of.
Declines as you as you have most recently seen or are you embedding.
Greater declines in the back half of the year than what you've just experienced maybe over the past month or so.
Okay.
Yes, I'd say, Mike as we look at it we think things have kind of stabilized here and we think the trends as we exited the quarter, we're going to be consistent with the back half of the year as best we can tell at this point.
Got it Okay and then my second question is around the inflation dynamics I know you talked about kind of 15% high level, but this is the peak can you split that out between between your segments because it seems fairly clear if we look at some of the plumbing.
To Steve's question.
<unk>.
There could be a relief on the horizon, there may be a little stickier on.
On the paint side, but just if you could give us a little more color on the difference in inflation trends.
Between the two segments and potential timeline for.
For relief as you see it.
Sure sure Mike happy to do that.
So as you indicated we have experienced a fair amount of inflation, obviously, all year and starting actually in the basically the mid point of 2021.
As you said and we said earlier, we think we've hit a high point.
Looking at our cost basket across the various segments.
We have seen some input costs back off their highs from earlier in the year, obviously copper and zinc, which go into our plumbing products.
We have begun to decrease.
That impacts it takes about two quarters or six months to flow through and impact our financial statements.
If you consider the timing of the inflation that we experienced and now the timing of the decline in some of the commodity prices.
Not going to have much of an impact here in 2022, then will be much more of an impact.
In the first part of 2023, so that could provide a tailwind.
We go into 2023.
No other parts of the inflation basket, though are beginning to moderate as well ocean freight which is something we've talked about quite extensively on prior calls we're starting to see that begin to moderate that said fuel costs will probably offset a portion of that because over the road trucking continues to be high.
In certain other.
The components of our endpoints like packaging and pallets.
I'll continue to remain high.
On the <unk> side of our business.
We are seeing input cost be stickier.
We'll face.
Some upward pressure specifically, we're seeing that is <unk> two.
In other inputs and so we're closely monitoring that and if we have to take additional pricing actions to offset any of this inflation.
We will do so.
As evidenced by the fact that we put through 10% price in the second quarter. So.
We think we are in good position we were slightly.
Price cost positive for the second quarter.
So we're set up well, but we're continuing to monitor the situation and we'll react accordingly.
With additional pricing if needed if need be.
Yes.
That's very helpful. Thanks Chuck.
Okay.
Thank you.
The next question for today comes from the line of John Lovallo from UBS. Please go ahead. Your line is now open.
Good morning, guys and thank you for taking my questions as well.
First one is maybe just a point of clarification did.
Did you say that the DIY volumes in the quarter were actually flat, which would be a very good outcome versus your peers and if so what do you think were the biggest drivers that on a relative basis.
Yeah.
Yes.
Yes, DIY volumes for the quarter.
We're relatively flat yes.
Yeah.
John did you have a second.
Yes, I'm here John did you have a second question.
Yes, I'm sorry, if you heard my answer.
So you said, so you said that.
Missed it they're relatively flat.
Sell in.
Remember was greater than sell out in the quarter.
So yes.
So I hope that's clear.
That answers your question on uncertain.
Okay. Okay.
Just curious because that is better than what your competitors are saying and I was just curious if you thought.
What was kind of the differentiating factor there.
Yes, I think part of it John .
Comparing our results against the second quarter last year.
Second quarter last year, we had relatively soft performance in DIY because of the Texas freeze and so as you think about the year over year comparison, we.
We are catching up.
On that and so that's why we have better sell in and sell out in the second quarter.
Yeah.
Okay. Thank you and then second question Glenn.
Revenue.
Now that's skewed when you look at revenue and.
Dec Dec arc.
And the growth in second quarter, it was roughly 80% price and about 20% volume, but then when you look at that time were relatively flat in DIY.
Got it Okay and then.
In terms of just.
Sure any pressures are you seeing any trade down for consumers' needs.
Neither of your segments.
Not really it's been pretty stable.
Worked hard to to reduce the impact of <unk>.
Moving along the assortment from from from the lower priced at a higher price from pro the DIY for example, so theres still exists.
Some impact of mix as we see that kind of movement, but we really haven't we haven't seen evidence of a trade down when we look across the volume of our big ticket items like Spas. For example, we continue to see strong demand there strong backlog.
Of about 25 weeks.
So.
Which is greater than we would typically see in a normalized environment.
On our.
In China, where we have really are focused on the higher end products.
