Q4 2022 Masco Corp Earnings Call
Okay.
Good morning, Ladies and gentlemen, welcome to Masco Corporation quarter and full year Conference call. My name is Emily and I'll be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press the star.
Goodbye to Ireland.
Now turn the call over to David Chaika, Vice President Treasurer, and Investor Relations you may begin.
Thank you Emily and good morning welcome.
Welcome to Masco Corporation's 2022 fourth quarter and full year conference call.
With me today are Keith Allman, President and CEO of Masco, and Johnson device, Medicine's, Vice President and Chief Financial Officer.
Our fourth quarter earnings release, and the presentation slides are available on our website under Investor Relations.
Our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow up if we can't take your question now please call me directly at 313 792 5500.
Our statements today will include our views about our future performance, which constitute forward looking statements.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements.
We've described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K, and our Form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics, our references to operating profit and earnings per share will be as adjusted unless otherwise noted.
We reconciled these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.
And now I'll turn the call over to Keith.
Thank you Dave Good morning, everyone and thank you for joining us today.
I'll start this morning, with some brief comments on our fourth quarter.
And I'll turn to our full year results and our view on 2023.
Before I get started however, I'm sure you saw our announcement that Johnson devices. It has decided to retire from masco effective at the end of May and we are working to identify his replacement.
John has been a fixture at masco and in the industry for over 25 years now.
And has been an invaluable partner to me.
Our board and the investment community during his 15 year tenure as CFO of our company.
He will be sorely missed and we wish John all the best in his future endeavors.
Now please turn to slide five.
In the fourth quarter, our topline decreased 5%.
As we saw lower volumes across most categories.
Partially offset by significant pricing actions of 9%.
Our operating profit declined in the quarter due to the lower volumes higher operational costs and currency.
This was partially offset by pricing actions and expense control as SG&A declined $22 million to 17, 4% of sales.
Our earnings per share for the quarter was 65.
Earnings per share benefited from a lower average diluted share count as well as the effective tax rate of 24% lower than our previously guided 25%.
Turning to our segments.
<unk> grew 2% in local currency with a 1% decline in North American plumbing.
<unk> offset by 7% growth in international plumbing.
<unk> drove market share gains in many key markets, including China, Germany and France.
Our international business has continued to execute well, which speaks to the strength of the <unk> team strong brands and its ability to gain market share.
In North America.
Our spa business is now work through its extended backlog and backlogs are now in the normal range of 4% to six weeks after a tremendous three year run of more than 50% sales growth.
Turning to our decorative architectural segment sales.
Sales declined 8% against a strong 15% comp.
Yeah, why paint sales declined low double digits, while propane continued its excellent performance with mid single digit growth against a tremendous comp of over 50%.
Now, let's review our full year performance.
Let's turn to slide six.
2000, 22022 was a challenging year.
Strong growth in the first half followed by a notable declines in demand in the second half.
Despite these volatile conditions masco, and our 19000 employees across the globe responded well to deliver for our customers and our shareholders.
For the full year the company grew sales 4%.
For a two year stacked comp of 21%.
Strong pricing actions increased sales by 9%.
Offsetting by volume declines of 3% and currency impact of 2%.
Volume growth in the first half of the year was more than offset by volume declines in the second half.
Operating profit declined 7% with an operating margin of 15, 6% and earnings per share increased from $3 77 to $3 77.
From $3 70.
Total commodity and other inflation was low double digits for the full year.
This inflation together with supply chain challenges resulted in lower margins for the year, Despite our significant pricing actions.
We are focused on improving our margins by continuing to drive productivity as we apply our 80 20 mindset to return to our pre pandemic levels.
Turning to our segments.
Plumbing segment grew 6% excluding currency led.
Led by strong growth at both <unk> and Watkins.
In our decorative architectural segment full year growth was 6%.
DIY paint grew low single digits for the year, while propane grew over 25%.
Propane has had a tremendous three year run of approximately 70% growth.
And now accounts for one third of our paint business or over $900 million.
This strong performance earned bear its second consecutive partner of the year Award for the home depot.
We will continue to invest in our paint business to capture further share in both the DIY and pro markets our recently.
We launched adjacent paint categories, such as aerosols interior stains and Cox and sealants have performed well and are expanding the offering to additional stores and expect further share gains in 2023.
We will be launching bear dynasty exterior for the summer painting season, expanding the lineup of our number one rated dynasty paint line.
And we will continue to invest in people and capabilities to better serve the pro painter and continue our strong performance.
Turning to capital allocation.
Our strong balance sheet allowed us to deploy approximately $1 $2 billion in capital during the year.
We repurchased 16 6 million shares or $914 million, representing approximately 7% of our outstanding shares.
We increased our quarterly dividend, 19% and paid $258 million in dividends to shareholders.
And we finished the year with net leverage of one eight times, providing us ample financial flexibility.
Our balanced and disciplined approach to capital allocation and strong cash flow resulted in a return on invested capital of approximately 39%.
Lastly on the ESG front, we believe our business should be part of the solution to the world's climate crisis.
Therefore, we have established a target to reduce our emissions by 50% by the year 2030 aligned with science based targets.
This is consistent with our commitment to doing business, the right way and our purpose to provide better living possibilities or homes, our environment and our community.
