Q1 2023 Masco Corp Earnings Call

Good morning, ladies and gentlemen.

Welcome to Masco Corporation's first quarter 2023 conference call.

My name is Michelle and I will 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 Star then the number two.

I would now like to turn the call over to David Chaika, Vice President Treasurer, and Investor Relations. Please go ahead Sir.

Thank you Michelle and good morning, welcome to Masco Corporation's 2023 first quarter conference call.

With me today are Keith Allman, President and CEO of Masco, and John Snub Masco, as Vice President and Chief Financial Officer.

Our first quarter earnings release, and the presentation slides are available on our website under Investor Relations.

In our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow up.

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.

Described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K, and our Form 10-Q that we filed with the Securities and Exchange Commission.

Our statements will also include non-GAAP financial metrics.

Our references to operating profit and earnings per share will be as adjusted unless otherwise noted.

We reconciled these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under investor relations with that I'll now turn the call over to Keith.

Thank you Dave Good morning, everyone and thank you for joining us today.

Please turn to slide five.

I am pleased with the start of our year and want to thank our employees and supplier partners for executing well in an environment that remains challenging.

We are focused on winning in the recovery by continuing to engage with our customers launch new products and expand the breadth of our brands.

At the same time, managing our cost in these uncertain economic times.

In this period of volatile macroeconomics and slowing demand our topline decreased 10% in the first quarter against a strong 12%.

Volume was down 14%, partially offset by pricing actions of 6%.

While operating profit declined in the quarter, primarily due to the lower volume higher input costs and continued investments for future growth.

Our strong execution delivered a decremental margin of approximately 20%.

Our earnings per share for the quarter was <unk> 87.

Turning to our segments plumbing sales declined 8% in local currency with North America, and international plumbing declining, 10% and 3% respectively.

Both our North American and international plumbing businesses continued to further strengthen their industry, leading brands customer service and new product development.

In North American plumbing Delta Faucet launched new products at the kitchen, and Bath industry show, such as the Delta shower digital shower and the Delta steam shock each offering consumers a more customizable shower experience.

And our Spa business Watkins wellness launched a complete redesign of its top selling hot springs highlights offering.

These spas have exciting new features to enhance the consumer experience.

We'll help Watkins outperformed the competition even in the challenging market.

And our international plumbing business has grown.

We launched new products, yes.

A world's leading plumbing tradeshow.

Including a new product portfolio, sanitary ceramics, and bathroom furniture paired with their premium faucets and showers.

Additionally, they introduced the next generation of their in Wall box style, which allows installers to connect any type of plumbing fixture without the need for major construction work.

It is growing also displayed their focus on the environment with a concept study of a bathroom that consumes 90% less water and energy highlighting their commitment to the development of innovative and sustainable products.

With our strong brands.

Geographic diversity and innovative products, our plumbing segment is well positioned to continue to gain global market share.

Turning to our decorative architectural segment sales declined 10% in the quarter against a strong 17% comp.

Propane declined mid single digits against a tremendous cap of over 50% in the quarter of 2022.

And DIY paint sales declined high single digits.

In the quarter bear continued to launch new products and services and received recognition for their industry, leading customer satisfaction.

We gained shelf space with our adjacent paint categories, such as aerosols interior stains clocks, and sealants and applicators as these programs expand it into additional stores.

We launched bear dynasty exterior for the summer painting season, expanding the lineup of our number one rated dynasty paint line.

And we continue to invest in people and capabilities to better serve the pro paint.

By adding additional sales reps, increasing job site delivery capabilities and expanding our loyalty programs.

Lastly in a recent third party paint satisfaction study.

<unk> earns a number one rating in the exterior paint category and then number two rating in interior paint.

Demonstrating the strength of the bear brand.

Quality of our products and our exceptional service performance.

Turning to capital allocation.

With our strong free cash flow and balance sheet, we returned $121 million to the shareholders through dividends and share repurchases as we bought back one 1 million shares for $56 million in the quarter.

Now.

Turning to our outlook for the remainder of 2023.

While we delivered solid first quarter results, we remain cautious and continue to expect softening demand trends in 2023.

As our markets suggest to increasing interest rates persistent inflation and tighter consumer spending.

In this uncertain environment, we are focused on adjusting our costs and minimizing the impact to margins from lower volumes.

We have enacted select hiring freezes and have reduced staffing with head count down approximately 5% year over year.

We announced the closure of one of our plumbing manufacturing facilities and we have delayed the opening of our new spot plant as we continue to balance investing to win in the recovery with cost reductions.

With the actions we are taking to address this dynamic environment.

Our continued strong capital deployment and the uncertain macroeconomics, we continue to anticipate earnings per share for 2023 to be in the range of $3 10.

To $3 40 per share.

While near term market conditions remain challenging.

We believe the long term fundamentals of our repair and remodel markets are strong.

So cyclical factors such as home price appreciation in existing home turnover will likely remain a headwind for 2023.

