Q3 2022 Masco Corp Earnings Call
Propane and will continue to capitalize on the significant growth opportunity.
Moving on to the overall demand picture.
Pos in incoming orders slowed more than expected late in the third quarter across most of our product categories and we anticipate the slowdown to continue into the fourth quarter.
In the third quarter, we also experienced higher operational costs, mostly in plumbing that.
It will continue into the fourth quarter.
These operational costs include higher than expected freight and material costs due to persistent inflation.
As well as production and absorption inefficiencies associated with changing volume levels.
Lastly, the U S dollar continues to strengthen.
Which will result in lower revenue and operating profit dollars than we previously forecasted.
Because of these dynamics, we are lowering our earnings per share expectation for the year to $3 70 to $3 80.
From our previous expectation of $4 15 to $4 25.
We are enacting plans to address lower volumes and elevated operational costs.
While market conditions are softening.
We believe we are well positioned to outperform in more challenging times and deliver long term shareholder value.
Our portfolio lower ticket repair and remodel oriented products service, both DIY and pro customers and we have product channel and geographic and price point diversification to provide stability and resilience through a cycle.
We've taken significant pricing actions and what continue to recover cost inflation experienced in 2021, and 2022 as certain commodities and cost pullback from their highs such as copper zinc and ocean freight.
We continue to invest in our leading brands and innovation to capture share.
We have experienced agile management teams that have successfully navigated uncertain economic environments before and we have a strong balance sheet cash flow and liquidity that can be used to our advantage.
This confidence in our business as exemplified by the new $2 billion share repurchase authorization approved by our board of directors.
This authorization is a continuation of our capital allocation strategy.
First and foremost reinvest in our business to drive profitable growth.
Second.
We maintain a strong investment grade balance sheet.
Third pay a relevant dividend with a targeted 30% payout ratio and fourth.
Deploy excess free cash flow to share repurchase or bolt on acquisitions.
We have consistently executed on this strategy to drive long term shareholder value and we'll continue to do so.
I'll now turn the call over to Jon for.
For additional detail on our third quarter results and full year outlook John .
Thank you Keith and good morning, everyone.
As Dave mentioned in my comments today will focus on adjusted performance.
Excluding the impact of rationalization.
Other one time items.
Turning to slide seven sales in the quarter matched prior year.
Excluding currency grew 3%.
Selling prices increased sales by 9%.
We offset by lower volumes, which decreased sales by 6%.
In local currency North American sales increased 3%.
This performance was driven by strong growth in propane as well as in spas.
Higher net selling prices increased sales by 11%.
Partially offset by lower volumes, which decreased sales by 8%.
In local currency international sales increased 5%.
Net selling prices increased sales by 4% and higher volume increased sales by 3%.
Partially offset by a mix impact of 1%.
Our gross margin of 31, 5% was impacted by higher year over year operational costs in the quarter.
We anticipate that gross margin will continue to face pressure in the fourth quarter, but will improve year over year.
Our SG&A as a as a <unk>.
Percentage of sales improved 110 basis points to 15, 6%.
Operating profit in the third quarter with $351 million and operating margin was 15, 9%.
Operating profit was impacted by lower volumes higher.
Higher operational costs and currency par.
Partially offset by higher net selling prices.
Lastly, our EPS in the quarter was <unk> 98.
Turning to slide eight plumbing.
Plumbing sales were flat to prior year.
Excluding the impact of currency segment sales grew 5% against a healthy 15% comp in the third quarter of last year.
Pricing contributed 7% to growth and volume decreased sales by 2%.
North American sales increased 4% in local currency.
This performance was driven by strong spar volumes and pricing actions across the segment.
Partially offset by lower volumes in other product categories.
International plumbing sales increased 5% in local currency against an 18% comp from last year.
Growth was led by strength in China, with most European markets roughly flat versus prior year.
Segment operating profit in the third quarter was $220 million and operating margin was 16, 6%.
Operating profit was impacted by lower volumes higher.
Higher operational costs and currency, partially offset by higher net selling prices.
Turning to slide nine decorative architectural sales increased 1% in the third quarter.
Our propane business continued to deliver outstanding performance with sales up mid teens against the robust comp of over 45% in the third quarter of 2021.
We continue to gain share and drive conversion as our propane offering strong brands and high quality products resonate with pro customers.
Our DIY paint business declined low single digits versus prior year largely as expected.
Additionally, our lighting and builders hardware businesses declined in aggregate mid single digits in the quarter.
Operating profit was $151 million in the quarter and operating margin was 17, 2%.
Operating profit was impacted by lower volumes and higher freight and material costs.
Partially offset by higher net selling prices.
Turning.