<unk> sees there with a good growth in China and that continues despite the market slowdown that popped back very nicely. So we're seeing good demand there and we are seeing the demand on the lower end of our assortment. So overall have not seen evidence of a significant trade down.
Don't expect any as we move forward through the year.
Okay. Thanks, guys.
Thank you.
The next question today comes from the line of Susan Mcclary from Goldman Sachs. Please go ahead. Your line is now open.
Hey, good morning, everyone.
My first question is building off of Johns question. There as you take a step back can you talk a bit about the overall state of the consumer how it changed during the quarter what their willingness to spend is on housing.
Any signs of elasticity as the pricing continues to come through across the product categories.
Well, we did we did see some moderation of demand and we are seeing some signals of slowdown as we look at.
The various leading indicators if you will like website searches and those sorts of things that we watch closely.
And there was.
A moderation that I would say, while we don't break down specific end quarter trends I would say that mid quarter, we saw a moderation in them then.
Fairly flat since then and it's consistent across our categories.
For the specific categories.
Fairly consistent across the channel so overall.
I think a consistent moderation of demand there's some categories for us at a buck that trend we talk about our propane sales that was very strong on our spot sales.
We're very strong in international book continues to perform.
Very well for us, but faucets and showers hardware lighting DIY paint I would say.
We have seen a moderation of demand as I said that happened kind of mid quarter and then.
Has been flat.
Flattish.
Coming through the rest of the quarter.
We expect volumes to be down modestly in the second half.
Maybe a little less in plumbing, a little bit more decorative and I'll remind you that.
Plumbing had I think it was a 16% comp in Q3 and decorative had a 15% comp. So you can factor that in as you think about the segments on a quarter basis.
Maybe one thing I would add to keith's comments.
At the consumer the consumer the consumer continues to look healthy to us.
We continue to see strong balance sheets.
Home equity continues to look good.
In terms of your your question about elasticity.
If you think about our portfolio of low ticket repair remodel products.
Yes.
Consumers.
Have the flexibility to buy our products in a lot of our products.
From a break fix purposes.
So.
We're not seeing the consumer bend.
As a result of the higher prices.
They're feeling in the market at least for our products.
Okay, that's very helpful color.
As a follow up as we do you think about the macro environment shifting.
Early steps, you're taking to prepare the business or what are the things that you're watching for to indicate that you may need to make some underlying changes in terms of perhaps cost structures or those kinds of things looking out.
At the end of the day ultimately it would be demand for us.
That would be the trigger for us to implement our contingency plans and Thats really a.
A part of our ongoing business planning process and this is something that.
We all have experience in dealing with it's part of what we do so.
<unk>, certainly variable cost and discretionary cost that we could execute on the SG&A front for example.
And back.
Growth investments are hires in looking at that variable cost and depending on the depth of that as we've proven the ability to do it we could get into the fixed cost as well. So we have contingency plans in place we watch.
Leading indicators I mentioned.
Site traffic, we have deep access and relationships in the channel as it relates to.
Consumer tick.
Ticket et cetera, and we watch those leading indicators, but fundamentally.
We don't we wouldnt execute cost outside of a leading indicator, we wait to see where the demand goes underwear.
Very keenly watching that.
As part of our standard process meeting on a regular basis with the businesses to review their contingency planning. So this is yes.
This is this is certainly is an area where we have.
<unk> and its part of our business.
And that's fundamentally how we're looking at it having said that.
<unk>.
Portfolio as we reconfigured it with what John mentioned with the break fixed component with the fact that it's lower ticket and their high Bang for the Buck coupled with the.
Fundamental shifts that we've seen in terms of how people buy and products for the home and how they view their home we feel good about the long term aspects of our portfolio.
Okay. Thank you very much good luck with everything.
Thank you.
The next question today comes from the line of deepening with Haven from Wells Fargo Securities. Please go ahead. Your line is now open.
Good morning, everyone. Thanks for taking my question.
The first question is on price cost.
You talked you mentioned you are try slightly price cost positive in the quarter.
Is it true across the segments.
Especially in plumbing comment specifically, because it doesn't look like price fully offset intra quarter headwinds from higher costs.
Yes deepa.
We were priced slightly price cost positive across both segments.
Plumbing.
Decorative architectural I think the thing that you might.
You might focus on a little bit more so we did have some operational inefficiencies.
In the second quarter in plumbing, it's Keith.
Referenced in his prepared remarks, specifically we had some.
Shipping.