We believe structural factors such as consumers staying in their homes longer the age of housing stock and high home equity levels will drive increased repair and remodel activity in the years to follow.

I'd like to remind you of the strength of masco and the power of our focused business model.

Our portfolio of low ticket repair and remodel products with market, leading brands and product and geographic diversification.

Revised growth and stability through cycles.

We arguably have the strongest portfolio of brands and building products industry with Delta at how it's growing in the plumbing industry and.

And bear in kills and paints and partners.

Our products are found everywhere consumers want to shop.

We are able to leverage consumer and customer insights across all channels.

This drives powerful innovation as evidenced by our 25% vitality index and leading customer satisfaction as evidenced by numerous customer satisfaction and service awards.

And through the execution of our Masco operating system, we look to drive operating margin expansion through cost productivity and volume leverage.

As demonstrated in the first quarter.

Yes.

We will continue to invest in our brands capabilities and people to outperform the competition in both the near and long term.

With favorable fundamentals for a portfolio of low ticket repair and remodel oriented products and our continued focus on executing our growth strategy together with our strong free cash flow and capital deployment, we are positioned to drive shareholder value creation for the long term.

Before I turn the call over to John I wanted to take a moment to thank him for his over 27 years of service to Moscow.

He has been an invaluable partner not only to me, but the entire organization our board and the investment community. During his tenure with the company.

He will be missed and.

We wish John all the best in his future endeavors.

John will be leaving us at the end of May and we are in the process of selecting his successor.

We have strong internal candidates and have engaged a search firm to assist in conducting a thorough external search as well.

While we complete this process, Dave Chaika, <unk>, Vice President Treasurer, and Investor Relations has been appointed as our interim CFO .

Dave has over 20 years experience with the company starting in our M&A department and progressively adding additional responsibilities including treasury.

Risk management financial planning and analysis and Investor Relations.

Additionally, prior to Masco, Dave was a vice president in the commercial banking industry and an officer in the U S. Navy.

Now for the final time, I will turn the call over to John to go over our first quarter results and 2023 outlook in more detail John .

Thank you Keith and good.

Everyone.

As Dave mentioned.

Today, we will focus on adjusted performance, excluding the impact of rationalization and other one.

One time items.

Turning to slide seven sales in the quarter decreased 10% in.

And excluding currency decreased 9%.

Lower volumes decreased sales by 14%, partially offset by net selling prices of 6%.

North American sales decreased 10% in local currency international sales decreased 3%.

Despite lower volume our strong execution in the quarter resulted in our gross margins expanding 150 basis points.

33, 6%.

This is the first time in seven quarters, we've expanded gross margins because we are now recovering the significant cost inflation, we've absorbed over the past two years.

Our SG&A as a percentage of sales was 17, 8% due to higher brand and marketing investments such as trade shows and sales meetings to support our growth strategy of investing in our brands service and innovation.

Operating profit in the first quarter was $312 million and operating margin was 15, 8%.

Operating profit was impacted by lower volumes.

Higher input costs and growth investments.

Partially offset by higher net selling prices.

Lastly, our EPS in the quarter was 87.

Yeah.

Turning to slide eight.

Plumbing sales in the quarter decreased 10% against a 9% comp.

And excluding currency decreased to 8%.

Lower volume decreased sales by 12%, partially offset by net selling prices, which increased sales by 5%.

North American plumbing sales decreased 10% in local currency.

This was driven by continued lower demand that we started to experience in the third quarter of last year.

This lower demand was fairly broad based across product categories and channels.

Our spa business, which is approximately 15% of the segment declined over 20%.

Now worked through the significant backlog generated from the spike in demand for its products.

International plumbing sales decreased 3% in local currency and 18% comp.

As demand softened in many European markets and China.

We're planning overall changes changes in channel inventory positions during the quarter did not significantly impact our results.

Segment operating profit in the first quarter was $202 million.

Operating margin of 16, 5%.

Operating profit.

Impacted by lower volumes.

Higher brand and marketing investments par.

Partially offset by higher net selling prices.

This resulted in a decremental margin of 19%.

While input costs have declined from the peak levels, particularly container costs.

Overall input costs remain elevated.

Turning to slide nine decorative architectural sales decreased 10% for the first quarter, because it's a strong 17% comp.

Paint sales declined high single digits with propane sales decreased mid single digits against a robust comparable over 50% in the first quarter of 2022.

Weis pad sales declining high single digits.

Keith mentioned, we gained shelf space there are adjacent product offerings, such as aerosols interior stains coxon ceilings and applicators.

Propane, we are investing along with our partner and our joint capabilities to continue to grow share in this large and growing market.

Okay.

Lastly, our operating profit was $133 million and operating margin was 17, 6%.

Operating profit was impacted by lower volumes and higher input costs.

Actually offset by higher net selling prices.

While we have seen modest sequential relief in certain input costs.

Other input costs continued to experience upward pressure, such as tio to labor and transportation costs.

The overall input basket remains elevated.

Turning to slide 10, our balance sheet remains strong with net debt to EBITDA at two two times at the end of the quarter.

