Q2 2023 Masco Corp Earnings Call
Good morning, ladies and gentlemen, welcome to the Masco Corporation's second quarter 2023 conference call.
My name is Michelle and I will be your operator for today's call.
As a reminder, today's conference 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 two.
I will now turn the call over to Renee Benedict Director Investor Relations and F. PNA you may begin.
Thank you Michelle and good morning, welcome to Masco Corporation's 2023 second quarter Conference call.
With me today are Keith Allman, President and CEO of Masco, and David Chaika, Nascar's interim Chief Financial Officer.
Our second quarter earnings release, and the presentation slides are available on our website under Investor Relations.
Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow up.
If we can't take your question now please call me directly at 31379 to 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.
With that I'll now turn the call over to Keith.
Thank you Renee.
Everyone and thank you for joining us today.
Please turn to slide five.
I'm pleased with our performance in the first half of the year.
We have demonstrated the resiliency of our business and our ability to mitigate the impacts of volatile market conditions, while maintaining our focus on growth productivity and shareholder returns.
In the second quarter, our topline decreased 10% against a strong 8% comp.
Volume was down 12%, partially offset by pricing actions of 4%.
While sales were down $225 million or operating profit only declined $10 million due to strong cost recovery and improved operational efficiencies.
This solid execution resulted in operating profit margin expansion of 140 basis points and a decremental margin of only 4%.
In addition, our earnings per share for the quarter grew 3% to $1 19.
I'd like to thank our employees for their dedication and continued efforts to execute on our strategic initiatives and deliver strong results.
Turning to our segments.
Plumbing sales declined 10% in local currency.
With North American and international plumbing, declining, 12% and 8% respectively.
In North American plumbing demand trends continued to be soft across channels and product categories.
And international plumbing as expected the slowing demand we began to see in Europe and China in the first quarter continued into the second quarter.
We continue to expect our international plumbing market to be down high single digits for the full year.
Despite the top line decline, our plumbing margin expanded 270 basis points to 20% in the second quarter.
This strong margin performance was driven by pricing actions taken to recover the significant inflation we have experienced.
As well as improvements in operational efficiencies, particularly in our North American plumbing business.
We are focused on driving our operating profit margins back to at least the 2019 level of 18% overtime.
And I'm pleased with the progress we are making in the plumbing segment.
We also executed on our bolt on acquisition strategy by entering into an agreement to acquire sort of $3 60, a leader at Masada steam and infrared wellness industry.
This acquisition complements our spa business expands our wellness product offerings, and Leverages Watkins expansive dealer network.
We expect this transaction to close in the third quarter.
Lastly in plumbing, we are pleased that Delta faucet was named showroom partner of the year by one of our large plumbing wholesale customers demonstrating the value we provide to our customers.
And our strength in the wholesale plumbing channel.
Turning to our decorative architectural segment.
<unk> declined 8% in the quarter against a strong 15% comp.
Propane declined mid single digits against a robust cap of approximately 40% in the second quarter of 2022.
Yeah, why paint sales declined low single digits against a strong low teens call.
During the first half of the year, we secured additional shelf space and adjacent product categories launched new products and invested in our pro paint business.
This demonstrates the strength of our beer brand quality of our products and our commitment to exceptional service performance.
Our over 40 year relationship with our paint partner the home depot is extremely strong.
And we believe we have a significant opportunity to continue to grow share together in the pro paint market.
We're also excited to announce that we will begin distributing product from our new paint distribution and manufacturing facility located in central Ohio.
In early September and.
And we expect to begin producing pain and the new facility in the first quarter of next year.
This new facility enables our paint business to continue to provide superior levels of service expected of us and the capacity to accommodate the growth we expect in this business.
Turning to capital allocation.
We continued to generate strong free cash flow during the quarter.
And maintain a solid balance sheet.
As a result, we executed on our balanced capital deployment strategy and returned $89 million to shareholders through dividends and share repurchases.
Including buying back 500000 shares for $25 million in the quarter.
With the pending acquisition of saw about $3 60 for approximately 125 million euros.
Our share repurchases for the year will be approximately $350 million.
Now turning to our outlook for the remainder of 2023.
As a result of our strong execution during the first half of the year.
We now anticipate earnings per share for 2023 to be in the range of $3 50.
The $3 65 pence per share up from our previous guidance of $3.10 to $3 40.
In this uncertain environment, we remain focused on closely managing costs minimizing the impact of lower volumes and driving our margins back to 2019 levels.
We will continue to invest in our brands capabilities and people to outperform the competition and deliver returns for our investors both in the near and long term.
We believe we're well positioned to weather the challenging near term demand environment and have strong long term fundamentals in our repair and remodel markets.