To slide 10, our balance sheet is strong with net debt to EBITDA at one nine times.
We ended the quarter with approximately $1 5 billion of balance sheet liquidity.
Working capital as a percent of sales was 18, 5%.
Working capital was impacted by higher inventory levels at many of our businesses.
Cost inflation and delays in receipt and delivery of materials.
We continue to balance our inventory levels with demand and expect working capital as a percent of sales to be approximately 16, 5% at year end.
In the quarter, we also paid down a $100 million of the $500 million term loan and we borrowed in the second quarter.
Additionally, our board authorized a new $2 billion share repurchase program effective October 22020 to replacing the existing authorization.
This action underscores <unk> strong financial position and our board's confidence in <unk> future.
We do not expect further share repurchases. This year as we use our free cash flow to repay the balance of the $500 million term loan that we took out in the second quarter.
Turning to slide 11.
Let's review our outlook for 2022.
Given moderating demand and additional foreign currency headwinds, we now expect our full year sales growth for masco to be in the range of 3% to 4% versus our prior guidance of 5% to 7%.
We now anticipate full year operating margins to be approximately 16% given lower volumes and higher operational costs.
While we continue to expect year over year margin expansion in the fourth quarter, it will be lower than previously anticipated.
In our plumbing segment.
We now expect 2022 sales growth to be in the range of 1% to 2%, including foreign currency.
Versus our previous guidance of 3% to 5%.
Given current exchange rates foreign currency is expected to unfavorably impact plumbing revenue.
By approximately 4%.
We now anticipate the full year plumbing margins will be approximately 16, 5%.
In our decorative architectural segment, we expect 2022 sales to grow in the range of 7% to 8% versus our previous guidance of 9% to 11%.
Looking specifically at paint growth for 2022.
We currently anticipate our DIY paint sales to increase mid single digits.
In our propane sales to increased strong double digits.
We now expect the full year decorative architectural margin to be approximately 17, 5%.
This is lower than our previous guidance due to lower than anticipated volumes.
Higher advertising spend.
Finally, as Keith mentioned earlier, our updated 2022 EPS estimate is $3 70.
To $3 80.
This assumes a 233 million average diluted share count for the year.
Additional modeling assumptions for 2022 can be found on slide 14 in our earnings deck.
With that I'd like to open the call for Q&A.
Operator.
Thank you in order to ensure that everyone has helped 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.
Your question. Please press Star then two.
First question for today comes from Michael Rehaut from J P. Morgan Michael Your line is now.
Thanks.
Good morning, everyone I appreciate it.
Wanted to focus for a moment on not just the <unk>.
Engine demand backdrop, but how youre looking at your own inventory levels as well as inventory levels in the channel.
And how much.
The extent that you are able to get a sense.
How much of the change in demand trends that you are expected in the fourth quarter.
Are being driven by.
Any types of channel inventory, destocking relative to consumer trends and market demand trends and.
How do you think of that perhaps persisting into the first quarter of the year.
Thanks, Mike This is Keith I'll take that one.
We did see moderating demand Pos in the quarter.
A bit more than we expected.
It was fairly broad based I would say across categories.
In terms of incoming orders and Pos, which we think is most important.
Most categories saw this decline across channels. So broadly speaking, we did see moderating Pos demand on the consumers on the customer side.
Across channels and categories.
We do expect volumes to be down.
In both segments for Q4 understanding that decorative had a 15% comp in Q4, our propane I think it was like 50% comp so.
We do expect volumes to be down in the fourth quarter across both those segments.
In spite of this we do have backlogs in some of our business wellness in particular and we do.
So John and I, both mentioned, we had another solid quarter of.
Pro paint growth.
In terms of your question with regards to inventory.
Inventories in the channels.
I would say that inventories are in pretty decent shape I wouldn't say that there.
Overstocked are excessive.
Some destocking.
Is occurring across categories and channels for sure, but there's always movement in inventory levels, particularly.
And changing macroeconomic environment and changing markets like we have.
Evens out usually around the end of the quarter, we do see some stocking destocking that happens around quarter end that we've talked about in the past. So we are.
We are not really expecting inventory destocking to be a material impact for us as we think about Q4. So the majority of it we would say is in end market demand driven.
Yes, Mike maybe a little bit of additional color to give you I would say is that destocking will probably mostly in the non paint categories paint paint we manage very closely with.
With the home depot, and then with respect to our inventories as I mentioned, the third quarter, our inventories were a little bit higher than we would like but I think the teams are very focused on this.
Doing a good job of trying to match, our inventories with with demand and so.
As I also referenced in my prepared remarks, we do think we'll get our working capital as a percent of sales down.
And probably more normalized levels at like 16, 5% herself.