We ended the quarter with approximately $1 $3 billion of balance sheet liquidity.

Working capital as a percentage of sales declined 100 basis points to 19, 1%.

Net 13 day reduction.

This is an improvement in working capital.

Net cash from operating activities was $33 million, an improvement of $260 million compared to prior year.

As expected lower volumes and less supply chain disruptions. This year, we anticipate working capital as a percentage of sales to continue to improve to be approximately 16, 5% at year end.

During the first quarter, we repurchased one 1 million shares for $56 million returned $65 million to shareholders through dividends.

As we discussed on our fourth quarter call, we anticipate deploying approximately $500 million towards share repurchases or acquisitions for the full year with.

With activity likely more weighted to the second half of the year.

Lastly, we have retired the $200 million remaining on our term loan that matures today high borrowing on our revolver we.

We will likely repay outstanding borrowings on our revolver during the third quarter.

Now, let's turn to slide 11, and review our outlook for the year.

We had a better than planned start to the year. However, we believe the delayed impact of rising rates tighter credit lower consumer spending in the face of persistent inflation have yet to fully play out in the economy.

With these uncertain times as the backdrop, we are maintaining our full year outlook at this time.

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%.

The operating margins of approximately 15%.

At this time currency is projected to have a minimal impact on our 2023 results.

Our SG&A as a percentage of sales trended below normal levels during the pandemic.

However, as we continue to invest in our business for future growth.

While maintaining cost discipline.

This percentage to increase back to a more normalized pre pandemic level.

It'd be around 17, 5% for 2023.

And as always we will take appropriate actions to address our cost as the year develops based on market conditions.

So 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 and plant startup 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 or 2023.

Currently anticipate our DIY Pete two decreased high single digits.

Propane business to decrease mid single digits as we.

Recycle over 25% peak gross propane growth in 2022.

We anticipate full year decorative architectural margins to be approximately 16%.

This is largely due to our significant pricing actions in this segment is typically only recover the dollar amount of inflation.

As a result.

All else equal operating profit dollars remains neutral from cost recovery pricing actions results in margin compression.

We are also planning an increased investment in people and capabilities in 2023 to drive future growth in our protein business.

Greater impact in the coming quarters.

Finally, as Keith mentioned earlier, our 2023 EPS estimate remains $3 10.

The $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 14.

Our earnings deck.

Before I conclude I want to take a moment that they keep for his 10 years of partnership.

Our board.

The entire masco team for everything over the last 27 years.

Leaving masco is bittersweet for me.

I look forward to keeping in touch with my friends and colleagues here and watching the company's continued growth and success.

Steve is a very capable executives we have worked together for more than 20 years.

The finance team.

Both Miss a beat under steady leadership his new role as interim CFO .

And I'm proud of everything that we have accomplished together at masco.

The team the best of luck in the future.

With that I'd like to open the call for Q&A operator.

Thank you Sir.

Ladies and gentlemen, we will now begin the question and answer session.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad.

If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number too.

And in order to ensure that everyone has a chance to participate we are requesting that you limit yourself to one question and one follow up.

Please standby for your first question.

Your first question will come from Matthew Bouley at Barclays. Please go ahead.

Good morning, everyone. Thanks for taking the questions and just wanted to pass along my best wishes to Jon.

So just on the overall margin outlook.

Given your first quarter margins came in ahead of the full year guide pre.

Previously you guys had spoken to sequential margin improvement across the business and so now the guide mathematically implies lower margins for the balance of the year. So my question is that just conservatism is there still a path to sequential margin improvement in either segments or is there something out there that could still take.

Margins lower thank you.

Hey, Matt This is Keith I'll start off and John maybe you could add some detail.

I think when we when you think about margin.

And our performance vis vis the outlook, it's really driven by volume.

As we've talked in the past.

Volume incremental volumes decremental volumes are at around that 30%, 30%, 35% range.

So that is.

A fundamental driver of.

What's happening to our margins. Additionally.

As I talked in my prepared remarks.

We endeavor to strike a balance here of managing our costs in these uncertain times.

We've demonstrated our ability to do that thus far and we'll continue to do that but it's also important that we continue to invest in our business. So youll see continued investments.

Uh huh.

Marketing and advertising for example, this quarter, we had two significant trade shows which when added up.

Our material investments for us that haven't happened in many years, we're getting together more as an organization in terms of sales meetings to continue to drive so there's additional investments.

On top of <unk>.

Yeah.

The headwind that we plan on experiencing from lower volumes.

And then there's pricing actions that calendar that and we will take we have taken pricing and we'll see those.

Anniversary here, mainly in the second quarter, then a little bit into the third quarter.

And Matt maybe just maybe just add a little bit of color further color to keith's comments.

Our prior statement was really that we would see sequential year over year improvement every quarter as we will go through the year and so.

Yes.

And what we intended to convey was that Q2 Q1 of this year would be better than Q1 of last year et cetera, et cetera, as the year rolls out.

And so as we look at it.