I want to thank all our employees for their outstanding efforts throughout 2022. It is a team effort to continue to deliver for our customers and shareholders.
Now turning to 2023, we expect the softening demand trends in the second half of 2022 to continue into 2023, as our markets adjust to increasing interest rates persistent inflation and tighter consumer spending.
Overall, we anticipate volumes to decline in the low double digit range.
Offset to a small extent by pricing actions.
Our current market assumptions for 2023 are as follows.
For the North American repair and remodel market.
We expect the market to be down approximately low double digits.
This is after a very strong three year run of approximately 20% growth.
For the paint market, we expect the DIY paint market to be down high single digits and the probe market to decline by mid single digits.
And for our international markets principally Europe .
We expect markets to contract by high single digits.
As a result, we anticipate <unk> sales in 2023 to decline approximately 10%.
With this lower top line assumption, we will drive to minimize our decremental margins to be in the low 20% range versus our typical 30% decremental margins.
We are focused on recovering the significant cost inflation that we experienced over the past two years through operational productivity.
Apply chain normalization.
And additional pricing actions.
With this focus we expect our operating margin to be approximately 15% in 2023.
Turning to capital allocation.
Our strategy remains unchanged.
First and foremost we will invest in our business to maintain and grow our leadership positions in wind in the recovery.
The second pillar of our capital allocation strategy is to maintain a strong balance sheet with gross debt to EBITDA levels of below two five times.
Third.
We have a targeted dividend payout ratio of 30%.
Our board declared a 2% increase in our dividend for 2023, which will bring our annual dividend to $1 14 per share and marks the 10th consecutive annual increase.
We expect our cash flow conversion to be over 100% in 2023.
As we manage our working capital.
We will deploy that free cash flow after dividends to share repurchases or acquisitions.
Based on our projected free cash flow, we expect to deploy approximately $500 million to share repurchases or acquisitions in 2023.
In addition to paying the remaining $200 million of our term loan.
Lastly, there is no change to our M&A strategy, we continue to review and selectively pursue opportunities that have the right strategic fit and the right return for masco.
With the actions we are taking to address this more challenging environment.
Coupled with our continued strong capital capital deployment.
We anticipate earnings per share for 2023 to be in the range of $3 10.
The $3 40 per share.
While we expect the near term environment will remain challenging as our markets and the economy adjusts to higher interest rates and prices.
We believe the long term fundamentals of our repair and remodel markets are strong.
Cyclical factors, such as home price appreciation and existing turnover will remain challenged and likely a headwind for 2023.
Over structure.
Structural factors such as consumer staying in their homes longer the age of housing stock and high home equity at levels will drive increased repair and remodel activity in several ways.
Many homeowners have taken advantage of low mortgage rates and are likely to remain in their homes longer.
One 5 million more homes will reach the prime remodeling ages of $20 to 39 years old over the next three years.
And home equity levels remain high and can withstand significant pullbacks in home prices and still be above 2019 levels.
All of these structural forces provide tailwind for our business and increase our confidence for a strong repair and remodel market.
After the economy stabilizes in 2023.
We will continue to invest in our brands capabilities and people to outperform the competition in both the near and the long term.
With favorable fundamentals and our continued focus on executing our growth strategy together with our strong free cash flow and capital deployment.
We are positioned to continue to drive shareholder value creation over the long term.
Now I'll turn the call over to John to go over our fourth quarter full year and 'twenty three outlook in more detail John .
Thank you Keith and good morning, everyone.
Before I begin my comments I wanted to take a moment to thank Keith.
Board and the entire <unk> organization for the opportunity to serve as CFO for more than 15 years.
I've had an amazing and fulfilling 27 year career with the company as I look forward to my retirement I wish everyone. The best.
With that.
I've mentioned in my comments today will focus on adjusted performance.
Excluding the impact of rationalization and other one time items.
Turning to slide eight sales in the quarter decreased 5%.
Excluding currency decreased 2%.
Lower volumes decreased sales by 11%, partially offset by net selling prices, which increased sales by 9%.
In local currency.
With American sales decreased 5%.
Volume decreased sales by 14%, partially offset by higher net selling prices, which increased sales by 10%.
In local currency international sales increased 7% driven by increased selling prices.
As it relates to inventory, we believe channel inventories have stabilized as we saw sell through approximately equal to sell it.
Destocking had minimal impact in the quarter.
Our gross margin of between nine 5% was impacted by lower volumes and higher <unk> higher year over year operational costs through the quarter.
Our SG&A as a percentage of sales improved 20 basis points to 17, 4% through continued cost discipline.
Our operating profit in the fourth quarter was $234 million.
And operating margin was 12, 2%.
Operating profit was impacted by lower volumes.
Higher operational costs and currency.
Partially offset by higher net selling prices.
Lastly, our EPS in the quarter was <unk> 65.
I would like to note that this performance was based on a tax rate of 24%.
Versus the previously guided 25% tax rate.
Due to the implementation of our tax planning strategies.
Because of this assumption we have provided restated adjusted EPS numbers for the first three quarters of 2022 in the appendix on slide 28.
Turning to the full year 2022 sales increased 4% over prior year against a healthy comp of 17% for full year 2021.
Excluding currency.
Sales increased 6%.