Great. Thank you for that.
I guess secondly, maybe just shifting to raw materials.
If you could just kind of give us a sense of.
Where you were I think on a consolidated basis by segment Thats, Obviously also very helpful.
In terms of price cost.
And what the raw material headwinds.
During the quarter itself.
And looking into 2023 given more recent.
Movements in the various inputs.
How should we think about raw materials.
In terms of where the prices stand today.
Think back to turn into a.
A tailwind.
Okay, Mike I'll try to hit a couple of questions. There, let me try to break that down.
And again it didn't give you a sense in terms of price cost I'd say across the enterprise we are price cost favorable.
Sure.
Across the enterprise as well as in breaking it down to the segments both segments.
As we think about raw materials going forward, we had seen some moderation in raw material prices, particularly.
On the pain side of the business comprehensive <unk> have come off their highs from earlier in the year, but I would remind everyone that it takes a couple of quarters.
For that benefit to flow through and hit our P&L and so.
I would say that we probably arent experiencing as much of the price cost favorability as we would have anticipated in the third quarter given some of the moderating volumes that Keith just talked about.
As we think about.
The go forward period, where you would expect.
Yes.
It's always hard to foreshadow, but we would expect.
No.
No more favorability in price cost as we go into Q4.
And just given our pricing actions.
Put in place.
Some of them were mid year in question, Hans Ola is going out with price at the beginning of the year as they typically do.
So there'll be some favorable price cost as we go into.
2023.
I think that covers.
Most of the questions you asked Mike, but if I Miss something let me know Hey, John This is Keith let me if I can just.
And so here just a minute do you referenced some.
Commodities that have come down and Pat Thank you Matt.
Plumber.
When you referenced conferencing thats obvious.
Segment.
Yes.
That was great.
And I appreciate that clarification.
<unk>.
The only element of and I apologize I guess my multi part question was just.
On a net basis for 2023, given where.
Commodity prices are currently if you would expect.
Raw materials to be a net tailwind.
On the whole for next year.
Yes, we're not really getting deep into 'twenty three here, we'll talk about that.
Next quarter, Mike, but certainly.
Our expectation would be that we'd see some commodity relief and it's while it's flowing through our P&L are little slower than we had anticipated because of some.
Some of the volume pullback.
I would say, we expect that to be a tailwind in 'twenty three.
Okay. Thanks, so much.
Yeah.
Right.
Yes.
And our next question comes from Adam Baumgarten from Zelman. Please go ahead. Your line is now open.
Hey, Thanks for taking my questions good morning.
With me on paint just given the weak DIY activity that youre seeing are you seeing or expecting I should say an increase in promotional activity going forward.
And when we think about promotional activity in general I would say that it's it's been more muted than in the past I think given that.
Where the volumes were.
We have.
Increased our advertising and plan to continue to do that in terms of promotions overall in the industry I suspect it will that we'll see a little bit of an uptick in that but it.
It remains to be seen our preference obviously is to complete on brand service and innovation and continuing to drive that that's worked well for us and I think if we do see incur.
Increased promotions that will be more spot promotions, if you will rather than.
What was traditional pre pandemic say, where they were more.
Ingrained into the market more consistent and that's what we're currently seeing.
Got it thanks and then.
Just on the.
The cost actions you alluded to any specific areas that you're targeting or maybe just some more color around what the plan is there and which areas of the business will be affected.
Yes, I think when you look at.
What happens in an environment, where there is a.
A quick volume reduction Theres, a couple of things on the cost side that are impacted firstly is on the material side.
The costs that we have seen that particularly in plumbing that have backed off a little bit from their highs take a little bit longer to flow through our P&L because of the lower volumes and that's the case for us it's taken a little longer than expected say a quarter or two to flow through the <unk> because of that volume. So that's a piece of it.
That really comes with time.
As the as.
As they roll through the P&L.
It also drives absorption issues.
And variable overhead principally and as we see where that will settle in that's going to give us the ability to better dial and our shift dial in our shift patterns and balance our factories to drive productivity and this is quite typical when you see rather rapid volume reductions and we're working that.
Inbound logistics is talking about specific in plumbing.
That's been timely deliveries can.
It can be challenging and drive productivity issues frankly, we expected to see.
A more rapid improvement and that things are improving but not to the pace that we thought they would be so we're continuing to work those down so in terms of the operational costs that we're currently facing that gives you a flavor of how we're attacking it we expect to be through that by the end of Q1.
In terms of a more protracted recession, if that is there as John mentioned in his calls we have a experienced management team that have been through times like this and our focus frankly has to come out of a recession stronger than when we went into it and we were able to demonstrate that in <unk> and we're going to demonstrate that again.