Structural factors such as high home equity levels, the age of housing stock and a homeowner staying in their homes longer will drive increased repair and remodel activity in several ways.
Home equity levels, which are highly correlated to repair and remodeling remain at record levels due to rapid home price appreciation.
And can withstand significant pullbacks in home prices and still be above 2019 levels.
Also 1.8 million more single family homes will reach the Prime remodeling ages of 20 to 39 years old through 2027.
All told with households, with homes in this prime remodeling age than to have above average income at home values, which supports the likelihood of investing in remodeling projects.
In addition.
Homeowners have taken advantage of low mortgage rates and are likely to remain in their homes longer and with record levels of equity. These homeowners are more willing to take on larger Martin modeling projects to update their homes.
All of these structural forces provide tailwind for our business and increase our confidence for a strong repair and remodel market. After 2023, when the economy stabilizes.
With favorable fundamentals for our portfolio and.
And continued successful execution of our growth strategy.
Along with our strong free cash flow and disciplined capital deployment.
We are well positioned to drive shareholder value creation for the long term.
Before I turn the call over to Dave.
Want to update you on our CFO search.
As I mentioned last quarter, we have strong internal candidates and our search firm has delivered strong external candidates as well.
We are in the final stages of the selection process and anticipate naming our CFO shortly.
Now I'll turn the call over to Dave to go over our second quarter results and 2023 outlook in more detail Dave.
Thank you Keith and good morning, everyone.
As Rene mentioned my comments today will focus on adjusted performance, excluding the impact of rationalization and other one time items.
Turning to slide seven.
Sales in the quarter decreased 10% and excluding currency decreased 9%.
Lower volumes decreased sales by 12%, partially offset by net selling price increases of 4%.
North American sales decreased 10% and in local currency international sales decreased 8%.
Despite the sales decline, we executed well in the quarter and our focus on operational efficiency helped drive gross margin expansion of 320 basis points to 36, 2%.
Our SG&A as a percent of sales was 17, 2%.
Operating profit in the quarter in the second quarter was $404 million down only $10 million year over year, and operating margin expanded 140 basis points to 19%.
Operating profit was impacted by lower volumes, mostly offset by higher net selling prices.
Lastly, our EPS in the quarter increased 3% to $1 19 per share.
Turning to slide eight.
Plumbing sales in the quarter decreased 11% and excluding currency decreased 10%.
Lower volume and mix decreased sales by 15%.
Actually offset by net selling prices, which increased sales by 4%.
North American plumbing sales decreased 12% in local currency.
Our wholesale plumbing channel performed well in the quarter offset by softness in retail and spas.
Our spa business declined over 20% against a strong 35% comp.
International plumbing sales decreased 8% in local currency against an 11% comp as demand continued to soften in many European markets and China.
We also began to see a small negative mix impact in international plumbing, which we expect will increase in the second half of the year as the international markets will likely slow further.
Segment operating profit in the second quarter was $245 million up $7 million year over year.
And operating margin expanded 270 basis points to 20%.
Operating profit improvement was driven by net selling price increases and continued improved operational efficiencies, partially offset by lower volumes.
Turning to slide nine.
Decorative architectural sales decreased 8% for the second quarter against a strong 15% comp.
Paint sales declined mid single digits with propane sales decreasing mid single digits against a robust comp of approximately 40% in the second quarter of 2022.
On a two year stack basis, our propane comp is up over 30%.
Demonstrating the significant share we have gained over the past two years.
Operating profit was $180 million and operating margin was 20%.
Operating profit was impacted by lower volumes higher input costs and growth investments, partially offset by higher net selling prices.
We've now Anniversaried, most selling price increases so price increases will have little impact on the second half of 2023 for this segment.
With respect to input costs for paint, we experienced raw material inflation in the first half of the year and our overall cost basket remains elevated.
We are starting to see relief in certain paint input cost and expect modest low single digit deflation in the second half of the year on these raw materials.
For the full year, we continue to anticipate low single digit inflation for our paint raw material basket.
Turning to slide 10.
Our balance sheet remains strong with net debt to EBITDA at one eight times at quarter end.
We ended the quarter with approximately $1 $4 billion of balance sheet liquidity.
Working capital as a percent of sales was 18, 9%, which matched prior year. So net working capital days improved by nine days.
With the expected lower volumes and fewer supply chain disruptions. This year, we anticipate working capital as a percent of sales to continue to improve and be approximately 16, 5% at year end compared to 17, 4% in 2022.
During the second quarter, we repurchased approximately 500000 shares for $25 million.
We continue to execute on our disciplined capital allocation strategy and anticipate deploying approximately $500 million to share repurchases and acquisitions for the full year.