Some labor inefficiencies in the second quarter that probably will create a more of a headwind.
For the plumbing segment.
You probably are you there.
Oh, Hey, sorry, I was on mute I apologize for that.
Just a follow up can you talk through some of and.
Some metrics that might have positively surprised you negatively surprised you on the quarter I mean.
Yes.
I think I'm looking at the magnitude of some magnitude.
Change that.
Possibly surprised you and if that changes in the second half.
The year.
We continue to perform well in Europe .
So so much.
Surprise.
We've watched that performance developed and that was good to see.
For our franchise to be able to grow like we did in Europe , and China I think that was.
Very solid.
We've talked about now for a number of quarters about how we are working very hard to drive stickiness in the propane demand as evidenced by our continued growth and share gain in that.
Part of our business that the team is doing an outstanding job together with our channel partner to.
Really.
Take advantage of the opportunity that we had with our supply chain excellence when we when we had an opportunity to.
<unk> share of wallet of some new customers.
To really show that more that they're paying.
We've had positive response, there so I think our continued growth.
In Europe , and our continued stickiness and demonstrated capability to keep our business that we're gaining in the pros.
Positive aspects of the quarter for sure.
On the negative side, the operational inefficiencies that I, just mentioned in plumbing, where probably a bit more persistent than we had expected.
It's been a very dynamic environment as you well know.
In the last couple of quarters, and we thought we would see some improvement and obviously, we didn't see an improvement in the second quarter. The improvement that we've anticipated. The question. So we probably expect some of those inefficiencies to carryover into the third quarter in the plumbing segment.
It would be continuing to be a bit of a headwind for that segment.
You go into the third quarter, but we do think things get better as we roll into the fourth quarter.
Thanks, So much further color very helpful. Good luck.
Okay.
Thank you.
The next question today comes from the line of Keith <unk> from <unk>. Please go ahead. Your line is now open.
Thank you questions on international plumbing strong numbers in the quarter you highlighted it in the prepared statement.
It's been a lot of fear around Europe .
It could be coming are you getting any indications that this pace of business could fall off in the second half of the year given some other energy pressure and various other things going on the continent.
Yes.
Yes.
Talk a little bit earlier Keith.
A dynamic environment and we don't have a crystal ball. So we're focused on.
Being fleet of foot and watching and being ready to make adjustments. If there was some sort of significant economic.
Changes.
And it's a dynamic.
Environment for sure, but we are not saying that currently we're not seeing that reflected in a trade down and we continue to see good robust demand.
Through Europe .
We are taking the contingency plans and putting those in place in terms of conversion as I mentioned from natural gas to other sources of energy, we procured the majority of our energy through 'twenty three from renewable sources. So the team is doing a good job too.
Prepare for <unk>.
Address the current challenges in terms of seeing indications of what might happen going forward.
We are working hard to be ready for what might happen, but we're not seeing any indications of.
It turned out in Europe at this point.
The other thing I would add to Keith's commentary and if you think about homes gorilla.
A good portion of their revenue comes from project sales.
Think about hospitality hotels going up a lot of that takes place.
And youre seeing in countries outside of Europe Asia, the middle East So theres a good fundamental baseline in demand there.
We do sort of projects in Europe , and even when the consumer market turns down. These projects continue to have to be finished and so that will provide some basis of support per homes closed during the fourth.
Okay. Thank you.
Thank you.
Question today.
It comes from the line of David Macgregor from Longbow Research. Please go ahead. Your line is now open.
Yes, good morning, everyone.
You talked about the gross profit margins and the fact that theyre going to be under a little more pressure in <unk> and that would expect to improve a little more than <unk> I Wonder if you could just unpack that a little for us and talking about some of the puts and takes that are behind those dynamics.
Yes, certainly there is theres a couple of things that are happening there. David one is we've talked about the cost recovery element of our of our deck.
Decorative architectural business where are we.
Cook.
The dollar cost of inflation and so obviously, we talked about and as we've talked historically about.
A 5%.
Inflationary increase has about 100 100 basis points.
Impact on our margins in the segment and if you think about the fact that we had mentioned we had mid teens.
Inflationary impact in the second quarter.
Thats, a big contributor too.
Some of the gross margin pressure that we're feeling on top of that the second thing that would be impacted would be the second.
Were volumes that were poor shadowing.
Those two I think.
Two big things that are.
Impacting our gross margins in the second half.
Okay.