Here, but the usual suspects in terms of levers we have around variable costs that we would look to in terms of either delaying.
Spend or cutting back in marketing and advertising travel entertainment those sorts of things.
And then.
Of course, there's always fixed cost levers that we could look into now given where our capacity utilization is across our own supply chain, our own factory network et cetera, and the high level demand I don't anticipate that would involve.
Any sorts of reconfiguration of our manufacturing footprint, just because of the demand and our expectation for growth, but that gives you a few of the levers both short term and midterm.
Great. Thanks, Keith I appreciate it.
Okay.
Our next question comes from Jonathan Nevada from UBS. Please go ahead. Your line is now open.
Hey, good morning, guys and thank you for taking my questions.
The first one is on the implied <unk> plumbing margin seems to be implied in sort of the low to mid teens.
Versus I think expectations of closer to 20% it doesn't seem like the sales decline explains this so just curious if you can give us some more color on whats going on there.
Yeah. So.
John maybe I'll start and maybe Keith you can chime in and part of it so.
Our four acute plumbing.
Guide for <unk>.
Profit I agree on margins it does imply some some.
Pull down from where we had previously guided.
Really two components to it one.
Is the.
The volume drop that you talked about.
And then the second piece would be the operational costs that we alluded to in our prepared remarks.
Some of that relates to.
Higher than continued higher than expected freight and material, but then also some of the production inefficiencies with the changing volume levels that Keith mentioned, so keep maybe.
With that I'll turn it over to you to give a little bit more color on that portion of it sure I would say the biggest pieces of volume. So we have the FX there that we talked about in the lower volumes.
That does a couple of things that give us challenges with regards to cost and I've talked about this a little bit.
Last response.
One is the longer time for the lower material cost that we expect it to hit our P&L and then.
Secondly is the absorption issue so that's a factor.
And then John mentioned the elevated freight.
And in some cases and labor costs. So that was that's an area that we expected to see more relief and coming into Q4 than we have.
So that's the second charge and then thirdly operational inefficiencies principally in our plumbing area driven by.
In bound logistics on the reliability and timely of those deliveries that gives us labor efficiencies and challenges in the shop floors that hasn't improved as much as we expected. It to now it is improving and we continue to take actions to drive that improvement at a faster rate, but as we look at.
That improvement in paradoxically, while the lower volumes.
Does gives give us absorption issues. It does give our supply chain. Some some relief. So we're we're getting after this and the improvements are coming but they won't be totally behind us until Q1, so that frames up some of the.
Margin challenges and why while it will be a little bit better in margin, it's not as good as we had previously guided to.
Okay. Thanks for that and then the second question is the SG&A leverage was surprising given given the sort of flattish top line.
Cost to you guys taken out and how sustainable is that before it begins to impact the business.
Well I think we're going to add this is not a run rate that we will stay out we're starting to fill filter back in SG&A.
We've put in.
We put in more advertising in our.
Paint business and we're committed to continue to invest in brand service and innovation because that fundamentally is what will make us strong as we can be coming out of these sorts of pullbacks or recessions. However, you want to think about it. So we're very careful in terms of how we look at SG&A. It is a dial.
That we have that we can turn that we can either delay some growth spend or delay.
As I mentioned advertising travel entertainment participation and shows those sorts of things, but we're very careful with it we're focused on the long term exiting of this.
Pullback so that were stronger than we went in as I mentioned.
Yes, John I would add to Keith's comments that's right.
As we start looking forward to 2023, I think we're going be very focus on SG&A.
And trying to match that our investment in SG&A up with what we're seeing from demand in the marketplace and so Keith pointed to lever that we can pull we're on top of it. We're watching this very closely right. Yes, we did enjoy some better SG&A leverage here in Q3.
And as someone who has got a complete focus as we move forward.
Thank you guys.
Yeah.
Thank you. Our next question comes from Matthew Bouley from Barclays. Please go ahead. Your line is now open.
Good morning, everyone. Thanks for taking the questions.
I wanted to ask about the decorative margins in the guide for Q4 it.
It seems like there is an expectation there for relatively significant I guess decremental margin.
And Keith Youre alluding to everything around the challenges with.
A rapid reduction in volumes.
And perhaps that's a big piece of it but just kind of looking at that that decremental volume assumption in Q4.
What just to number one confirm if that's what it is that really is what's driving that Q4 guide and then kind of what's the right way to think about volume decrementals longer term.
On the assumption that we do continue to see kind of weakness in consumer demand. Thank you.
There's a couple of items I'd point, you're doing that John maybe if you want to add some color to it.
Clearly the volume moderation is a big piece of it no question about it and then secondly, I would remind you when we talk about how we typically perform in price as it relates to.