With the pending acquisition of <unk> 360 for approximately 125 million euros, we expect to deploy up to $350 million for share repurchases for the full year.
Now, let's turn to slide 11 for updated outlook for the year.
For Masco overall, our topline is developing largely as expected and we still expect sales to decline approximately 10%.
However, with our strong first half execution and margin performance. We now expect full year margins to be approximately 16% increase from our previous guide of approximately 15%.
In our plumbing segment, we expect 2023 sales to be down in the range of 10% to 12%.
Narrowed from our previous expectation of down 10% to 14%.
We now anticipate the full year plumbing margins will be approximately 17%.
Increase from our previous guide of approximately 16%.
In our decorative architectural segment, we expect 2023 sales to be down in the range of 8% to 10% narrowed from our previous range of down 5% to 10%.
We anticipate the full year decorative architectural margin to be approximately 17% into.
The increase from our previous guidance of approximately 16%.
Head.
Good morning. Thank you for taking my question. The first one here is you know it looks like the improved 2023 outlets is really driven by the outperformance in the second quarter with you know the second half expectations seemingly unchanged. This it seems a little bit conservative given given the magnitude of the beat in the second quarter.
I know you called out Keith at maybe some incremental softening in Europe , just curious more broadly what you're seeing that kind of keeps you a little bit more and they can talk a conservative side.
Well I clearly John volumes. The main driver and you know, we're we're seeing a consistent performance in North America, if you well in terms of against our expectations.
We did expect to see.
Somewhat of an increase if you will and the slowdown in Europe , and we didn't see that so while our first quarter.
In Europe , I think it was down 3%.
We expected that to accelerate as is.
We saw that Europe was lagging a little bit and demand and that has come to fruition. So when we think about.
Our overall guidance I divided into a couple of pieces one in terms of the overall top line as expected it's coming at as we anticipated so no real change there.
I would tell you that our performance on our execution was stronger than expected and so we had better margin performance coming through in the first half.
And so that that that it would say jada the components of it we kinda as expected on the top of the line.
And a little bit better than expected in terms of our performance.
Understood.
Yeah.
Similarly, but we do expect continued pressure on volumes in the back half of the year that will weigh on margins as well as additional growth investments. We also have very strong price cost realisation in the first half that will as we laugh most of our price increases will will diminish in the second half. So that's why they are our second half looks a little more conservative compare.
What we've put up in the first half.
Understood. That's a good segue my second question to me. It sounds like you are anniversary most of the the price increases how are you thinking about incremental pricing opportunities across segments as we move into the backup.
Well it you know that obviously it depends on where commodities go I think we've demonstrated across our business the ability to get price.
Thanks to our strong brands or innovation pipelines, how we service our channels and the value we bring to the consumer so it it really depends on where the Costco I think when we look at.
Where we've gotten our price we've gotten this year I think over the last couple of years, we've gotten in the range of 12% pricing. So.
Pretty significant obviously price over the last couple of years this year already we've gotten some.
In spots uncertain.
[noise] categories, and plumbing, where we had to catch up we've gotten some additional.
Pricing.
We've demonstrated price cost neutrality and decorative overtime and we expect that to continue but really in terms of the outlook for pricing as we go forward will depend on where commodities go.
Thank you guys.
Thank you. The next question comes from Michael's with Iron J P. Morgan. Please go ahead.
Thanks, Good morning, everyone.
Maybe just to circle back to the private question, perhaps to kind of get.
Get a finer point on it you know in terms of the guidance and what looks like effectively a reiteration of the back half outlook.
In the second quarter, and I think you know for for the year overall.
The top line doesn't look like at the top of the line outlook doesn't look like it's changed that much you did have a great margin performance in the second quarter, though and it looks like.
Effectively you're not necessarily expecting that better than expected margin performance to continue into the back now.
So I'm just trying to understand number one if that's correct and number two specifically on the margins sign and I understand you know your outlook on the top line remains relatively unchanged but.
What you know perhaps is different about what you were able to achieve in the second quarter.
Given that you know the sales more or less came in line with expectations that might not followed screwed slowly into the back half in terms of the better than expected a margin performance.
And I point to three things Mike.
Firstly as Dave mentioned in the last question, we do expect to continue to have top line volume pressures as we go forward.
As as expected Europe , Europe has softened and we continued to see the study if you will softness and in North America. So by them is is the biggest driver of it.
Secondly, we enjoyed year over year pricing benefit Ah.
In the first half and that'll that'll fairly quickly go away as we get into the second half and laugh.
The biggest chunks of the price increases that we came that we put in in 2022, so that laughing at the price.