Higher net selling prices increased sales by 9%, partially offset by lower volumes, which decreased sales by 3%.
Local currency North American sales increased 6%.
In the international sales increased 8%.
Our SG&A as a percentage of sales decreased 90 basis points to 16%.
Operating profit for the full year was $1 4 billion.
Operating margin was 15, 6%.
Lastly, our EPS increased 2% to $3 77.
This amount also assumes a tax rate of 24% versus the previously guided 25%, which favorably impacted full year EPS.
Five.
Our adjusted EPS calculation for 2023, we will continue to assume a 24% tax rate.
I want to thank our employees across the globe for their hard work and dedication to achieve these solid results during a challenging year.
Turning to slide nine plumbing sales in the quarter decreased 3%.
Excluding the impact of currency sales grew 2%.
Pricing contributed 9% to growth volume decreased sales by 7%.
North American plumbing sales decreased 1% in local currency.
This was driven by lower demand, we started to experience in the third quarter.
Lower demand was fairly broad based across product categories and channels.
International plumbing sales increased 7% in local currency.
<unk> grew sales in many of their key markets, most notably, China, Germany and France.
Segment operating profit in the fourth quarter was $148 million and operating margin was 12, 4%.
Operating profit was impacted by lower volumes higher operational costs and currency.
Partially offset by higher net selling prices.
Turning to the full year 2022, plumbing sales increased 2%.
Excluding currency sales increased 6% with net selling prices contributing 7% to growth.
Partially offset by lower volume mix, which decreased sales by 1%.
In local currency North American plumbing sales grew 5%.
International plumbing sales increased 8%.
Full year operating profit was $834 million with an operating margin of 15, 9%.
Yeah.
Turning to slide 10.
Architectural sales decreased 8% for the fourth quarter against a 15% comp.
Our pro paint sales increased mid single digits against a robust comp of over 50% in the fourth quarter of 2021.
We continue to see solid demand for our pro paint offering strong brands and high quality products.
Our DIY sales declined low double digits versus prior year.
Additionally, our lighting and builders hardware businesses in aggregate declined mid teens in the quarter.
Solid mid single digit comp.
Operating profit was $101 million in the quarter and operating margin was 13, 9%.
Operating profit was impacted by lower volumes and higher material costs.
Partially offset by higher net selling prices.
Turning to the full year 2022 sales increased 6% driven by low single digit growth in our DIY paint business.
Meaning propane growth of AUM.
25%.
Full year operating income was $608 million and operating margin was 17, 7%.
Turning to slide 11.
Year end balance sheet is strong with net debt to EBITDA at one eight times.
We ended the quarter with approximately $1 $5 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percent of sales was 17, 4% at year end.
2023.
With expected lower volumes and less supply chain disruptions.
Anticipate working capital as a percent of sales to improve and be approximately 16, 5% at year end.
From 2022, we also paid down $300 million the $500 million term loan that we borrowed in the second quarter of the year.
Finally during 2022, we repurchased 16 6 million shares for $914 million, we returned $258 million to shareholders through dividends.
No.
Let's turn to slide 12, and review our outlook for 2023.
I would like to preface our guidance by reminding everyone that these are uncertain times, which makes forecasting extremely challenging.
For Masco overall.
We're planning for volumes to be down in the low double digit range.
Partially offset by low single digit pricing.
Based on this assumption, we expect 2023 sales to decline approximately 10%.
Getting margins of approximately 15%.
Currency is projected to have minimal impact on our 2023 results.
Our SG&A as a percentage of sales trended below our normal levels during the pandemic.
However, as we continue to invest in our businesses for future growth, while maintaining cost discipline. We expect this percentage to increase back to a more normalized pre pandemic level be around 17, 5% for 2023.
As always we will take appropriate actions to address our costs as the year develops based on market conditions.
Operating margins will be impacted.
More in the first half of the year due to lower volumes and strong year over year sales comps, particularly in the decorative architectural segment.
As we previously discussed.
Operating profit in the first quarter will also be impacted by the higher operational costs, we experienced starting in Q2 last year, particularly in the plumbing segment.
As we think about the cadence for the year, we expect our Q1 sales and margin profile look similar Q4 2022.
Our year over year operating margins expanding expect it to improve each quarter thereafter.
In our plumbing segment, we expect 2023 sales to decline in the range of 10% to 14%.
We anticipate the full year plumbing margins will be roughly flat with 2022 segment margins at approximately 16%.
Lower volumes, even in the first quarter higher operational costs.
Will impact margins with favorable selling price increases partially offsetting these headwinds.
In our decorative architectural segment, we expect 2023 sales to decline in the range of 5% to 10%.
Looking specifically at paint for 2023.
Currently anticipate our DIY business to decreased high single digits.
On a pro business decreased mid single digits.
Recycle over 25% propane through 2022.
We anticipate the full year decorative architectural margin to be approximately 16%.
This margin is largely due to our significant pricing actions in this segment typically only recover the dollar amount of the inflation.
As a result.
All else equal operating profit dollars remained neutral from cost recovery pricing actions resulted in margin compression.
We are also playing an increased investment in people and capabilities in 2023 to drive future growth in our pro paint business.
As it relates to share repurchases.
Modest share repurchases and expect to spend approximately $500 million on share repurchases.
With this activity being weighted more towards the second half of the year.