Our margins going forward.

The back half of the year margins get a little bit the comps get a little bit easier because margins decline, particularly in the fourth quarter.

We think we can get there for each of the subsequent quarters from here, but yes, it will be lower than that.

Where we're at here.

Here in the Q1.

Got you Okay. Yeah. Thanks, Thanks, John for that clarification and thanks Keith.

So.

Second question.

You mentioned in decorative that there were some shelf space Windsor in your adjacent categories. I'm. Just curious if you can kind of put a little finer detail on that any any color around kind of loaded or was there a margin impact from that in the decorative business.

We're not going to get into the specifics on the lower than the margin that needs is very good.

I think it's good business for us we've been working with our partner the home depot.

Cox and sealants applicators.

Stay in some of the products that we've talked about and as evidenced by the fact that we're rolling it out to additional stores, it's working and it's really attribute to the bare brand and the team.

They're in their execution. So it's good business for us it's building.

Clearly the main portion of our business obviously is on the liquids, but this is good and it's been.

Our strategic effort for the team.

Successful.

Alright, Thanks, Keith Good luck guys.

Thank you.

Your next question will come from John Lovallo at UBS. Please go ahead.

Good morning, guys and thank you for taking my questions, maybe just dovetailing off of Matt's question. There I mean 15, 8% margin in the first quarter <unk> were generally well above the first quarter.

And the full year outlook is 15% I mean, I know, we're only through the first quarter, but maybe if you could help us frame the sort of the upside and downside case, there I mean, let's say that demand.

Stays relatively flat from where it is today and where could those margins actually shakeout.

Yes, John maybe I'll start and Keith you can feel free to chime in so.

Is keith alluded to in answering matts question.

Did deliver some strong performance.

In Q1, and obviously, the 6% price help and as Keith also just referenced.

A lot of that pricing benefit starts to subside as you go through the year and you will see some benefit in Q2, because that's been a lot of the pricing got initiated but that benefit will really subsided pretty significantly as you go into the back half of the year, so that would that benefit going away that will have.

Some impact on margins if you'd also mentioned that you know.

We do expect volumes to be pressured this year.

If you think about the strong comps were up against.

Here in the first particularly the first half of the year.

<unk>.

Softer in the back half of the year last year. So.

We continue to expect that down.

Overall, our 10% guide to the top line being down I think that that weighs on it.

And then we've got some additional investments that we're making you know Keith mentioned, the fact that we're continuing to invest in.

In programs and initiatives.

Across the entire portfolio, but very specifically in the pro paint initiative, we kind of the last kind of headwind. We've got in is they've got a couple of facilities that are starting up in the back half of the year.

Create some.

Expense headwinds to us so that all of those things are kind of pressuring margins now to your question is yes.

Volumes remained flat from year could there be some upside to that yes, there could be.

And I expect there to be a values remain plant that that's not the model that we're forecasting at this point Keith animals Lasagna, Yes got it.

A little bit I think the declining volume is the pressure on the margins, where we could see some potential upside if we didn't see that volume decline.

Nice execution in the quarter.

R R.

The dropdown or Decrementals is typically in that 30% range.

We've done a pretty good job of that in Q1.

If we can continue to do that that would be some potential upside there is always an opportunity for.

Commodity cost to come down really what do we look at where.

They were in this first half first quarter, we haven't seen that deflation.

Elevated so.

We think we have our guidance right place, giving the given the uncertainty of the macroeconomics and we're going to continue to invest to invest in our brands, while driving and watching driving productivity and watching our costs.

Okay. That's helpful guys and then maybe more of a high level strategy question here. If we think about the propane effort at home depot I mean, what do you see as sort of the biggest challenges to growth there.

Is it is there are sufficient.

Sufficient dedicated sales force are there enough specialty products needed to complete bigger jobs.

Where do we get how do we get to the point, where it's very competitive with sherwin or PPG.

Sort of the missing elements in your view.

Well I would tell you I think we are competitive as evidenced by I think.

45% two year stack of growth in pro.

Get that without being competitive.

I like where our product offering is theres certainly tweaks, we can continue to make.

So the offering but we've got the right price points and we have.

A very strong brand.

So it's really about execution.

And when we look at what's happened to.

The customer base over the last couple of years. When we've had this extraordinary growth is that we've been able to because of our supply chain prowess get our pain in the hands.

More painters and what we're seeing and have a significant data with regards to net promoter scores and customer satisfaction and how they view, both our product and the total service offering with our partner the home depot, it's very strong so the challenges continuing to execute to continue to deliver on our brand.

Thomas and.

Continue to have the right price and the right service proposition and delivering so I think we're competitive and it's.

Certainly they have tough competitors, but I think as evidenced by what the team's been able to do we're looking forward to the challenge.

And Jonathan I also.

Pointed out to you that maybe I'd just add sorry to cut you off there to add to Keith's comments.

Uh huh.

If you take a look at the business we've done this to a $900 million business.

In a market this size call it $9 billion to $10 billion.