It is a big factor and then thirdly as we've consistently talked about we're going to continue to invest in our business now, we're making and watching our our spend very carefully but we're committed to investing to to win in the recovery and to continue to gain share. When we have some of these challenging top line area. So.
Investing in our plumbing business and and making sure that we have our capacity in the right spot with regards to our European plant, that's coming on line and and investing it or.
Decorative architectural business with regards to continuing to build capabilities.
And to continue to drive above market growth and pro paint getting our capacity right with our new facility.
In Central Ohio, and as I said, we're starting to distribute out of that and and shortly will be manufacturing liquids and paint out of that that building. So we're we're continuing to invest in our business and that some incremental headwinds as we look forward. So those are the three main drivers with for sure by them being the mainland.
Considering I just added that we also bring it online or European plumbing manufacturing plant that it'll be a little bit of headwinds here in a second half as well and then also as we've mentioned in it.
Pair remarks negative mixed impact receiving an international is probably a little greater than we originally viewed coming into the year, which accounts for again, the the second half.
Feel a little bit softer.
Okay No no. That's that's helpful. I appreciate that extra color I guess there.
Secondly, we just to shipped to the pain segment you know the the.
Performance Pro in particular is is impressive given the.
The year ago calm and you know I was hoping maybe that kind of.
Maybe take a step back and give you an overview in terms of where you always think you've kind of noted that following to move last year the appropriate businesses around.
900 million I think in 2022, maybe it's a little bit less this year <unk>.
Where do you think the opportunities are going forward, so that business and if you could remind this if that's a similar margin businesses D I y.
Or maybe a little bit above and and you know how you see the relative growth opportunity there.
Michael I think the the the.
The opportunity is to continue to drive pro loyalty.
That's a loyal group.
And over the past three years.
We have gained significant confidence and of course significant sure when you look at our growth versus the market.
So we are very close.
Mostly monitor customer experience with our product and it's clearer when we look at net promoter scores in other metrics that they're very.
Very satisfied with the switch that they have made a greater share of wallet or or trying bear for the first time, so it's really about.
Continuing to stay focused as we have frankly for the last decade and improving.
Month over month quarter over quarter, our capabilities in the service and and generating greater loyalty, so things like buy online and pick up in store.
And expansion of our delivery options are pro outside Salesforce continuing to figure out ways that we can work more closely together with the.
The folks at the home depot to drive better loyalty enhancing our actual loyalty programs.
So things of that nature. Our capacity is also you know a component of that as we saw one.
We're able to provide outstanding delivery in spite of what happens in the supply chain, that's a big plus for us and so that's that's part and parcel of all of the rationale for a new plant in Ohio, So enhancing our services identifying new capabilities focused on the pro strengthening our relationship everyday with.
Home depot.
That's really the story.
And my God on the margin front, it is a little bit lower margin than our core business because we do have additional resources behind it mainly additional people in pro sales reps, both outside the store and inside the store to provide the level of service that the pro painter demands as well as additional loyalty programs that Keith mentioned, so it is a little bit of a lower margin.
Business is still very good margin and as we continue to grow that would expect that gap to close.
Great. Thank you.
Thank you. The next question comes from Stephen King Kim.
Please go ahead.
Yeah. Thanks, very much guys [laughter], sorry about that thanks, very much guys. Yeah wondering if I could follow up here a little bit on the the price cause commentary you know it sounds like you saw some benefit this quarter in terms of price cause I'm curious as to whether or not.
Ah you're including in improving outlook for price cost in your margins are forecast for for plumbing and in general are you still expecting to see a return to market growth in late 2023. If you can just sort of sort of update us on us on your market outlook particular.
Lily as it relates to plumbing.
I'll take that that last part first Steven we're not going to be.
Offering up at this point our view on 2024.
But we do believe that this is a relatively short term deaf and that this recovery will happen more sooner than later, but we're not gonna get into specifics of 2023 at this point and.
In terms of your question on.
Vice cost benefit or are you really asking a question regarding our view on commodities.
It really more like just the the the net of price and costs in the plumbing segment you already talked about you know the anniversarying pricing in Denmark, but within plumbing I'm curious broadly for the segment.
<unk> is your outlook for margins in the back half and plumbing.
[noise] informed by an improving view of net price cost.
We were going to lap the majority of our prices in the back half of the year. So we have certainly have seen an improvement in the first half.
It won't be netting them or lapping the majority of our price increases that we've given in really come in here in the third quarter sooner in the third quarter of it then.
We had another a couple of incremental price increases late in the year. They will have a little bit of that impact, but that the the impact of price classes going too.
Be less in the second half.
