Masco Corporation (MAS) Earnings Call Transcript & Summary

Good morning. Thanks for joining us at our 2020 RBC Global Industrials Conference. My name is Mike Dahl. I cover homebuilding, building products. We're very thankful to have with us John Sznewajs, CFO of Masco Corporation. Masco has been one of the more interesting stories with a real transformation over the past handful of years, really culminating this past spring with the divestiture of the cabinets and windows business. Now looking at really a high-quality, resilient through-cycle business focused on plumbing and paint. So that's really been one of the more remarkable transformations in the sector, in our view, but that is kind of an intro. John, thanks for being with us. I think first and foremost, actually still to the audience, this is a Q&A session that we will moderate, but please feel free to hit in your questions in the Q&A box. These will be anonymous. I will ask them, and we'd love to have your participation.So with that said, I'll ask the first kind of question, and John to kick it off, maybe just give us your lay of the land and what you're seeing, obviously, there was a lot of strength through your second quarter and some of your larger customers have talked about continued strength really through August. What can you tell us about how things have kind of progressed recently and how you're viewing the fall?

Yes. Mike, good morning, and good morning to everyone on the phone or on the webcast. You're right. We did exit the second quarter with a good deal of strength. And I would tell you that the demand we're seeing in the market right now continues to be very good. As you might expect, the trend that I think we're all a little surprised to see is how the consumers reacted to the pandemic in how they chose to invest in their home during the course of the pandemic. And we've seen that trend continue here in the third quarter, which means good demand for us and like you suggested, good demand for our customers as well. And that's both across our plumbing business and our paint business. We've seen, Mike, in terms of geographies, Europe has picked up although the particularly Central Europe, which was a little lagging. Germany is showing good signs of strength. We had some real softness in France, in Italy, Spain in the second quarter in the U.K. We've seen some better demand coming out of France in the southern countries. U.K. is still probably the laggard of those four. So we've seen good improvement there. We've seen China come back nicely. So we're pleased with the demand we're seeing, not only domestically, but then we've seen good demand internationally as well.

Got it. That's good to hear, especially that some of the aggregates have started to pick up geographically. I guess kind of the biggest question on everyone's mind is with the strength in the consumer, the DIY and some of the wallet share shift toward in-home spend. How long does this persists? As we think about a post-vaccine world, how does this normalize out? And with you specifically in your paint business, given how strong DIY has been, obviously, focused on Pro a lot of these past handful of years, but it's still a comparably smaller business. So how do we think about the growth rates? I know that's not all entirely fair, given where we're at today. But just how do you think and plan around that?

You're right. There's definitely a lot uncertainly that remains out there. I mean whether there's going to be a second wave, how we make it through the winter and all that. That said, the way we look at it is that the underlying fundamentals that drive demand for our products and it remain good. I mean people -- housing values continue to be good. Our home price appreciation in that regard has been very good. The numbers that have come out over the course of the last several months have all been positive. Interest rates remain low. So people, if they chose to either move in my new home, it's very attractive or if they choose to refinance their home, which ultimately puts some extra dollars in their pockets, remains very good. So we feel good about how all of that is progressing. As it relates into how does this ultimately play out over the long term. It is a tough one for us for case. And I don't think necessarily have that valid out interest yet. But that said, we think if the fundamentals remain solid, that should bode well for demand for longer periods. We think the next couple of quarters should be reasonably good for us. On the trends that you talked about, I think people will continue to invest in their home over the course of the next several quarters. Your question about Pro versus DIY paint. We definitely saw that shift in the second quarter, and that's continued into the third quarter. So I'd say, the Pro demand continues to improve. Consumers are much more engaged or willing to engage with a Pro contractor to come in and paint the exterior of their home. And slowly, consumers are warming up to the concept of painting crew coming in to paint the interior of their home. So that still is probably not as robust as we would like it to be. But I think consumers are slowly getting there. And I think that trend will continue to play out over time. But the thing that we cited on our second quarter call, Mike, is that with respect to DIY paint, we saw a lot of first-time painters, about 30% of those painters we saw were -- in the research that we had done were first-time painters, about half of that were millennials and that was a group that we thought would be very reluctant to embrace any do-it-yourself project. And they -- I think they quickly learned that all the DIY projects you can do in your home, painting inside of your house is a relatively easy project to take on and is it -- one, it is pretty inexpensive; two, isn't that hard to do; and three, it can really change the look in the feel of the house pretty quickly.

Right. So I guess, the positive for the Pro side would be, while it may not be difficult to do, it is physically taxing. So those first-time DIYers may turn into your Pro customers down the line. With respect to the interiors business, the paint side is slowly coming back, are you sensing any, or seeing any, notable geographic differences within the U.S.? And on what regions you may see relatively greater recovery in Pro interior versus other parts of the country?

No. Mike, we quite see the demand has been pretty consistent across the country. There's not been one pocket that has necessarily emerge as either a front-liner or a laggard in that regard. There are some seasonal differences. You would think in the summer, in the northern climates do a little bit more painting and then in the southern climate do a little bit less. Those typical seasonal trends have continued, but there's no outsized performance or undersized performance in one segment of the country versus another -- outside of the normal seasonal trends.

Got it. And then with respect to the margins, clearly, you've had a fairly strong performance, all things considered. I think your guide for the third quarter is to be similar to last year, given the strength in the volume recovery that we're seeing, can -- just talk to why that's still the right way to think about margins for you versus there potentially being some upside.