Commodities, we generally hold our margin dollars, but when you do that.
That results in margin percent pressure just by way of example, something like a 10%.
The increase to recover only commodity costs results in almost 200 basis point reduction in margin. So those those two the interaction of price versus commodities and the volume.
Reduction of the principal drivers.
That's right I think those are the two components I think the third principal component of the margin degradation in Q4, Matthew would be.
The investments that we referenced in marketing and advertising in this segment.
Perhaps more elevated than we would have experienced a year ago.
So if you take the volume drop the cost recovery nature of the inflation and the marketing spend the advertising spend that we referenced those would be the three big components.
Because the margin degradation that you see.
That that that investment.
In marketing and advertising will be largely contained to Q4 and I wouldnt say that thats going to be something that we bake in longer term.
Got it that's very helpful. Thanks for that guys and then.
Second just kind of shifting to the international business.
I guess with Hans grow it sounds like.
I believe you said at the top that Europe is slowing.
Whereas you got some of the other geographies were actually a bit more supportive.
I'm just curious if you can expand on that a little bit kind of kind of what are your expectations for how European demand evolve in that business and to what degree can those other geographies continue to offset that thanks guys.
So we delivered a nice quarter internationally in local currency up 5% as we mentioned so very pleased with that largely driven by <unk> growth in China as.
As well as several other markets <unk> has done an outstanding job of positioning that brand and driving it to.
Market leadership in terms of the premium brand in China, and we continue to grow there and expect that.
To continue.
European markets are starting to moderate.
Modest slowdown in incoming orders.
Sales overall in Q3 in Europe , I'd say were roughly flat.
Again, the broad exposure that we have across many.
Countries that have different economies in Europe .
It is helpful and that diversification of our risk there is very helpful. I'm glad to have it so.
It's clearly clearly seen a pullback in Europe .
But as I said, China Middle East is doing well for us as I mentioned in my.
<unk> remarks, we're seeing good growth in India, So I think that diversification as well more broadly speaking our diversification across price points, our diversification across channels.
And of course, our geographic diversification, both U S versus international and then within that international bucket at all helpful for Us and why we feel that we are positioned very well.
To make it through these moderating types.
Yes, maybe a little bit of additional color to frame. This up for you recall that international sales of approximately 20% of our overall sales.
And in that Europe represents about two thirds of international sales in the rest of the world represents about a third.
No.
Keith you just talked about and what we've referenced.
So the two thirds is roughly flat the one third of the business is growing nicely. So I just want make sure everyone's got that in context, there's a lot of people think our international businesses solely Europe .
It's much more diversified than that due to the good work that the <unk> team has done over the years to expand their sales base across the globe.
Great. Thanks, Jon Thanks, Keith.
Our next question comes from Susan Mccrory from Goldman Sachs. Please go ahead, Susan Your line is now open.
Thank you good morning, everyone.
Sure.
My first question is dialing in a bit on the consumer are you seeing any pushback on pricing from them and has that in any way impacting some of the moderation in volumes that youre seeing and how are you thinking about the consumer and their willingness to spend overall.
Well I think.
The overall inflation I think is really starting to have an effect.
On the consumer not just in our products, but in.
<unk> from energy to food to your.
You name it so I think that's.
That's all part of it.
Having said that we still in.
We're seeing we're seeing good order rates moderating a little bit in our spa business, we are starting to come down to chip away at our backlog I think thats. Our backlog now is in that 10 to 12 week range. So thats down and we're working that down but we are also seeing some good order patterns.
We are not seeing Susan.
A material shift down oftentimes.
In times like this in my career Ive seen for example, maybe a little bit of a shift towards private label, but we really haven't seen that at this point.
So we.
We do expect I expect that overall inflation will ultimately have an impact on the consumer and their spending habits, but where we sit right now I think the consumer is holding up well.
Yes.
Good good amount of home equity.
Unemployment is obviously in a very good spot. So there's a mixed bag out there as it relates to that combination of inflation and how the consumer feels but we're not seeing mixed down and we're seeing.
And some parts of our business still strong order rates.
Okay.
And then turning to the balance sheet can you talk a little bit about the ability to work down the working capital how you're thinking about that is perhaps a source of funds in the upcoming quarters and then any thoughts in general around capital allocation, you talked about paying down that term loan in the fourth quarter, but how are you thinking about leverage.
And buybacks and all the different opportunities in general.
Yes, sure Susan in terms of how we're thinking about working capital. If you think about the seasonality of the business generally the way the business operates.
Is the first call. It five six months of the year, where cash consumer just given the seasonal build typically that takes place of inventory for the summer selling season, the spring selling season and alike, and then right around mid year, we turn into a.