Okay. That's helpful. And then taking questions still staying with plumbing you talked about mixer fact, you you I think it was relegated to your comments were relegated to international at this point My recollection is that last quarter. You actually also started to see a little bit of mix impact negative mixed effect in plumbing. So I'm curious if you could.
Provide a little bit more detail around what you're seeing is.
It did it intensified is it is it intensifying in international is it spreading in any way into North America as well and is there any kind of margin impact that we should anticipate as a result from you know negative mixed shift and plumbing.
Eight minutes, Dave I'll take that one on the negative makes an international is really a function of countries are core European markets, which tends to be higher price point products are softening it a little bit more than some of our international markets. So we have more of a geographic mix impact might have a little bit of trade down that we're seeing in our core year.
Markets, but for the most part it's more of the geographic impact on the international side.
Here domestically, we're not seeing a lot of trade down we have a little bit of mix impact in the segment from our spa business and really more of a function of us pulling back on our lower price point more mass or retail oriented products last year as we work through a backlog, but as we got through our backlog in the spot is it turned back on that.
The retail portion of the opening price point of our Spa business, we got a little bit of impact here in North America, but broadly speaking with you haven't seen a whole lot of trade down across our other product categories.
I think with a reconfigured portfolio of lower ticket.
Products and I think that really helps to mitigate the large swings that you may see in a big.
Bigger ticket items.
Okay any marching impact from mixed.
Yeah, there will be a little bit but not much.
Okay, great. Thanks, very much guys.
Uh-huh.
The next question comes from Matthew Bully at Barclays. Please go ahead.
Hey morning, guys. Thank you for taking the questions.
Apologies, if I missed it but it but and decorative you know you you had D. I Y only down low single digits in the quarters, a little bit better than your full your guide previously, but then you still reduced the full year revenue guide for the segment. So just maybe just speak a little bit what sort of drove that DIY result in the <unk>.
Quarter and what changed in your full your outlook in spite of that thank you.
Yeah, I'm at a stage DIY business, we did see continuing softening throughout the quarter and.
We expect that to continue here in the back half of the year. When you look at existing home sales you know that that.
It tends to have a higher correlation with DIY paint and many of our other product categories existing home turn it over being down roughly 20%, we anticipate DIY in the back half of the year, probably being a little softer than we originally anticipated.
So for the full year that would put our DIY business expected.
Expected to decrease in the high single digits.
Okay understood. Thank you for that and then secondly.
Secondly on that new paint facility I guess one you.
Are there any startup costs associated with that as well into the second half of next year and just higher level on that curious if you could speak to <unk> sort of what this does for Moscow around service levels, you know where did you see room for improvement because of.
Lead to additional shelf space wins or pro expansion, just just kind of any additional longer term expectations that might arise out of that new paint facility.
They met I'll take the cost side and maybe you can take the second part of that question, but on the cost side, there will be some startup costs here in the back half of the year, probably a little bit in the first half, but mainly in the back. After this year's are really ramp up the distribution in the manufacturing capacity.
Mad if you think about.
The success that we've had in our paint business. It really it goes down to the relationship that we have with our channel partners, a home depot and our ability to provide innovation in service.
To our customers and the consumers that purchase bear.
The basis of that is really focused.
And the fact that everything we do is focused on that home depot customer and our supply chain around.
Those outstanding home depot point of sale and so what this new facility does is it gives us the capacity to be able to maintain industry, leading delivery performance. It gives us the logistical costs and ties in very tightly to where our consumers want to buy and it really hones in our ability.
Surprised that ongoing service.
Great escape thinks they have good luck guys.
And giggs.
Thank you.
The next question comes from Susan Mcclary of Goldman Sachs. Please go ahead.
Thank you good morning, everyone.
My first question too.
You mentioned that you saw.
Some strength in the wholesale side relative to some more weakness on retail there can you just give us a bit of color on how you were thinking about the inventory levels across the channels and any commentary on selling versus sell out as we think about.
Second half.
Yeah, it's it's been pretty consistent so there's obviously.
Various customers, who have different inventory policies based on how they want to run their business and we weren't very closely with them. So there are some.
Idiosyncrasies based on different customers, but when we look broadly across the.
Wholesale channel really across both wholesale and retail, but it's talking specifically to wholesale now the cell in has been very close to the sell out.
And so we are not seeing and nor do we expect any significant changes in terms of an inventory headwind or tailwind or destocking or restocking.
We think it's it's getting pretty good shape.
Being the inventory levels relative to the demand patterns were saying.
Okay.
And then.
You mentioned that you know you are starting to see some relief on the on the deck.
Decorative architectural side of things can you just talk about across the timing and how you're thinking about the commodity cost any input, causing hasn't made friends who over the next several quarters and maybe.
Next year.