That's helpful. And then just as a follow up I guess.
Given the fact that the macro seems to be softening up here a little bit I'm, just wondering to what extent.
You are seeing your channel partners tapping the brakes on replenishing inventories.
I'm just wondering if you can talk about what youre seeing right now in terms of channel inventory levels, and what you're expecting in terms of fluctuations around that over the next two to three quarters.
It's really a mixed bag in some cases, we're still a little light on where we'd like to have our channel inventories for the most part we've caught up.
I think the inventories are in pretty good shape as we worked to get inventory in place to better serve the customer and to meet the requirements a little bit of a.
Pull down.
Not atypical that some of our bigger plumbing wholesale.
Our customers approach their fiscal year end or fiscal quarter, Ed that there'll be some pullback in inventory. So there is a little bit of a pullback I would say.
Plumbing wholesale but by and large I think it's fairly stable.
Okay.
Thanks very much.
Yeah.
Thank you.
Our next question today comes from the line of Adam Baumgarten from Zelman. Please go ahead. Your line is now open.
Hey, good morning, everyone.
Maybe starting in paint just given the slower DIY outlook in the second half do you expect promotional activity to pick up in any meaningful way.
That really is a decision of our channel partner I mean, we obviously are together and that is in the discussions and the strategy around it in some cases.
Based on our partnership will choose to participate in that and to help fund some of that but.
As we sit right now I would not expect a material change in the promotional levels, but again, that's a choice of our customers.
Okay got it and then just switching gears to plumbing, just maybe if you could give us some color around the order patterns or showroom traffic that youre seeing in the spa business.
Yeah.
It continues to be robust really.
Our backlog is.
As I mentioned around 25 weeks and staying there.
<unk> have been pretty consistent.
Haven't seen a material movement up or down there so I would say consistent through the quarter.
Got it thanks a lot.
Thank you.
The next question today comes from Phil <unk> from Jefferies. Please go ahead. Your line is now open.
Hey, guys I guess, if demand does soften a bit what are some of the levers that you guys are talking about the contingency plan.
Perhaps for next year and then when we think about decremental margins in that softer demand environment. How should we think about that Jon and then do you anticipate pricing holding in that environment.
So.
As you think about our contingency plans and taking a couple of different flavors right.
Depending on.
To the extent of the softening of demand. Some things you guys are simple belt tightening you pull back on.
Open had been.
Hey.
Count requests pullback in advertising travel and entertainment and things like that.
If if the.
Decline is more persistent and deeper and longer than you expect and then you have to look at the structural aspects of the business you have to take out headcount reduced shifts things like that and so we'll see how.
This plays out in terms of our decremental margins.
It should be fairly consistent with our incremental margins.
They are kind of in that 25% 30% range.
We may not have that perfect alignment there the first quarter of a decline.
You can't always get the costs out as quickly as volume has declined but I'm going to try to to to marry those up.
As best we can.
The one thing that may be helpful. As we go into.
If there's a recession typically input cost declines so that could be a little bit of an offset to some of those decremental margins.
That's the way, we think about Kitano, if there's anything else you'd like to add I talked about.
The fixed and variable component of the cost plans that we have in place and it really depends.
On the depth of it so I think I think we've hit on that pretty good.
Cool and then pricing in that environment.
Pricing in that environment, I think it depends on again.
What we're seeing in the marketplace.
If it's a rare instance in a recession if commodities.
We're doing we would have to push through pricing.
We typically.
We do have.
By segment.
Areas, particularly don't give back a lot of pricing.
On the plumbing side of our business. Obviously, if there was deflation in inputs, we've got that cost recovery on an inflationary reverses itself in that environment and actually that's where you start to see margins expand in our decorative architectural segment.
Got you that's really helpful and then on.
Plumbing, if I heard you correctly.
It sounds like China is still quite strong certainly that part of the world is seeing a lot of Covid Lockdowns I'm impressed that it's held up so well and any color on how you can imagine for that and how youre thinking about that business in the back half.
Yes. Thank.
Thank you Neil that was real solid performance for us in China, particularly given the shutdown.
Period that was there in the quarter I think it really gets back to a combination of three things, we're executing very well the team there has been a real nice bright spot for us.
So good good folks there that are focused on growth no matter what is thrown at them and the shutdown was a significant secondly.
We are focused on the higher end segment and we believe we're the share leader in that premium segment and that tends that too.
Have less volatility and I think more consistency and then thirdly, when you look at where.