About how we're positioned everything Keith said.

We've got a great runway in front of us for future growth.

Because of our relatively small presence in the overall market, even though it's a $900 million business.

We've got a lot of opportunity to continue to grow this over the coming years with the.

Not only that the quality of the product initiatives the people.

The strength of the combination.

Fair enough.

The team has done along with our channel partner the home depot is a very powerful combination that the two companies and so we think that gives us a lot of opportunities for growth going forward.

Yes, I, probably should've said, even even more competitive as opposed to just being competitive.

Okay.

Thank you guys.

Your next question will come from Mike Dahl at RBC capital markets. Please go ahead.

Good morning, Thanks for taking my questions.

Keith I think in part of your opening remarks about kind of the caution.

Turning to express in the guide.

Recognizing there is some uncertainty in how the economic environment.

And the lag effect of some.

The stuff that we're all seeing out there more specifically you're a month into the quarter.

Your comments seem maybe a little more hedging around second half can you give us a little bit more color on.

What youre seeing at the start of <unk> and whether you've seen notwithstanding the comps whether you've seen any evidence of a significant change in customer behavior.

Across your businesses.

Mike Sure Mike as you know I'm, a little bit reticent to talk about in quarter, and where that looked month to months as there is a lot of variability there prior period had fewer days or if there was a load in for a new product launch or those sorts of things. So we tend to stick to the quarter I will tell.

Yeah that we did see a little bit of softening through the quarter and that coming out in April .

Fairly consistent with how we exited the quarter. So it's not that we're trying to signal what we're seeing in terms of something different that really really what came out of the quarter. Its pretty consistent it's more of understanding that we're in volatile times and that we're one quarter Ed.

And.

Well.

We'll learn a lot in the second quarter.

And.

We'll look at the guide and we will look at.

More informed opinion, it's just is an extremely volatile period right now that's that's what we're saying nothing nothing at all about <unk>.

Any sort of in quarter, how we exited the quarter.

We're doing it at the beginning of this quarter.

Okay, that's fair and it makes sense.

And then second question.

Just back on price cost I think clear enough in terms of some of the price commentary, where you got the carryover that then feeds.

I would think that costs fall somewhat similar.

<unk> in terms of highest in the first half of the year on inflation and then may be lower in the back half, but could you just give us a little more sense of from a pure price cost standpoint.

How you expect the year to progress as we go out over at <unk>.

Well I think I think we've done a pretty good job of recovering well.

Anniversary some significant price that we gave in the mostly in the second quarter.

Yeah.

I think the.

We've taken some pockets of further price increases in our plumbing business.

Where are we where we need it and.

We will continue to evaluate it but I think the fundamental messages theres an anniversary of the significant price increases that we gave last year that will come into the second half.

And really.

The dependency as it relates to margin does that the volume.

I guess, what I would add to Keith's comments are.

While inflation may have moderated from the peak maybe in the second quarter of last year.

Inflation, it's minor.

Stickiness is kind of monitoring it at higher levels than we had expected.

So.

That's your way into.

Higher price cost cadence for the year, I mean, yeah, well well, it's going to be better than this time last year, it's still out so maybe if you look at cap rates still.

Hovering around $4 a pound.

Sure.

Yes, some of our <unk> costs as you know we mentioned in our prepared remarks, we've seen a little bit of moderation.

And as stated kind of elevated levels, we're still seeing some pressure in some inputs, especially things like tio too.

So you know I would say.

That's going to be an impact in overall.

We're calling for kind of flat inflation now here in 2023, which is probably higher well it is higher than what we thought about at the beginning of the year.

No.

Because of inputs remaining high.

Other costs.

Labor continues to be sticky.

Pallets transportation continues to be high.

As Keith said.

We've been Belmont price selectively here in the first part is it's going to be we're still seeing fairly sticky inflation.

Very helpful. Thanks, John Thanks, Keith.

Your next question comes from Michael Rehaut at Jpmorgan. Please go ahead.

Great.

Good morning, everyone and John it's been a pleasure working with you and best of luck in the future.

First question I wanted to zero in a little bit on that.

The paint segment.

I guess both of my questions.

Center on that first.

If you could talk about the competitive backdrop.

We've heard a lot about.

Yeah, Sean Williams, potentially getting more aggressive and I am wondering specifically when you talk about investments in the.

In this segment over the coming quarters.

Where are those investments will be concentrated.

In terms of either personnel or potentially other types of marketing or even promotions.

Our brand spend.

If any of that is in response to.

Possibly the the overall competitive backdrop, becoming a little more.

Fears.

Hi.

Thanks, Mike.

Certainly we have very solid competition.

And that makes us better and we're going to continue to drive our investments, particularly in the Pearl but also in the island and in DIY, where we're extremely strong.

We fare quite well over the last two year stack as I've mentioned is 45%.

Gross when you when you talk about the pro and we're going to continue to invest in that we think we have a good proposition for the segment of the pro painters that we're going after and that investment really isn't so much a competitive response as it is a strategic plan that we've set out since this business was $50 million not too long ago, and we've grown it up to <unk>.