Sure.
I think.
In terms of in a in inflation.
We would say that it peaked back in the second quarter twenty-two and it's kind of moderated sequentially. Since then we have not seen much deflation at this point certainly container costs have come down off their peaks that's all for free.
But most other costs have remained I would say elevated.
In terms of specific commodities, we we have seen some pullback say in copper at 385 currently that's below.
Slightly that 2022 average zinc has come down below the 22 average, but that really only started last month. So we're not gonna see that rolled through our P&L and into our cost of goods sold at this point probably ended until into 24.
So when we think about.
All in deflation and plumbing for example, we'd call that low single digits for the full year and buy all in I mean commodities as well as noncommodity costs like frayed et cetera, so low digit deflation for the full year in terms of decorative.
Certain pain input costs have moderated sequentially for example, resins, but others like T. I O. Two for example, those it's still sticky standard elevated levels and we did have commodity inflation in the second quarter.
Our guide does not have a lot of paint raw deflation built into it.
So all in for the Deco segment.
We're thinking about low single digit inflation for the full year on that.
You know after we expect some low single digit deflation in the second half so all in four or Moscow. The enterprise, we're looking at inflation.
Inflation or deflation basically it to be flat for the total company.
Okay. That's helpful. Thank you and good luck.
With everything.
Thanks sexism.
Thank you.
The next question comes from Mike B C capital markets. Please go ahead.
Good morning, and thanks for taking my questions.
Keith on the the appointment comment in terms of you know you're driving that business to get back to at least 2019 level is which was a little above 18% and yeah. I think for five six years, you were traveling somewhere and.
In the 18th if not a little bit better it seems like you've kind of gotten to work done on uhm price costs more or less is it really just a question of when do the volumes come back as far as.
Getting to that 18 or what other drivers do you think you can pull or need to poll.
To get back there or higher.
Mike as you know, we're always focused and driving total cost productivity continuous improvement on a day to day basis, better negotiation with our suppliers and we're driving our service proposition to continue to push profitable mixes winning a.
Showroom supplier of the year from a significant wholesaler shows that we're doing just that so there's other levers to pull the continued to drive in a day to day basis margin enhancement and we're doing that but clearly with our strong.
Innovation and brands and the ability for us to price and get that dropped out and say that 25, 30%. The biggest level of whoever is incremental volume.
Got it alright.
And then just sticking with plumbing can you give us a little more color on the new acquisition some.
It sounds European based but just a little more color on maybe geography as products relative size or profitability.
Sure I'll I'll begin by saying that you know we believe in our wellness business. We believe in it because it has an outstanding team. It's a great brand a great set of brands and we have a inherent tailwind in North America in particular here, but globally as it relates to wellness and the mental and physical health.
Aspects of living better and utilizing machines like we have an and brands like we have to get that done.
We liked the space.
And this is a small bolt on acquisition, it's consistent with our capital allocation and our acquisition strategy to have smaller bolt ons and paint and plumbing, where we can drive leverage and this does just that it's a sign of company based in Finland.
The cost of this was 125 million euro the leverage that we intend to use not only is our operational capabilities and continuous improvement in our production system, but fundamentally our dealer network for Watkins that we have in North America.
We've demonstrated the ability to do this as we ventured into Ah frankly, when we went into a different brand originally with hot tubs and then when we went into swim spas and now in Tucson us. So this fits very nicely with.
Our overall strategy and with the capabilities improvements that we can bring to the business, we paid less than <unk> multiple it small.
[noise] about a percent of growth overall modestly accretive Ah E. P S.
You know, it's it's a smaller Bolton it's not in our guidance since we haven't closed yet we're going to fund it out of cash on hand, maybe a little bit of short term borrowing but we're excited about how this can leverage.
Our dealer network or continues to keep us in the forefront with things to talk about and to sell and build their brands and this team's gonna handle it very well.
Great Thanksgiving.
Yeah.
Thank you.
Next question comes from Truman Patterson.
Search. Please go ahead.
Hey, good morning, everyone thinks for taking my questions.
Orange remembers to whenever.
Hey, good morning, when I look at your first half performance right revenues kind of in line with your expectations, but margin was much better in each of your your segments to start the year I'm really just trying to understand what's been the the driver of the soft margin performance was it a little.
Better pricing environment, you know some cost out initiatives or lower investments.
You know, maybe some accelerated cost deflation et cetera, just.
What we're kind of a big drivers of that.
Andrew minutes, David Yeah, They get hit on three of the four it was better price realization better cost out and really improving our operational efficiencies. The one that really wasn't sniffed.
Significant as we expect it was deflation is Keith mentioned, we have seen some deflation, but that really wasn't above what we expected, especially when you consider the length of our supply chain visibility.