Finally, as Keith mentioned earlier, our 2023 EPS estimate is $3 10.
To $3 40.
This assumes a 226 million average diluted share count for the year and a 24% effective tax rate.
Additional modeling assumptions for 2023 can be found on slide 15 in our earnings deck.
With that I'd like to open the call for Q&A operator.
Okay.
Thank you.
In order to ensure that everyone has a chance to participate we would like to request that you limit yourself to asking one question and one follow up question during the Q&A session.
To ask a question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press star followed by <unk>.
Our first question comes from Michael Rehaut with J P. Morgan. Please go ahead Michael.
Okay.
Okay.
Great. Thanks, so much and John best of luck.
It's been a real pleasure working with you I can't believe it's been 15 years, he's been a real pro the whole time, so that's the block.
Thank you Mike look forward to catching up with you later.
Sounds good.
First question I appreciate the 2023 guidance and particularly the.
The volume assumptions, which I think are.
We were more conservative than your peers and so far at least this earnings season and appropriate.
I wanted to focus though on the.
Decorative margin and.
Your comments around that.
The fact that the.
The price the cost inflation recovery doesn't include margin in that price so hence the.
The margin decline.
But when you look at the margin versus the last 10 15 years.
<unk> has consistently done.
18% plus margin.
So this would be somewhat below.
I was hoping to get a sense.
It's not the 2023, perhaps 'twenty four 'twenty five how youre thinking about the business.
Cost deflation might help reverse some of that margin.
Contraction if that might occur later this year.
Or is it.
Perhaps there is anything structurally different about the business either with CRO, perhaps having a slightly lower margin or.
Other factors to consider relative to the longer term average.
Hey, Mike This is Keith.
As you pointed out the past two years have really been unprecedented in recent times anyway with regards to the rate of inflation.
Coupled with supply chain difficulties, which clearly impacted our margins.
We are absolutely focused on bringing the cost out of our operations and taking additional price.
Where needed now when you look at the impact of this significant inflation and we've talked about this before when you.
Particularly in our paint business recover the dollars, we performed well in the overall dollars.
But.
The significant margin erosion arises from that dollar only coverage when you talk about increases.
To this level.
So there will be.
Incremental pricing that we take as we move through the year and some parts of our business.
We expect these levels that are.
That we're experiencing in 2023 to be the kind of the base of which we will build going forward and when you think about that with regards to our 30% incremental leverage on additional volume that would actively improve our margins. So we anticipate in.
And are driving very nice margin expansion as we get through 'twenty.
2023, we do feel that this is going to be a relatively short lived recession I'm reluctant to put a number on where we can go to but I think if you. If you think about the margins historically that we experienced pre pandemic.
Certainly.
Business is heading.
And Mike maybe I can give you.
In addition to Keith's comments.
More color specifically as it relates to the decorative architectural segment.
And the margins there.
So to your point that you raised obviously we.
I cover the dollar cost of inflation and maybe to put a finer point on that.
If you consider.
If we take a 10% price increase in the segments that will result in roughly a 180 basis points of margin compression.
So while we maintain our operating dollars at flat levels, and so which is a point that you were making yes, clearly the what we're seeing now and what we're foreshadowing for 2023.
Part of it.
Our 23 guide versus historical performance relates to the.
The cost recovery that we're getting on inflation.
The other thing that I would point you to Keith.
Keith prepared remarks in my prepared remarks, we talked about they weren't going to make some incremental investments.
Particularly in the decorative architectural segment around the pro business and so that's also having an impact on 2023 margins.
To the point you also raised to the extent that commodities were to roll over.
There would be.
Input cost deflation you would see some margin expansion.
As a result of that is due to the fact that.
There could be some pricing concessions that we gave when.
When commodities rollover, so that's how that math would work so, but so I think.
Your point is well taken and I think that it helps explain the 16% versus our historical margin.
Okay.
That's a great answer.
Before I ask my second question, perhaps you could fold it in.
Highlighted the incremental investment and pro I'd be curious to know how much of a drag.
It might be in this current upcoming year.
But secondly, I mentioned also that you know.
Overall.
Volume.
Expectations for 'twenty, three I think being.
No.
Much more conservative than some of your peers and we were certainly in that direction.
Sales in terms of how we're thinking about things.
Would be helpful and sorry, if I missed that earlier.
If you think about the low double digit volume decline you kind of broke it out between I believe how youre thinking or at least on a topline basis.
The two segments, but.
From an end market perspective.
I would assume that.
Repair remodel and market demand youre thinking about it at a similar level, but correct me if I'm wrong.
And.
Also how that other end markets that you play in such as Europe , or new Reds, which is admittedly it's pretty small.
How those different end markets play into the down low double digits.
Youre expecting that to kind of accelerate as the year progresses.
Mike maybe it'd be helpful. If I kind of go through are our principal markets and talk to our assumptions.
As it relates to overall market performance.
The big one obviously as north American repair and remodeling and in general we're looking at that market to be down low double digits.
International.
Obviously, a significant portion of our business, we're calling to be down high single digits.
And then as we've talked a little bit already in terms of the paint market. We think broadly of that obviously in two markets. The DIY and the pro market in our estimation is that the DIY market will be down high single digits and the probe market would be down mid single digits.