That said about 900 million so we're going to continue to invest in that.

I'm not going to get into the specifics of our plans going forward, but we're going to continue to invest in it too.

Continue to develop our service capabilities and to continue with what we already have in terms of strong net promoter scores and to grow those what we've done today are things like.

Buy online pickup in store ordering <unk>.

Expanding our delivery options, where we do more job site delivery.

Certainly expanding and developing our outside pro sales force both.

At Bayer and at the home depot.

Enhancing our loyalty programs, there's a number of things that we've done and we will continue to do so it's it's it's a competitive business.

But we're faring well and we're going to continue to invest in it and expect to continue to gain share.

Mike maybe if you just specifically wanted a component of your question.

Related to promotions and promotional activity.

There.

I'd say overall the level of promotion in the industry has been fairly moderate and perhaps similar to last year.

And can you can you do you think we offer a price competitive market.

We have a product in.

We think there'll be selective promotions, but we don't we don't.

We don't see elevating are escalating.

Over the coming weeks months whatever.

To the extent our channel partner.

Size to pursue promotions.

That's their decision, but ultimately we will support them in that if that's the direction they choose to go but that's their decision not our decision.

Right.

That's very helpful and I appreciate the.

The color on the promotions as well.

I guess secondly, you know, maybe just kind of taking a longer term view on the segment from a margin standpoint.

Your guidance for margins this year would be.

Lower than what you've seen in quite several years.

And I'm, just trying to triangulate how much of that decline, let's say from a longer term average of <unk>.

18, 19%.

Just pulling up here, it's actually right on the nose, 19%.

In 2012 to 2021.

How much of that might be the.

Dollar matching of cost inflation that.

Drive some margin contraction.

First is anything that you might consider structural in other words are there.

And I'm not.

I don't know this but I'm just asking for example, if the paint business has maybe a little bit of a lower margin profile given that it's smaller than DIY. It has higher investments or at least in the near term or if there's anything that's changed in terms of how we should think about the margins over the next three to five years.

Yeah, Mike I'll take a start at this and feel free to chime in so.

So if you take a look at it.

The differential that you cited and you consider the price cost relationship that we've got.

As we've said before that results in margin compression and if you.

Consider the amount of price we put in we put in double digit pricing over the course of the last couple of years.

And if you think about a 10% price increase would lead to about 100 to 200 basis point margin contraction that counts.

The vast majority of that margin compression, Mike that you cited.

There are some some of the investments would be a headwind.

Because if you bring on new sales force as always.

Cost ahead of sales generation, and so that that will be a little bit of a headwind to it.

So those would be probably be the.

Significant things there is not a.

There's a little bit of a margin differential in probe because of some of the investments that we've made in things like people job site delivery and other capabilities. The loyalty program that did Keith said it a couple of minutes ago. So that will that will be a little bit of a headwind does create a little bit of a margin headwind but.

The bulk of it is going to be the <unk>.

This recovery relationship that we've got Keith Arnold as anything else.

I think you hit it about violent decline the price cost recovery of dynamic and the continued investment in <unk>.

Alright, thanks, so much.

Your next question comes from Adam Baumgarten of Zelman. Please go ahead.

Hey, good morning, everyone. Just on the decremental margin piece I think last quarter, you were talking about the overall decremental margins, maybe being in that low 20% range and you're around 2000 for the first quarter or is that still kind of how youre thinking about the balance of the year or has that changed at all.

As Keith mentioned on the call or in his prepared remarks here, where you're working hard to keep our.

Cost control and keep our decremental and focus on our decremental margins and keep them around that 20% level, obviously things can change.

Volumes were to deteriorate more significantly than we were forecasting and that could have an impact on it but we're working hard to keep our decrementals around 20% this year.

Okay got it thanks, and then just on the price increases in plumbing I think it was 10 days or so ago, maybe weak and delta Brazeau and peerless.

Wondering how thats being accepted by the market just given that we're not hearing of a lot of price increases broadly speaking out there and building products.

I think you know it's.

It's a it's understandable when you look at the.

Massive inflation that we've experienced and we were a little bit behind that.

Getting that pricing in place and it's it's.

No one is ever happy to hear about price increases, but the channel understands what we've all been through and also what the competition has done so I think it's gone quite well.

Okay, great. Thanks, a lot best of luck.

Thank you al.

Your next question will come from Susan Mcclary at Goldman Sachs. Please go ahead.

Looking at the next couple of quarters, but what are you watching specifically within the business to determine if you need to take additional actions.

Or what would make you more confident to add incremental investments.

Susan I think others, there's an external and internal view that we look at.

The usual suspects in terms of external data in terms of home prices and home equity.

Increasing existing home sales.

Better than expected GDP GDP.

Yes.

China.

Consumer confidence and those are the externals that we look at but really our action would be.

More fundamentally triggered by what we see in terms of Pos and incoming order rates. So.