We're selling to in terms of end use it's primarily and as John mentioned into project business around hotels are in multifamily et cetera, which has the ability to to jump right back.
After that shut down more so than say, if we were into the lower price point that dependent more on retail traffic. So those three things combined have really come together to give us a very nice story in China.
Okay Super Thank you.
Thank you.
The next question today comes from the line of Gary <unk> from loop capital.
Please go ahead. Your line is now open.
Oh, hi, Thanks for taking my question higher level question for me just wanted to unpack the comment.
<unk> paint volumes are coming back down to 2019 will double so I'm just wondering if.
You are speaking at this point 2019.
Slide off for that business.
In one hand, you got strong demographic trends, but on the other.
Have you had a big surge in DIY demand during the pandemic, so I guess, a little bit higher level I'm, just kind of what the right baseline could be for that business.
Yeah.
Yes, I think that's exactly how we're thinking about it we had.
Mendes DIY demand.
As the pandemic hit and folks put more of a focus on their home and had.
More time, and then we've seen some shifts as the pandemic.
Restrictions lesson was that a move towards pro and we're very happy with how our pro business.
Has.
Been able to take advantage of that with respect to capacity and supply chain performance, but also keep that as it relates to quality and service and having a good value proposition for the pros and the stickiness of that share that we gained so.
When we look going forward with the millennials coming in informing houses and we know that Theyre diyer and they're DIY ers for multiple projects based on our research not just one and done so to speak so I think that's a very.
The impact of Covid as it relates to how those DIY or as view their home and invest in their home in the equities that they've developed and their home in their savings accounts that we think for the next couple of years for sure that the DIY volume is going to have some nice tailwind because of those structural factors. So yes, we're looking at kind of the.
Great growth during the pandemic, we've come back now to let's say a 2019 level in terms of volume we see this as the jump off point for further growth in DIY.
Great Thats helpful.
Follow up on capital allocation, well I guess I'll take that question you're focused on.
Off the term loan.
And the second half of the year, so you'll pause on repurchases, but what does that mean for M&A moving forward to take a pause as well.
The debt pay down.
No no I mean, we're continuing to look at M&A.
We continue to have our teams cultivate potential acquisition candidates.
I would expect in this environment, where things get a little choppy.
Fewer there are fewer candidates for sale that said our balance sheet is set up.
We're in a position to execute on.
Strategic M&A, if the right candidates were to emerge in this environment.
Understood. Thanks for the help.
Yeah.
Yes.
Thank you.
The next question today comes from the line of Kenneth <unk> from Keybanc. Please go ahead. Your line is now open.
Good morning.
Hey, Ken good morning.
Okay.
Good morning.
Okay.
I don't want to get that.
Hey.
Two questions I had.
Talking about <unk>.
'twenty one versus nicely can you just maybe say.
Is that accurate or is that your total paint volumes and then.
Could you maybe just level set like how youre thinking about.
Same comment.
First half.
This year first the second half just so we can see how that seasonality and all this COVID-19 stuff that's working through.
You have that.
I think the bigger question of analysis.
You guys sure why thats not a younger Yang situations, because theres a lot of small regional competitors in my view that our ceding share.
So can you really kind of maybe talk about where you are today versus 2019 and pro initiative. It's not doesn't have to be sure. There is a bunch of private smaller regional companies.
<unk> next year can you, maybe just give us a little context around.
That's because obviously as you guys had raw material availability and gained share because people came in and now they are staying with you I think sometimes the dialogues just between two data points rather than the broader picture. Please thank you.
Yes.
We're focused on our business and.
On the targeted customers that we have where our value proposition works the best as part of our partnership with with the home depot.
And.
It's challenging as I've consistently talked about in terms of quarter to quarter.
Market size determination with any kind of accuracy, but when you look at our growth rates, particularly with pro.
There is no question that we're gaining share in pro and we've done it now for.
Two to three quarters in a row and demonstrated I think some stickiness.
Regards to competition, we have very strong competition in our in our.
And that segment I think it makes us better very respectful of them with regards to where our volume is coming from.
Sure.
I really don't have an answer for that.
We know we are outgrowing the market, we're gaining share you're exactly right. There's there's regional competitors throughout the country, but we're really focused on how we can how we can best serve our customer and.
While we understand market sizing, it's difficult on a quarter to quarter basis, I think it's pretty clear, we're gaining share and feel good about the business now and then.
Moving forward.