So we look at to get those numbers, we look at.
Trends that we see and numbers that we evaluate in terms of industry research.
And we come to an assumption on how that all filters out and then importantly.
We look at how we were performing in the back half of 'twenty two.
And we rolled that in with our R&R focused.
And industry research to come up with.
Our estimations are where they are now obviously, we've heard and talk to many folks who have different views. So it really is a matter of the point of view that we take.
And if that point of view varies I think you can see that we consistently have delivered 30% dropdown on incrementals and when we see some pullback like we're expecting in 'twenty three we will.
Okay, Decrementals that look better than that 30% so.
We are ready to not only flex our business down and have demonstrated that with regards to cost control and working through issues associated with variable productivity and lining up our supply chains to address a new volume level, but we're also committed to investing in the key growth levers of our business.
Pro being one.
And propane.
Investing in.
High growth markets for Us we've talked about how successful we've been in China and in Europe . We continue to do that and then of course the core business here in North America. So hopefully that gives you an idea about our perspective and why our guidance is what it is and how this business is ready to do what I think is most important in these times of volatility.
And that is to adapt to changes as they come.
Great.
Yeah.
Yeah.
Our next question comes from Stephen Kim with Evercore. Please go ahead Steven.
Yes, thanks, very much guys and again, Jon I'm sure you can get a lot of this but it's been it's been a pleasure and best of luck.
First question for you I guess sort of at a high level.
I understand that certainly.
Things are uncertain.
You don't want to lean too.
Too much I suppose on your outlook for later in FY 'twenty, three but you.
You did provide.
Some commentary about a quarterly cadence, which I found very helpful.
Was curious as to whether when you said that you anticipate that.
The sales growth and the margins would improve.
By quarter as you make your way through 2023 is it your sense that by the time you get to the end of the year, we could actually be looking at some positive comparisons on the top line.
And.
And then certainly on the margin as well.
So Steven.
<unk>.
We gave out in terms of the cadence. Obviously, we said Q1 is going to look a lot like Q4 of last year. So and then what we said from their operating margins should expand on a year over year basis each quarter thereafter.
To your question.
Whether we should see positive sales comps by year end.
Given the double digit decline.
Approximately 10% decline that we're expecting in sales for the year.
Yeah, it's hard to say, how Q4 is going to develop it at this point, but at this stage I, probably wouldn't count on positive comps in Q4.
Okay.
Helpful. Thanks for that and then just a sort of a broader question.
About your expectations you know, obviously <unk> came in a little bit lighter than than I think you were expecting.
What's interesting to me is the timing of when you provided that commentary or outlook was worried about when mortgage rates were peaking in the U S.
And I would say in general since late October .
It kind of been a growing sense in the U S housing market, but perhaps we've at least.
You can see where the bottom is we could January was actually surprisingly strong.
I know youre going to say 111 months and a quarter, making all of that but if you could just sort of comment a little bit as to what it is that worsened in Europe or worse relative to your expectations.
Despite the fact that maybe the housing market, which is sort of the leading indicator perhaps.
It looks like it's actually gotten better.
Yes, maybe Steven I'll start off and maybe Keith you can.
You can chime in so.
I know youre, turning things off the housing market I, just want to remind everyone on the call that you know the housing.
New construction market really doesn't.
Impact us all that much.
10% of our revenue, but it is what we look at it in the fourth quarter with.
Our demand that we're seeing.
And also how the consumers behaving.
Really kind of drove us to the guide that we're giving giving right now the only thing I would.
I'd say as you think about 2023 and think about some of our businesses Keith in his prepared remarks talked about how our spa business, which has been a strong growth engine for us during the pandemic.
Backlogs are now down to more normalized levels.
As we think about that product category in particular.
As we go into 2023.
Just given the high ticket nature of that product, we do expect that that will probably weigh more heavily on plumbing growth in.
In 2023, and so it's broadly around what we're seeing relative to the consumer right now, but I don't know if theres something else you want to add sure.
Stephen if you think.
The fundamental question of.
If things are better.
What would that drive in our business and I think we've covered that in terms of thinking about our dropdowns on the incrementals on how we manage on that down.
With the Decrementals.
I would also put a finer point on that.
This notion of volatility and things can change and sure yes, absolutely a month doesn't a quarter, making a quarter doesn't make the year, particularly if you think about.
Our business in our industry is in June or July and then what I ended up happening in that kind of a tale of two halves of last year. So things can change and this is a volatile time and we're specifically focusing our organization on.
Adaptability and looking at signals now in terms of how our guide or how the industry may.
Improve your viewpoint to rates, obviously, that's a factor we are a new repair and remodeling company and a little bit of new construction, but fundamentally we are in our repair and remodeling. So some of the things that could change the assumption for us would be home prices and home equity holding up better than expected for example.
Certainly an increase in existing home sales would help.
When you think about.
Our international down high single digits, if we saw better than expected GDP and U S Europe and <unk>.
China that would.
Clearly help were strongly related to consumer confidence.
So and then on the performance side of the ability for us to gain more share than expected. So there are things that could could could we are watching and that could drive the economy to perform better than our guide.
I'll take us back to our fundamental message here is.
We have a very adaptable business small ticket use that big projects used on small projects. We cover very effectively on the premium segment in China brand leader in Europe and of course, a strong fundamental base here in North America. So our business is built for that and for these sorts of.