And that's really what we would qian to say Hey, it's time to maybe look at it a different investment rhythm base.

Based on what the market is saying and that's I think that's the key is flexibility and having activation points that we look at and having those plans on the shelf and of course, we have those.

Okay, and then when we think about the quarter. There were obviously some events that came through late in March as it relates to the banking environment in the consumer lending in there.

The change in the town front from both retailers as well as dealers on the plumbing in the paint side.

In terms of their willingness to take inventories into the season or any change in how they're thinking about the outlook and the approach to to demand.

No really not at all.

In terms of inventory position, we actually I think it was it was small I wouldn't say it was material, but we had a little restocking in our plumbing segment, where some of our bigger wholesalers, putting a little bit more inventory.

Certainly we want to be ready for the spring selling season and I think.

Our business leaders across the channel inventory I would say, we think we're in pretty good position.

Position for the level of demand that we're seeing at this point so no no real hesitation in anticipation of some sort of.

<unk> turned out as it relates.

Inventory.

What I would also say Susan is that event did not occur.

Cause us to add a little bit more caution.

Two our stance and our outlook going forward and only because.

There's going to be there could be some ripple effect through the economy is unanticipated or an unforeseen and so that's.

And the way, we digested that event.

Okay. Thank you very much good luck.

Thanks.

Your next question will come from Keith Hughes at Truest. Please go ahead.

Thank you.

In plumbing.

You called out the spa business in size.

It's declined in the quarter are there any other sub.

Sub product categories or channels that are outsized affecting the volume decline in the quarter.

Could you say that again, you broke up just a little bit Keith the last part of your question are there any other channels.

Yes, any of the plumbing channels or products that are outsized in terms of their decline in the.

Following the business in the first quarter.

But for spas, it's been it's been pretty consistent and broad base case, when we look at.

Product categories.

From from bathing to accessories too.

Fixtures, the taps and showers.

Pretty consistent retail to trade I would say that maybe trade held up a little held up a little bit better earlier on in the quarter as we were working through some of the backlogs in some some of the bigger bigger projects, but it's been pretty consistent.

But you're exactly right, we have experienced some 20% decline in the quarter and spas now that's after.

Three year run up some 50% growth. So it's been a real strong period of growth and I think that new launches and spas.

Total <unk> total new refresh of our best selling wine spies. That's just fabulous I think that's going to really help us compete in this challenging environment, but it's been pretty consistent but for the spot business as it relates to the spot.

Yes.

And second question on that.

Even if we ex out the small it's still a pretty notable units colon across the rest of the Columbia industry.

Not really knowing a lot of cyclicality, even in the tough periods.

What are you hearing of the channel while the business is.

Voting on all pretty notably in the units.

Yes.

Keith.

Some some degradation in value.

I would kind of point you to the fact that we were up against a pretty significant comp beginning from the first quarter last year.

9% comp is.

As you know.

Quite strong for this segment and so I think that plays into some of the volume decline that we saw in the year just.

Up against the Big number from the first quarter of last year.

Okay alright, thank you.

Your next question will come from Stephen Kim Evercore ISI. Please go ahead.

Yes.

Thanks, a lot guys and John we're going to Miss you.

But best of luck.

I wanted to follow up a little bit on the margin commentary I think basically just to just really be crystal clear I think that you talked about the margins on a year over year basis.

That delta year over year, improving sequentially through the year, so that seems to imply a <unk> operating margin better than 17, 2% wanted to just make sure that I'm understanding what you're saying and also will this year over year progression kind of hold true across both segments.

We didn't give commentary specifically.

But the cadence by segment.

Say that your commentary about.

The company's total Steven.

So you said it is year over year sequentially, we improved Q2 could be a bit of it might be a bit of a challenge for us.

As we go into the back half of the year things.

The ability to expand margins sequentially it gets better because on a year over year basis, just because of the softer margins we posted in the back half of last year.

So youre, saying that you may not have a better year over year.

Comparison in <unk> versus <unk>.

Yeah, well you know.

The quarter hasn't played out but that it.

It could be the case.

Okay.

Second I guess would be.

Is there anything about your outlook, which envisions a longer duration of a challenging environment.

So are we talking about maybe some things you know extending into fourth quarter, maybe longer than you had previously thought or anything about the duration that is worth commenting on.

Well, there's a lot of volatility and remains to be seen in our current thinking is that we'll go to growth.

As we exit this year and enter into next year, but that's certainly remains to be seen.

Okay perfect. Thanks, so much.

Your next question will come from Tim woes at Baird. Please go ahead.

Hey, everybody.

And John Good luck on everything.

Maybe just on the plumbing side, if you could maybe just give us an update on kind of what youre seeing on the supply chain I know Keith you had talked about that kind of getting better in the second quarter and had pretty good visibility there.

<unk> ability on that kind of go into the back half of the year.

An update on what's going on there.

Yeah, Tim I would say that we've.

Executed better than expected in the first quarter frankly, the supply changes come around Theres still some work to do we have pockets of tightness.