We're much more of a cash generation is as working capital comes in and typically you see the greatest source of cash generation in the fourth quarter as those.
Inventories and receivables kind of bleed down just due to the seasonal natural seasonal slowdown that we the business enjoys.
And then obviously right on the first year than the beginning.
To flip back and so.
Yes.
I don't expect any changes.
To that seasonality.
Over the course of the coming months and quarters.
In terms of.
Our focus in the business on this is absolutely the businesses our focus on it as part of our variable compensation scheme.
Working capital generation is.
And so I would tell you the teams across the enterprise are very much focused on doing the right thing and driving working capital flow for the business at the same time I would tell you given mike's longer term experience with our business.
If your economic environments.
Working capital generally as a source of cash generation.
<unk>, if we were to decline and so.
As if depending on how the economy rolls out over the course of the coming quarters I would anticipate that to be a benefit for the organization I'll now flipping to your thank.
Second part of your question about broader capital allocation.
I don't think our views on capital allocation has changed dramatically.
We've articulated our capital allocation strategy and I'll just repeat it for everyone's benefit one first and foremost is to invest in the business.
Because that is our highest return investment either growth capital and our maintenance capital with the business and so.
Those are naturally done I'll remind everyone is generally the light touch its about 225% of sales so not a significant draw upon our cash generation.
Second piece is to maintain a strong balance sheet, we have done so over the years and we've done a very diligent job of making certain that we.
We take advantage of the capital market debt capital markets. When there's attractive periods. We did so in 2021 very very.
<unk>.
And earlier this year, we did the $500 million term loan due to pull forward our share repurchase activity and we have a very strong commitment to live within our means.
So we would anticipate.
<unk> to pay down that that term loan fully as we foreshadowed back in May and June when we when we took that on we will be very disciplined about how we approach it and so I don't think.
That is going to change.
However.
We are committed to the dividend because we think.
Organization of our size, our quality should be paying a dividend in the 30% payout ratio. We think is the right.
Level to pay out for our industry and our organization and then lastly, because of the significant cash flow generation that we enjoy youre able to redeploy the excess to either share repurchases or M&A.
And I would say that both of those activities will continue we continue to look at what is the rate or the best return and begin.
That excess cash that regenerate.
And if we can find highly attractive.
Bolt on M&A targets for either a paint or our plumbing business.
To do that because we've got great franchises in both businesses, whether it's domestically with the delta team or whether it's internationally with the <unk> team or the behr team here.
We would gladly invest behind them to continue to grow their business and whether that's.
Product line acquisition channel access geographic acquisition, we look at anything along those lines to support those businesses continue to grow but to the extent we can find those types of acquisitions, we are happy to redeploy our excess capital to share repurchases and so I think we've been a very effective stewards of our capital allocation program over the years.
And I think we will continue to do so so can you I don't know if there's anything else you want to add alright, maybe just some specific context on working capital business are focused on that as John mentioned, it's part of our variable compensation scheme, and I would I would estimate that we'd finish the year in that 16, 5% range.
Yes.
Great. Thank you for all the color and good luck with everything.
Thank you.
Our next question comes from Mike Dahl from RBC capital markets. Your line is now open. Please go ahead.
Hi, Thanks for taking my questions.
Keith My first question is just around kind of the rate of change in what youre seeing in underlying market conditions, because at least our sense was that for a lot of the quarter things were probably okay. But then looking at where you ended up in the quarter and now with the guidance.
Why is it seems like things may have shifted pretty quickly.
Very late.
In the quarter. So maybe can you speak to just.
The cadence and how quickly conditions changed as you've kind of gone through September and into October and also what does that really mean in terms of your visibility even into.
Year end, let alone.
Beginning of next year.
Yes, I would say that the.
The slowdown really became apparent as you mentioned in September so it was late in the quarter.
The.
While it's early in October I guess, it's not so early in October now through call. It three weeks into October .
We've fat.
Factored that what we're seeing into October into our guide so our best view of.
Where.
Where the year is going to finish out is obviously incorporated into the guide based on that.
We've.
Sin.
Some some softening in DIY paint demand that we've talked about to give you a little bit of context on that and the overall.
Slowdown if you will has been as I mentioned pretty broad based it wasn't like there was one particular part of the country or one particular.
Channel or one particular type of product, while I would say, obviously that we're still continuing to do quite well in pro and we're working through and have good demand in our.
Spar backlog.
So it did happened late in the quarter.
And I would say it's been that.
It's been fairly consistent since then and what we're seeing in October .
Is incorporated into our guide.
Got it okay. Thanks.
My follow up question, just specifically around the.