We sort of had a pretty good understanding of what the deflation impact might be in the second quarter. So it really came down to the the productivity.
Improvements in better price realisation that drove the strong performance in two Q.
There's nothing one time in nature on those kind of internal productivity improvements, where they couldn't continue into the back half of the year is there.
No nothing really one time, a nice improvements I would say, it's probably a little bit of time in unexplained says that probably got pushed out in the second half of the year as well.
I wouldn't call that a one time event, but it did contribute to the strong performance in two Q.
Okay Gotcha, and then you know in certain categories, we heard of in the U S. Specifically, we heard of a little bit of demand improvement in the back part of the second quarter, just trying to understand across any of your channels or product categories of fuel in the U S or any sort of kind of stability.
Or improvement.
Oh, it was pretty pretty consistent throughout the quarter.
Okay.
Alright, Thank you all.
Hi, Sherman.
Thank you.
<unk> question comes from Joe I'll admire Deutsche Bank. Please go ahead.
Yeah, I think some morning, everybody thinks for the question.
Hey, Joe.
Just maybe a quick housekeeping item he talked about your performance and lighting and hardware either your to date or in each of the the first couple of quarters of the year.
These businesses really have been impacted by the market softness as all of our businesses Ah have I'd say that for.
Q2, they were down on that 20 per cent range, we expect them.
You know they've they've taken price we're working on cost actions as we are across the entire portfolio I would say that to expect these businesses to perform roughly in line with our low double digit volume decline expectations of the R&R market.
Understood. Thanks, and then just thinking about the back half guide.
Looking at your second quarter margins relative to a few years ago 2019, actually look very similar gross margin and then margins by the segments as well I understand the volume impact to the the second half, but could you may be parse it out between what we might see the third quarter and the fourth quarter, what might we see normal <unk>.
<unk> seasonality or is the fact that the third quarter's likely to be down where you're you're likely to hit those margins a little more than the fourth quarter.
Hey, Joe save adding you're more likely to see the typical margin seasonality strong emerge as in Q3 compared to Q4 Q4 tends to be a lower margin quarter in general lower volume I think in terms of you every year. We we do expect your expansion probably less more modest.
Over your expansion here in three cues from what we saw clearly in two Q then considering our comp in Q4 of 22, probably a little bit more year over year expansion in Q4.
So expansion in both of those quarters at the consolidated level an operating margin.
Correct.
Okay. Thanks, a lot.
Thank you.
The next question comes from Philippines.
Please go ahead.
Hey, guys congrats on a really strong quarter.
Thanks for for me I guess first question on plumbing North America any color how the business formed if you're kind of flushed out the spa business, because I think you have some tougher comps and potentially some destock when does that kind of level off and a bleep chaetae called out some relative weakness and home center versus.
The pro channel can you give a little more color and what's driving the relative difference into two channels.
Yeah, I, if if I said that I I misspoke I would say if if if anything are pro is a little bit stronger I think that has to do with some project backlogs working through the system, but not I wouldn't lean too heavily into that it's just just maybe a slight better performance and pro versus DIY.
Wanna clear that could you fill asked me the second part of that question.
The first part starting more on any color on how the the North American plumbing business perform extra spa business cause I think that part was a little more challenging to be helpful to remind us one of those comparison headwinds kind of.
You guys lap that spot [laughter].
Still seeing by you know in North America, we saw really earlier, we saw the volume start to turned down so volume in topline challenged in Europe , a Europe was down only about three per cent in Q1, and then it started to accelerate as expected, so where where in both north American.
Europe and plumbing, we're experiencing volume Ah challenges.
I would say.
Very solid execution really driving good price cost realization.
Getting our supply chain back in tune in providing the service levels and the productivity and cost efficiency that that was a real driver. So when we think about our performance versus expectation as we said.
Earlier in the call top line is kind of where we expected it to be but our performance Ah, particularly in plumbing is better than expected. We quickly got after the costs were driving productivity and the team is doing a great job in both North America and Europe .
Oh, that's helpful and perhaps a question for Dave I mean, a lot of questions today on the <unk>.
A relative performance the back half on margins maybe fading.
Little bit versus the first half he called out maybe some expense getting pushed out a modest expensive getting pushed out in the back half and some investments.
That will kind of funneled. So can you help size some of those headwinds we should've account for it to better appreciate the margin for <unk>.
Yeah, it's not gonna size them up Phil, but just enough to contribute to a little bit lower margin performance in the second half as compared to the first half we're talking growth investments of Pearl Representatives were paints.
It could be a little bit of additional marketing compared to the first half, but beyond that just a little bit a little bit of headwind on the margins side.