Things in terms of variability and that's what we're driving but there are areas, Steve and that could lead to better than expected performance on the overall macro.
Great. Thanks, a lot guys.
The next question comes from Michael <unk> with RBC capital markets. Michael. Please go ahead.
Good morning, Thanks for taking my questions on the Harsco others John .
It's been a heck of a ride.
And we look forward to catching up more offline.
A couple of follow ups here.
On the cost side I think the discussion with with Mike earlier around the paint side, which was helpful. But just to follow up there in some of your some of your peers have been talking about deflation coming through the next quarter couple of quarters.
Regress and so maybe you can give us a sense of how youre thinking about costs and how you are seeing costs in the paint business and also expand that.
Plumbing it seemed like was going to have some tailwind maybe calpers backups.
Give us a little more color on what Youre seeing.
On the <unk>.
<unk> costs as we work through this year.
So thanks, Thanks, Mike I'll ask Keith I'll start off on the paint raw basket and to give you a perspective on what we're seeing in terms of inflation.
How we're thinking about that.
You look at our overall paint raw material baskets.
While we have seen some relief in feedstocks for RASM.
But <unk> for example, and other specialty chemicals are very sticky and remain elevated.
So we are continuing to see overall in the basket and elevation.
On the indirect cost, which is a big big portion of.
Our raw materials at our <unk>.
Manufacturing process.
We are seeing continued inflation. So it remains a challenge and I'm talking about things like palettes transportation.
Labour absolutely is still elevated so we've seen some sequential moderation, but the raws continue to remain relatively elevated.
We're still recovering from significant cost increase that we've incurred over the past couple of years.
So at this point, we really have minimal raw material deflation built into our plans for 2023 and don't expect to see it and that's based on what we're currently seeing.
From our supply base and from the market.
And Mike maybe I'll take the plumbing side of the equation so.
As you looked at some of the base metals copper zinc that go into our plumbing products.
Obviously, the inflation there was pretty significant in the year up low double digits.
Uh huh.
If you looked at the prices through the course of 'twenty to 'twenty two they probably peaked in the second quarter. We saw some moderation in Q3 and Q4 of last year in those commodities.
That said.
Since the years begun we've seen a little bit of an uptick in both.
Those copper zinc.
No.
They're still elevated but off their highs obviously.
Ocean freight which is another good significant input for us on that side is moderated as well, but its still compared to historical levels, it's above normal levels.
And obviously wage is wage inflation is still something that we're dealing with.
Some of the things that.
Are also impacting us in the plumbing segment like our energy costs in Europe as you might expect given what's going on over there.
That's offsetting any of the benefit.
From moderating demand are moderating.
Inflation in the raw materials have been partially offset by some of these things.
Net.
Where do we land on this in 2023, and we think we will expect.
Expecting low single digit deflation in our plumbing input basket and as we continue to recoup some.
Some of the cost increases that we've incurred over the course of the last couple of years.
Okay. That's great. Thank you both that's very helpful.
And then on my follow up question I wanted to ask about the SG&A. So the comment that it's going back to 17, 5% certainly conceptually understand the idea of needing to invest in the business and some of the baskets qualitatively.
Talked about but when I when I look at the numbers I mean, what that really implies.
<unk> sales to be.
Down give or take $900 million year on year with SG&A dollars down immaterial amount maybe 'twenty two.
$5 million, so that that seems like an awfully lot.
A lot of reinvestment, maybe you can help us understand a little bit more bucket out.
Quantitatively.
Some of the things that you've discussed in terms of whats.
Sticky outlook on SG&A dollars.
Yeah, Mike maybe I'll give you a couple and then Keith feel free to add to supplement my comments, so Mike you're right.
Our guiding SG&A as a percentage of sales to be up in a big part of it is what you referred to you know obviously.
We're.
Foreshadowing sales down 10% for the year, which will have an impact on the margin I think the other thing to point out two things.
One is the reinvestment that we're making.
In SG&A some of that he comes in a couple of different forms.
Some of it is the pro investment.
Keith referred to some of the head count pro sales reps and things like that that we'll be adding some more feet on the street to the job site delivery also like in Q1 for instance, there's a couple of large tradeshows that we historically went to you, but we're really suspended during the pandemic and so this is the first time that we are coming back to.
For those in several years and so that will be expense.
<unk> for us.
And then I would also point out again.
In 2022 for instance, there are certain variable costs that were just lower than a year and we're projecting those to come back to more normalized levels in 'twenty. Three so those are two or three things.
Be impacting our SG&A for next year, So Keith I don't know if theres anything else you want to yes.
Yes.
Mike when you think about it in kind of in general areas.
The economy is coming back and the way that we approach growth and the way we develop.
Advocacy in the markets you have to be out in those markets. So I think you were at <unk> and <unk>.
Las Vegas, that's an example of a big net national.
Kitchen, and Bath show in the United States every two years.
There is a similar even bigger show I know youre aware of this and ish.
Where we have significant investments.
Big presence there as a matter of a course of business and that hasn't happened in four years and Thats coming back this year and Theres. Other examples of that across the globe, where we're investing and what I would say as a more normalized way of building advocacy for our brands and launching our new products now.
When you look for example in Europe , but ish.