This elevated spend in <unk>.
I guess, what Im wondering is was this was this kind of a preplanned.
Spend and the impact that it's having is just larger because the volumes haven't come through as expected or is this a newer program.
Where the spend is being put in place to effectively spend.
Even greater declines versus what you're currently seeing just a little more elaboration on what exactly this is why it why it didnt place fall as volumes are falling more meaningfully would be helpful.
Yes.
As John mentioned in terms of SG&A being something that we watch carefully and we make calls based on the most appropriate use of that so I would say, it's a little bit more accelerated than we have originally planned.
<unk>.
If you watch any kind of sports Tvs in our ads.
For Behr paint for dynasty, specifically, it's a great product and we think that when we look at that advertising spend versus the benefit that we get from that and that is the right thing to do so it's something that we look at and tweak.
Tweak as we see different demand characteristics and what we think would be the best bank for our Buck in terms of what and how we advertise and how much as John mentioned I wouldn't model that into.
Ongoing at that at the levels that we did in Q3 here and plan to do in Q4.
The full year, and we will talk more about 2023 next quarter and give you much more color on.
How do we feel about our brand spend et cetera at that point.
Mike.
Mike.
Comment on an additional acute you said.
If you take a look at the spend year over year, it's up right. So fourth quarter of last year. It was relatively muted spend.
So it's while it is higher this year and I think thats, probably the more significant component of it is compare year over year compare.
Okay Alright.
Thank you.
Yes.
Yes.
Our next question comes from Chairman of participating from Wolfe Research. Please go ahead. Your line is now open.
Hey, good morning, everyone and thanks for taking my questions.
First I just wanted to touch on the plumbing and paint op margin guidance in the fourth quarter, you will have gone through a variety of items already for both segments, but I was wondering if there was also a component.
Pricing that was previously announced that either wasn't as robust are realized.
As you all had previously expected in either segment.
No no it's really.
The things that we've already talked about in terms of.
Principally across both segments its the reduced volume.
Net.
Obviously has issues in plumbing in terms of overhead absorption.
But mainly the drop down on incremental revenue from that volume FX is a factor we've had some operational issues that we're working through in plumbing and will be.
Find us by the end of Q1 that we've talked about price price realization has been very solid for us.
Okay.
And then just thinking your propane.
Segment this year.
Share gains over the past year two years I'm trying to understand if this is a bit more of a.
Kind of general Jack-of-all-trades type pro that you've gained or whether a decent portion of the success has been drawing in converting what we'll call traditional paint dedicated pros.
The home depot.
And then finally.
Better than the fourth quarter guidance.
Does that actually assume that propane volumes will decline year over year on that tough comp.
Yeah, I think it probably a little bit of a decline when you talk volumes year over year because of that but it will be.
Modest modest decline in volumes we've had.
Good volume growth.
This quarter that we just finished.
And propane is performing very well for us.
Let's call it mid teens growth against that I think our comp last year Q3 was like 45%.
We continue to.
Get data and we watch this very carefully in terms of the.
The stickiness of the share gain that.
We've got both with new customers and to your point.
Our combination with <unk>.
The smaller painters or more.
Paint focused.
Professionals, who are paying and we're getting some of that demand as well.
Recent data on our net performed the net promoter score is very strong so feel very good about what the team has done in terms of what we committed to which is to keep this.
Share gain going in.
The experience they are particular.
Our research are referencing the experience with our product.
The probe the programs that we have for pros and of course, the partnership and how the home depot of servicing.
That general segment, so our confidence is reflected in the outlook and while yes, there'll be a modest volume, but when you look against the comp in terms of gallons. We feel we're doing a very good job of maintaining the share as we've committed to.
Yes.
The only thing I'd add is we're kind of in a period of some really tough comps on the pro side of about 45% in Q3, 50% in Q4, I think north of 50% in Q1.
Bear team is just a terrific job in executing and taking this year, but.
As you.
You go up against these enormous comps.
Always tough to tell.
To post even higher comps on top of that.
Okay, Alright, thank you all and good luck in the coming quarter.
Thank you.
Our next question comes from Matt <unk> from Jefferies. Your line is now open. Please go ahead.
Hey, guys. Your <unk> guide any color on the implied volume declines by segment and any early read on how we should think about 2023 by regions or businesses because it seems like the pro side of things in small cell are holding up quite well any color would be helpful.
Okay.
Yes in terms of volumes.
Phil I'd say.
Overall.
Volume.
As you think about volumes.
Sure.
For Q4.
Say.
We talked about.
Kind of a low single digit volume declines in plumbing in Q3.
That.
Maybe even more significantly in Q4, just given the way were seeing things right.