With some of the supply base, but all in all in all I'd say, it's it's getting it's getting better as the volumes have eased a little bit our delivery rates are improving productivity et cetera. So I would say all and wallets, it's not perfect.

It's getting better.

Okay. Okay. Good and then just maybe on the on the plumbing business within the international business.

Any change to how youre thinking about that business over the course of the year and the reason I ask is it performed better than I would've thought and I think Q1 was actually the most difficult comparison so.

Maybe just how youre thinking about that business kind of cyclically in Europe , and then kind of a kind of competitively with some of your competitors there.

Mhm.

There is there really hasn't been a change in how we're thinking about the international business, but I will tell you that the way we are thinking about it is that we expect it to have more volume pressure as we look through to the end of the year than what we've experienced so far it's held up really nicely and I think declined 3%.

Against a strong 18% comp so.

In this kind of environment that that's really strong when we think about how we're looking at that for the full year to be down overall high single digits. So we are.

Experiencing are experiencing we are expecting.

A little tougher top line environment, there than what we've experienced so far but that's not a change in our thinking.

Okay. Okay.

Hey, guys.

So Jim you had asked in terms of the competition that we're doing very well relative to competition and in Europe and we are.

Most definitely taking share and growing team is doing an outstanding job.

That's great to hear it's great to hear thanks, guys.

Your next question will come from Truman Patterson at Wolfe Research. Please go ahead.

Hey, good morning, everyone I'm, John it's been great working with you over the years and good luck in the future.

I'm, hoping that you all can discuss.

The sequential ramp in plumbing op margins quarter over quarter pretty nice ramp do you think that some of the operational inefficiencies over the past couple of years, there has been labor transportation some supply chain stuff.

Wait on those margins are kind of largely behind you at this point and then is there any way you might be able to quantify.

Some of the costs that might be embedded in the back half of the year. I think you mentioned, some brand and marketing investments plant investments et cetera.

So the team has done a good job of getting our efficiencies in order.

As you well know in a period of declining volume that that is an ongoing effort as we work to balance depending on where the volumes go.

Our variable costs and how our shifts run. So it's the work is never done when youre in a volatile environment like this but I would say that the significant amount of our inefficiencies that we've experienced associated with the last couple of years are fixed and behind us and the team got after honestly a little quicker than I thought they would so that was a nice positive in the quarter.

In terms of the specific.

Spend that we'll have.

We have a new.

Plant startup there'll be some some startup costs in our European plant that we're moving continuing to move forward with so that'd be a little bit of a headwind and then the.

The reduced volume.

The dropped out of that is the main driver.

Okay, Perfect and then John I believe you said that the overall inflation bucket this year should be flattish.

A little bit higher than what you were.

Expecting three months ago, but is there any way you might be able to kind of break it out by segment I believe last quarter you were expecting.

Plumbing raw materials to be down like low single digits, and duck or closer to flattish.

Any way you can help us think through that.

Yes.

On that we're seeing.

<unk>.

And I guess moderated, but still high levels of copper prices copper hasn't come down like we thought so its still hanging in there for box, we thought it might retraced or a bit more.

Again I would tell you is on the pinion put aside those are trending a little bit higher than we would've expected at this point.

As well with tier two.

Are you seeing upward pressure and so I think on both ends both segments I should say Truman, we're seeing things being stickier perhaps.

The plumbing side than we had initially forecasted three months ago, a little bit more upward pressure on some of the inputs like tio too on the pain side.

Perfect. Thank you all good luck in the upcoming quarter.

Your final question will come from Phil Ang at Jefferies. Please go ahead.

Hey, guys. Thanks for squeezing me in and John Congrats and thanks for all the help and as well as you Dave I appreciate all the help and congrats on the new role.

I guess my question for you Keith perhaps.

You sit in your largely in R&R theres been a fair amount of site meant on new construction. This spring selling season, not necessarily the perfect read through but it sounds like your guidance is at least doctor in a step down in demand perhaps in the back half of this year curious if your view and channel partners outlook on demand. This year has changed much and they'll call. It the last few months.

How do you kind of see the year progressing on the demand side.

Yeah, really really hasnt changed much and when you look at our full year guide compared to how Q1 fair thats pretty consistent across both segments. So I would say.

Not a lot of change really.

And again, we're one quarter in.

Okay helpful. And then from a mixed standpoint anything you want to call out I mean at least we're hearing maybe at the high end of the market is holding up a little better but curious if you're seeing any nuances on mix and what kind of impact that could have on on margins, especially in a more mixed.

Macro backdrop in the back half of the year potentially.

We really haven't seen anything material sale.

A slight.

But not material, maybe a little bit of trade down in Europe and plumbing, but.

Beyond that net for the company, we haven't really seen any significant mix impacts or trade down and our guide doesn't really reflect that either.

I appreciate all the help guys.

Thank you.

You all for joining us on the call. This morning and for your continued interest in Moscow. This concludes today's call.

Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank everyone for participating and ask that you. Please disconnect your lines.

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Yes.

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