We've always had our significant competitor and a very big position out there they've made the decision not to not to reinvest and won't be there.
We don't think Thats the right thing to do in fact, we're leaning into that into that investment, we're showing a great new product assortment with <unk> in terms of our showers and our.
Fossett launch, we're getting into adjacent products with our best furniture, and we're continuing to build.
Continuing to build our brand.
When you look at where we're investing in continued growth and continued momentum.
Look to the pro as John as John mentioned.
Investment for US Paul Pro loyalty has been building over the last three years, we've gained significant share and we intend to continue to outgrow that market. So adding more people on the street to continue to.
Get new customers, new painting customers to try our products, we've seen that would be very successful when they try it.
There was a lot of question on our ability to maintain the share gain and the stickiness we've done that.
So we're focused on continuing to drive those share gains and it takes an investment to do that in terms of operations things like buy online pickup in store expanding delivery options.
Expanding the pro sales force as I mentioned, working and expanding our loyalty programs. This is all fundamentally.
Our our strategy and at the end of the day, we're committed to managing our decrementals in the downturn, while at the same time investing so that we win and exit stronger coming out of this recovery and we think thats the right equation for our business.
That's great very comprehensive thank you both.
The next question comes from Matthew Bouley with Barclays. Matthew. Please go ahead.
Good morning, everyone. Thanks for taking the questions I also want to extend my best wishes to Jon.
Apologies if I missed this call issues, but on the on the revenue guide for plumbing, the down 10% to 14.
I think you had talked about Q1 sales results for the whole business, perhaps looking similar to Q4.
So I'm, assuming you're saying something similar for plumbing.
And so therefore, the assumption would be rather sharp deceleration in the plumbing segment beyond Q1, I guess number one correct me if I'm wrong, but number two can you sort of help us out with.
Any additional cadence there and any kind of specifics around whether its the spa business, that's moving the needle or some assumed destocking.
Along those lines to help.
Help us on that plumbing guidance. Thank you.
Yes, sure Matthew So I'll give you a little bit of color on that you touched on it partly in your question.
A portion of what we expect to see.
In the year in plumbing is due to the spa business because it is a high ticket item and it's one that as Keith mentioned in his prepared remarks as is now back at normalized backlog levels.
Our backlog and so that's unfortunate but the other portion of that I would guide you to think about is if you look at.
The sales cadence through the course of.
2022.
Plumbing had much less of a pullback then.
Paint business did in 2022 and so.
As we see the calendar rolled to 2023, partly due to the spa business, partly due to.
Some of the stronger comps that theyre going to be facing in the first part of the year, we shouldn't expect to see a little bit of soft a little bit more softness perhaps in the plumbing segment.
As a result of those strong accounts that they face.
Matthew you mentioned Destocking I know Theres been talk.
And out in the industry of that in various channels.
Did see I'll call it moderate to very moderate destocking in plumbing in Q4.
A little bit in the North American wholesale.
And less than retail it really wasn't significantly material for us and we're not expecting significant headwinds from destocking in 2023.
Alright, Thank you for that that's super helpful.
And then the second one sticking with plumbing on the margin side in the guide there.
It seems like the <unk>.
Assumption on the decremental.
On the softer end of <unk>.
The low Twenty's, you mentioned for the entire business for the year.
And I heard you say earlier, you're not assuming much in terms of raw material tailwind for the business. So.
Just kind of any any any help on kind of what you are assuming there is an ocean freight et cetera, what are some of the areas where you feel like you can sort of manage that.
<unk> in 2023.
Okay.
The biggest impacts the planned volume reductions.
So the way, we impact that is to drive productivity and to reset our our manufacturing and supply chain. So as you might imagine we're working hard.
Equalize shifts to make sure we're continuing to drive productivity productivity and the variable overhead line.
Always drive and focus on our direct labor and shifting that direct labor down.
And we have had.
As we've talked about.
Really starting in the back half of last year's operational and supply chain challenges and it really is on rhythm and getting our supply base to deliver us and delivered in a way that's <unk>.
Synchronous with what we expect and how we have our bids build schedules. So we can be very efficient that's still a challenge that were significantly better.
That challenge will remain through Q1, but coming out of Q1, we're going to have that behind us and have our productivity, where we expect it to be so.
Lower volumes as the principal driver of the margin pressure and the higher costs that will work through early in the year.
Yeah.
Got it alright, thanks, Keith Thanks, Joe and good luck guys.
Thanks, Matt.
The next question comes from John Lovallo with UBS, John Your line is open.
Good morning, guys. Thank you for taking my questions and John Best of luck with everything.
First question I guess is are you guys anticipating implementing additional pricing actions in 2023 or is it really just largely carryover pricing at this point.
No we will have some additional actions.
No.
Spots of our plumbing business that we're looking at and we'll be implementing price and then our decorative business as I mentioned with our commodity basket. We're continuing we're continuing to see elevation, there and we'll watch that.
Got it Okay, and then I think the outlook for $500 million of either acquisitions or buybacks. I think you mentioned buybacks would be sort of back half weighted just more curious on the acquisition front I mean, what youre seeing in terms of pipeline there.
Yes, I'll take that.
John So.
Our corporate development team is active and we as a management team are active in.
<unk>.
Cultivation process.