The structural aspects of DIY that we talked about the <unk>.
That we are relatively low share in pro and we're demonstrating.
The ability to grow together with our channel partners. So that's that's.
That's how we view that's how we get it.
Thank you.
Yeah.
Thank you.
The next question today comes from the line of Ralph Jefferson from Bank of America. Please go ahead. Your line is now open.
Hi, good morning, Thanks for taking my question.
First as you look at your Capex investments for 2022 are you adjusting any of your capacity expansion plans to reflect the moderating demand or changing macro environment.
Yeah.
No.
When you look at the major projects, we have and where their focus.
European plumbing business, our spa business.
This is.
Investments that will start to.
Begin to ramp up in 2023 and will reach full.
Capacity until after that so.
While we're certainly aware and are keenly watching.
What's happening in the short term here as it relates to.
A potential slowdown or a pullback and we have contingency plans in place that we talked about and we have an experience base and our leadership team that has operated in this environment. Several times. So we're confident in that but we're also confident in the fundamentals of our low ticket DIY repair and remodel.
The pro aspect of our of our business.
For the long term and it has strong fundamentals.
Strong correlations to what we think are a positive tailwind.
Tailwind so no we're not we're not going to pull back on these important capacity increases for us because.
Where they are what business, there and what geography, they're in the office, we have overall in the long term of our business So no change to that.
The only thing.
Ed Good comments is that we generate.
Our high cash flow generating company.
The amount of dollars that we allocated to Capex was relatively light compared to our free cash flow. So we have the free cash flow to fund these without really pulling back on any other investments that we need to make across the business.
And most of the most cases, where we look at this capital there are step wise, where we can.
Begin to capacity, let's say, the new factory with various amounts of equipment and staffing. So it's not an all or nothing thing as it relates to the total investment, but we have no plans right now to fall back on our capacity Capex rather.
Okay that makes sense and then the guidance implies.
<unk>.
The plumbing margins up into the second half of the year versus the.
First half.
Can you just.
Maybe help us understand how much of that is lower inflation.
From on the metal side or versus additional price realization or additional price hikes that you've announced in the first half of the year.
Yes.
As I think about it.
The improvement in the back half of your employment Youre going to be Q3 margins. My guess would be very similar to Q2s and Q4.
Improved significantly compared to Q4 of last year. So.
I think.
The fundamental difference is the improvement in performance in the fourth quarter.
Relative to the fourth quarter of last year.
Sure.
The pricing.
The improvement in commodity position really will not be much of an impact in the back half of the year, that's really going to be a 2023 event just given the length of our supply chain and the fact, it takes about two quarters for that benefit to flow through and hit our P&L.
Yeah.
Okay. That's really helpful. Thank you.
Thank you.
Our final question today comes from the line of Mike Rehaut from Jpmorgan. Please go ahead. Your line is now open.
Hi, Good morning, guys, Doug worldwide for Mike I was just wondering if you guys could give more color on the supply chain. Currently I know you guys have mentioned earlier that you believe inflation has peaked so I'm just wondering in terms of the supply chain moving forward and maybe comparing it to earlier in the year in parts of <unk>.
Last year, you know, where you guys see yourselves in terms of of that battle.
I think.
When we think about it in terms of pricing we have.
We're seeing as John mentioned in an earlier question, we are seeing some pullback.
And brass and copper and zinc and that sort of thing, but we're also seeing some pressure in other spots of the business.
Oh, two special camera specialty chemicals in our paint business. So we are still very attuned to the relationship to the commodity.
Inbound pricing and the pricing that we need to have for our customers and what we're saying.
Keenly aware of that.
Where the supply chain is.
Frankly, it's a little tougher than we expected this quarter. When we were sitting here a quarter ago thinking about it is in terms of labor.
Costs and freight costs.
Importantly, beyond the cost of it it's really the availability of those two aspects.
<unk> of our input and when you have.
Freight that is.
Less predictable the delivery times as I think we're all saying you've got our personal lives where the the delivery times of inbound.
Product is not as reliable fill rates. The lead times are more challenge that puts a challenge to the rhythm of manufacturing into the rhythm of our supply chain.
Did see that in plumbing this.
This past quarter. So I think that's really what I would highlight that has changed.
Thank you guys. Good luck.
Okay.
Thank you.
This concludes today's Masco Corporation's second quarter 2022 conference call. Thank you all for your participation you may now disconnect your lines.
Okay.
Okay.