Okay I appreciate the collar guys. Thank you.
Thank you. The next question comes from Adam Baumgarten.
Zellman and associates. Please go ahead.
Hey, good morning, everyone. Just on the paint side you know one of your large competitors is expecting a high single digit decline in raw materials and you guys are.
Out looking at low single digit inflation, just curious maybe within a difference may be there if it's timing or a different formulations, just give <unk> give a little more color on that.
And when we talk about low low low inflation that and it includes everything all in in the costs basket, specifically to your questions at and roars, Yeah, There's there's different.
Levels of vertical integration some different supply chains that are used so there's there's there's differences to how we manufacturer and certainly a different scent in the distribution cost structure and and and how we go to market. So there's there's a couple of big differences there.
Yeah, I think it's probably more a function of time independent and and how how vertically integrated we are compared to others and when that what inputs are actually buying compared to overall formulations, a little bit of difference can be accounted for in the inventory accounting practice as well as lethal or FIFO, we're all FIFO here Moscow.
Okay got it that's helpful. And then just maybe any update on the promotional environment and the penile at this point just given the softness in India.
Yeah and in general I'd say the level of promotions industrywide has been moderate.
And somewhat similar to last year. We are we are seeing some more selective events and promotions uncertain items. You know, we obviously work with our partner on events and promotions that we think will drive in health profitable sales, but ultimately it's our channel partners decision on the promotional environment, but I'd say it.
Similar to maybe a little bit and spotty cases, a little bit insistence specific promotions as I mentioned, a little bit a little bit more but not not not a terribly.
Okay. Thanks <unk>.
Yeah.
Thank you. The next question comes from <unk>.
Loop capital. Please go ahead.
Oh, hi, Thanks, I was hoping you could talk a little bit more than what you're seeing from the consumer that you mentioned that you were expecting the downturn to be shallower than previously anticipated. But then DIY is also expected to be a little bit softer just because of the lower levels of housing turnover. So.
Additional color, where do you think the consumers that with this plan will be great.
Hager 'cause staged yeah, I I'd say, it's a lot of our readers sort of choppy that consumers seems to be strong.
Clearly when you look at spend across industries that consumers seem to be spending in other industries, such as travel and leisure did you seen those industries pick up significantly this year, a little more pullback and and home improvement spending you'll probably as as affordability has been pinched a little bit as rates have risen.
So we you know consumer we think is still very interested in in invest in their home, especially as home medically levels remain high but we have seen a little bit of a pullback characterize as a bit choppy and a bit uneven overall, but still think the consumer seems to be pretty healthy.
Okay got it.
Follow up questions just on the <unk> environment, just more broadly.
It was a pipeline changed at all.
And I also wanted to sign a 360 deal or other opportunities maybe consistent.
And science and and see with an acquisition or you know you are are there any chunkier opportunities out there.
Yeah, I'd say the our our pipeline has not changed clearly M&A environment has changed that we've talked about.
Definitely has been slower over the past year, or so less opportunities coming to market sellers clearly see that some some bars might not be as competitive. So they pulled back plus they don't want is potentially set it up with your earnings.
So definitely a slower M&A environment, but our outlook in our our focus on bolt on acquisitions and not change and we continue to cultivate some nice opportunities.
Understood. Thank you.
Thank you.
Our last question comes from Keith Hughes Ah <unk> Securities. Please go ahead.
Thank you.
Question on propane you've had a just a tremendous shoot you an M D.
Linda shared any around the propane as you said and.
The prepared statement kind of leveling out here a little bit I guess, what's the next step and propane is there more products more services you can offer the propane or where where do you and your partner expect to go with us.
It's really about service Keith.
10 years ago. When we started this we made a list of the things that we could do to improve the service for the pro painter.
We have.
Tweet what's in the can.
And some.
Light cases, but fundamentally we believe we have the brand and the innovation and the right price points to be successful we've got a great partner in terms of the distribution channel. So it's really about service.
So it's about understanding what the.
Pro needs and scaling that up and making sure we're delivering that occur.
Across the entire entire market so.
So as as I've mentioned before a different delivery options that they like better loyalty programs.
More improve service, it's it's a lot of keep on keeping on to what we've been doing and continuing to drive it and.
It's work, it's certainly the the the COVID-19 situation and our ability to supply got our product and a lot more hands of the builders.
And we saw tremendous net promoter scores so they like it so it's a matter of staying focused and continuing to drive incremental improvements in service.
And to continue to grow at a greater clips on the market.
Okay, great. Thank you.
You would like to thank you all for joining us on the call. This morning and for your interest in Moscow that concludes today's call. Thank you.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please.
Disconnect your lines.
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