<expletive> of acquisitions, but then at the same time.
As you might imagine in this environment.
They're there.
The conversations.
Sure.
I'll, probably not as productive just given some of the softening up performance in businesses through the course of the back half of 'twenty, two but that said you never know when people are going to transact. So we have to be out there we have to be engaged.
And so we've got the team out there actively looking.
That's.
So.
Always hard to forecast what may develop through the course of 'twenty three.
And so that's why we're getting for everyone to think more about share repurchases at this moment, but Keith I don't know I think.
It remains to be seen but the cost of capital and the leverage limitation that that represents could make it a little bit more difficult for financial buyers and could help us, but we are seeing a little bit of.
The slower deal flow, but again very active in the cultivation and try to make sure that we drive strategic fit right return.
Okay.
Makes sense thanks, guys.
The next question comes from Garik <unk> with loop capital markets. Please go ahead.
Oh, hi, Thanks, just curious on the DIY side with it.
Down low double digits.
2023 <unk>.
Category has been slightly up against some tough comps, but it has been trending.
Lower from a from a growth perspective I'm. Just wondering are we at pre pandemic levels for DIY paint.
And any perspective on how we are they are relative to history it would be great.
Yes, so as we look at our paint volumes Derrick.
We are at roughly 2019 volumes, it's not just slightly under them right now so we.
The market has kind of reverted back to those 2019 levels.
I would tell you that the fundamentals of how we look at that market are still supportive of long term growth for DIY, particularly the millennials. That's a big cohort. They are clearly an influx thing into the housing market and we've.
We've seen based on our basic research that there are more than willing to pick up a paintbrush and do their own painting, So I think thats.
Our position that will bode well for us as we as our brand gains more and more traction and really a leadership position with those millennials when they look at the data that we see.
The other thing I would point out of character.
I should have mentioned this earlier to the extent that the economy does soften you do tend to see a shift more towards DIY consumers taking on projects more projects themselves as opposed to have the projects done for them. So that could be a tailwind for us as we go into 'twenty.
<unk> 2023.
If you think about the.
The pandemic and how that played out as it relates to a significant growth early in the pandemic with DIY and then as that.
<unk>.
Fear if you will of.
<unk> is coming into your house abated as the pandemic was more under control that shifted over to pro growth and I think the position that we have with our outstanding partnership with the home depot in terms of being able to cover that variability and those shifts our pro business is very strong now.
Different shifts in the market.
And potentially different shifts from one part of that market say DIY to pro.
Like our brand we like what our brand represents to both the end consumer as well as the professional.
Great. Thanks for the color.
On the pricing side, you mentioned you are looking at some targeted price increases I'm curious.
Given some of the softening of demand are you seeing any any pushback on pricing.
Any impact on mix at all.
Again, where we where we're talking about our targeted price increases for 2023, it's mainly in plumbing.
We've got some international price increases planned in some spots I think we have some.
Certain parts of our assortment assortment in North America.
You have a little bit of color in terms of pushback.
Today that really I think.
It's all about the price value relationship and the service that we bring and our customers are.
And channels are well aware of the cost that we're experiencing not only in the direct material front, but really as I talked a little bit before referencing our paint basket.
The way we ship our packaging our freight costs are labor costs, those sorts of things so.
I would say not any more pushback than you would normally see.
On the mix front.
A little bit of trade down.
Slight to trade down in our in our plumbing business, we have seen in spots but.
Really nothing that I would call significant at all in 'twenty, two and nor do we expect that in 'twenty three.
<unk>.
Part of that similar to our.
Coverage across DIY, and pro and paint as it relates to being able to address market swings. We also have broad assortments and we cover price points and we have styles and various technologies that fit for.
For different people so.
We are prepared for those kinds of.
Changes if they come but we're really not anticipating very much mix shift at all.
And Garik the one the one point that I would just add to Keith's comments as you think about price for 'twenty three.
The significant majority of price will be carryover price rather than.
<unk> implemented price in 2022, so I just want make sure that that distinction is very clear to everyone.
Our final question today comes from Keith Hughes of Chewy Keith. Please go ahead.
Thank you I just want to go back on the guidance and plumbing you highlighted some several things.
Done well, particularly the small business or coming off some big numbers, but is there any other detail you can give us the decline you're you're forecasting is greater than your.
Equal to or greater than your decline.
Remodel mature assuming what else is going on there.
Yeah.
Well I think John touched on this a little bit earlier cases.
If you think about our paint business that adjusted volume wise kind of mid year.
Plumbing business was a little bit later to do that so.
I think thats a combination.
Asian of larger backlogs bigger projects that tended not to flex so much so I think that carryover.
<unk> helps to account for a little bit more of a.
Volume reduction guide on plumbing than we have on pain.
And we will all have the same.
Cadence you talked about earlier.
Or will the decline be more ratably.
During the year based on your forecast.
I think Keith you would be.
Kind of the same similar cadence that we described earlier, we are a little bit more impact in the first part of the year given the stronger comps that we're up against and then.
We get into.
Easier comps in the back half of the year.
Okay. Thank you.
Okay.
Like to thank all of you for joining us on the call. This morning and for your interest in Masco. This concludes today's call.
Thank you everyone for joining us today. The call has now concluded and you may disconnect your lines.
Yeah.