Right now and then on the decorative architectural side.
The implied guide for Q3.
On the DIY side.
We're down.
Digits and so if you take that into consideration with Keith just kind of a on a modest protocol and you can kind of read through what the volume declines might be in Q4, perhaps low double digit in Dec arch.
Okay, and then for next year.
Is that.
Thanks Robert.
Q3.
We're not giving 2023 guidance just yet, but we'll give that out on our Q4 call.
Got you.
And then your margins.
<unk> addressed here is a little light in the fourth quarter.
And some of these issues youre going to flush out by <unk>.
Roger sorry to follow that will fall as well as the ocean freight containers any color when you start seeing that flow through more meaningfully and we've shown the cost out programs.
Is that enough to kind of offset potential volume clients, where your margins could potentially hold next year.
As we look at.
The volume decline Phil.
And everyone is as we think about our decremental volumes.
Generally run in the 30% range enterprise wide, maybe a little bit higher than that on the plumbing side, a little bit lower than that in the Dec arc side.
And so as you think about volume declines it was going to have.
<unk> an impact on profitability.
To your point is.
As we get through some of these higher raw material costs.
As they start flowing through and hitting our P&L that should be an offset will be a one for one offset probably.
It's hard to tell at this point, but probably a little bit of margin headwind there.
Okay, and then you start seeing that.
Got it.
I'm sorry, Phil go ahead.
That raw material benefit you start seeing it more early early <unk> and I think John you mentioned the bigger drop off I think it was that card and maybe Keith kind of correctly use it more plumbing just wanted to flush out.
The potential impact and the timing of some of that stuff.
Phil are you are you looking for the potential impact.
Tailwind from raw material prices flowing through to our P&L and comparing that to the best potential headwinds of volume in 2023.
Keith I appreciate you're probably not go to that level of detail, but I'm just trying to gauge what raws falling when does that flow through that early <unk>, you that and I think John you may have.
You'll see the drop off potentially in pain was that really more in plumbing just wanted to flush that out in terms of potential outflows.
Overall, just from a timing it's hard to say.
You can see it's a really good benefit.
We should start to see a flow through fill in Q1 and is planning yes.
Okay, alright, thanks, a lot.
Our next question comes from Stephen Kim from Evercore ISI. Your line is now open. Please go ahead.
Yes, thanks, very much guys I appreciate all the color you provided so far I was wondering if you could talk a little bit about whether you're seeing any meaningful mix impacts across the business plumbing paint internationally U S that are worth.
Falling out and then in addition, any plans to adjust staffing or capacity in light of what you've seen and what would you be monitoring.
In order to make.
A move.
There in terms of capacity or staffing.
In terms of mix impact, we haven't really seen one row expecting one.
When we look across for example, in China, where we had such a strong performance in high jewelry, Thats premium brand and Thats, where we stand there and that continues to do well.
We monitor that but we really arent seeing anything dynasty is doing very well for us which is at the high end showroom products.
<unk>.
And Delta are performing well, so no real impact.
In terms of staffing of course, we look to maintain.
Maintain our labor productivity numbers, and we focus our businesses on our Decrementals in times like this.
And staffing as a piece of it and so thats capacity in the sense of a short term capacity in terms of matching staffing and we match our inventories to our our demand levels as I mentioned.
Earlier in the call at this point, where we expect our growth to be mid to long term.
I wouldn't suspect that wed be looking at any.
Brick and mortar and we're carefully evaluating the timing of our capital and our expansion projects to make sure that we continue to drive strong.
Turn on invested capital, but our plan is to continue to go forward with those as well.
That's very helpful. And then just generally on a related note you talked about the <unk>.
Abruptness of the decline.
That came upon us on and I guess my thought my question is how youre thinking about if there's any implications for what the recovery may be do you think it's possible that the recovery could be similarly abrupt or is based on what you are based on what Youre seeing is it your view that.
The recovery would be sort of typical or even perhaps more protracted just kind of curious as to whether you think there's any thing to be implied from the abruptness of the onset of the weakness.
I think it's a little premature to prognosticate on the steepness of the recovery based on where we are at this point I think when we look at the overall.
Savings rate as a consumer.
Health as it relates to the overall structure of our industry with the age of stock with millennials coming into the the repair remodel and specifically into the DIY.
<unk> when you look at our coverage call. It a 50 50 50 mix roughly in our overall enterprise between pro and DIY.
The price point coverage these geographic certainly.
I think we're positioned to fare better than most as it relates to coming out of this and that so that's how we're driving the business.
Great I appreciate it thanks very much guys.
I'd like to thank everyone for joining us on the call. This morning and for your continued interest in Masco. This concludes today's call. Thank you.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.