Yes, sure, Mike. As you saw our second quarter did come in well. And just really a credit to the teams. They -- when the pandemic first hit, they really went after cost very quickly to make sure they rightsize the business to the current environment. And then we saw pretty significantly and strong demand hit us in the second half of the second quarter. And so they had a --they did a good job of holding on to that cost containment that they exercised in the second quarter. But as we talked about on our call, in July, some of those costs will start creeping back into the system. And some of those things are simple things like T&E is going to be creeping back in the system. But also, investment back in the brand in our brands is something that we really pulled back on. So think of advertising and whether that's what you would see on television or whether it's some of the online advertising that we're doing. We pulled back really hard on that. And our view is because demand is so good, it's the appropriate time to reinvest in our brands or continue to invest in our brands. And so we are putting some more advertising, you could see some of that if you've been watching television over the course of the last couple of months. And then at the same time, we put out front hiring freeze in place. We put our annual merit increase. We froze that and put that on hold in the second quarter. We're starting to release some of that. So selectively hiring, starting to hire people. And some of our businesses, we've put the merit increase back on the table. In those that are lagging, we've continued to hold off putting that merit increase in place. And then we also had talked about some investment we need to make in displays, particularly in our building hardware business in the third quarter for a program win that they enjoyed. So indeed, margins, while good, we'll see a little bit of -- I'm going to take pressure, but just some more investment as we go into the third quarter. Your point on volume is a good one. Yes, we kind of cited 0% to 10% growth across the business. If we see stronger volumes emerge, might -- could there be a little bit of margin upside? Yes, you would expect it with greater volume, slightly better margins. And so I think that logic would still hold in this case.

Got it. And sticking with the cost side. And so it makes a lot of sense that the growth-oriented investments would continue and come back in terms of -- I think it's been a learning process for a lot of companies as we've gone through the past 6 months, as far as what is and isn't necessary to run a business efficiently. And so while you're stepping -- while you're putting your foot back on the pedal on some of the growth investments, how should we think about opportunities for more permanent cost optimization that you've -- where you've been able to find new efficiencies that you had really seen prior to COVID?

Yes. So Michael, we're working through some of that. Through the downturn, one of our businesses, our lighting business, for instance, have the opportunity to take out one of their distribution centers. And they evaluated some of their costs at their headquarters and did some permanent fixed cost reduction. And that had been -- took place in a number of our other businesses as well. Have they aggregate to huge dollars? Not necessarily. But we are taking a look at simple things like T&E and how much travel do we do. How much -- I think everyone's getting much more productive on conferences like these where you may not need to travel to go. But in some elements, Mike, travel is important. Face-to-face communication will always be an element of business. And so I'm not going to tell you that it's going to go away permanently. But I think we can reevaluate things like that. So are we looking constantly through our Masco operating system to find ways to grind out costs, whether that's short-term variable costs or longer-term fixed cost nature? Absolutely. And I think a big part of that also depends on how they develop over the course of the coming months, right? If this gets behind us, the virus gets behind us pretty quickly, I think you'll continue to see business revert back to normal at some point. But I think we'll hold on to some of those costs that we've taken out over time.

Got it. Okay. And then on the cost side. And actually, let me pause for a second and get ask the audience. I've got a few more questions that I wanted to kind of kick through, but please, if you've got questions, that are top of mind, please start writing them in, and we'll certainly ask them. Sticking with the cost side, John, what we're starting to hear a little bit more of is some tightness around logistics and some inflation in freight. And this was obviously something that we saw kind of on steroids in 2018. That was a challenge really across a lot of businesses. Can you talk about kind of what you're seeing there, and how you're thinking about that and whether that's kind of a risk that we shall be considering?

Yes, Mike, I think we've seen a little bit of tightness here and there on freight and distribution. But I wouldn't say it's a significant issue for us at this point. Just -- like I said, pockets from here and there. In terms of the cost side, we will recall the distribution logistics cost is a relatively small component of our overall cost structure. So if there's a little bit of inflation, then that shouldn't be a significant headwind to our overall cost structure or our margins over time.

Right. And do you feel -- I think heading into this, there were some concerns around kind of price/mix pressures. And obviously, now with demand where it is and there may still be some mix issues and puts and takes around there. But power standpoint, do you -- how would you characterize kind of your pricing power? And if you could separate by business, that would be great.

Yes. So it's generally, tiny look at our 2 businesses, the pricing power in plumbing has been good over time. Generally, in breaking it down a little bit further, Mike, our European business, Hansgrohe, generally goes with some kind of price on an annual basis to the market because they sell-through a broad distribution and generally smaller customers, there's not the major home centers or they're not as big as the home centers are over here in Europe. So I think it's pricing power. On our side, we have -- domestically on the plumbing side, we've also enjoyed pretty good pricing power as well. Typically, we've been able to get price through our wholesale and trade side, perhaps more easily than we would on the retail side. But that said, as you've seen our margins expand over time, we found ways to get price in inflationary environments as required. But then we've also taken a lot and done a lot of work to look at our cost structure. You've seen our plumbing margins expand nicely over the course of the last 5, 6 years as we've undertaken that network to get there. And that's -- so that's good. On the paint side of our business, we really don't talk much about paint, but the thing that I -- given the fact that we're -- we've got a lot of concentration with a single customer. That said, I would tell you that if you look at our margins, again, over a long point in time, we tend to be price cost neutral in that business over long periods of time. And so if we're in an inflationary environment, you may see our margins contract for a quarter or 2 until we can have those pricing conversations with our customers. And similarly, you can see in deflationary environments, our margins expand per quarter do before we roll back price. But it has been a very good relationship on the outside and inside. Like I said, we've been price cost neutral.