Masco Corporation (MAS) Earnings Call Transcript & Summary

So with that thank you all for coming. John, thank you for being here. And please go ahead, sir.

Yes, thanks for the welcome and it's good to be back live in front of people here in Miami and for those of you that are joining us on the webcast. So Matt, let me just give a couple of minutes to walk through Masco, who we are, just to level set for everyone. So it's been quite an 8-year journey for Masco as we've transformed the portfolio pretty significantly. And so we finished 2021 about $8.4 billion of revenue divided between 2 segments. We have our plumbing segment, which is comprised of largely our faucet and showering businesses. The 2 biggest companies are Delta Faucet here domestically in the United States and Hansgrohe, our German-based company, that's really our one truly global brand. But then within the Plumbing segment, that's about $5.1 billion in revenue, we've got a number of other companies as well. So we've got Watkins, which is one of the leading hot tub businesses here in North America. And actually, it's quite a global company as well. We've got BrassCraft, and we've got a number of other smaller, both domestic and European businesses. And then on the other side of the business, we have the Decorative Architectural Business, which finished out just about $3.2 billion in revenue in 2021. And the biggest component of that is Behr paint. And many of you may know Behr, one of the leading paint supplier to the Home Depot. And over the course of the last several years, not only have we been driving the growth of Behr through continued engagement with the DIY consumer, but we've also been growing very significantly with the PRO customer. And that's been a great collaboration between ourselves and our channel partner, the Home Depot. Both of us have invested both in people, technology and dollars to go after the Pro market. And now we've grown that business to be quite significant. It's about 30% of our overall paint business now. So as you think about Masco, there's a couple of things that I would like you to take away. One is that we've probably got the best set of brands in the building products industry between Delta, Hansgrohe and Behr. Two, we've got a broad set of distribution, not only do we sell to the home centers, but we sell broadly to -- a lot of the building materials distributors, we sell to Ferguson, and like and we also are very active on the e-commerce channel. And the last thing I'd like to leave you with is that we generate a fair amount of free cash flow. We're not very capital intense. So the cash flow that we generate, we've been redeploying back to shareholders. And so in 2021, we've put back -- or gave back $1.3 billion to shareholders in the form of share repurchases, dividends and we did a small acquisition in 2021. I mean, that's kind of a high-level summary of who we are. We'll take it whichever direction you want to go from here.

Great. No. Wonderful. Thank you for that overview. Plenty of areas to jump off of there. We will start high level before we get into some of the topics that I know are top of mind for investors. Maybe just thinking about the end markets in the U.S. I know you got added on the call to sort of mid-single digit R&R growth in 2022. I think the comment was that includes significant price, I think that's particularly unique in this environment. So maybe you could kind of walk us through the cadence of volumes and price and just sort of how you're thinking about the shape 2022?

At least for our business, the way we think about it -- and you're right. I think a big portion of the growth that we see both in the market and with our business, we'll be through price in 2022. That said, we do think there will be volume growth in both of our segments, in both plumbing in as well as the decorative architectural segment because we are seeing good demand for our products as contracts continue to have very good backlogs for both small ticket and large ticket projects around their home. And so as we look at that -- and we look at the inflation that we're seeing, definitely price is probably more significant. I'd say the majority of the growth that we're going to see, but clearly, volume will be a component of our growth as well.

So maybe jumping to the segments then Plumbing, the guide was 3% to 7% growth. Kind of similar question, but is it a similar breakout in terms of price and volume, as you just mentioned for the entire business? And any color on the cadence for the Plumbing segment growth through 2022?

Yes. I mean if you take a look at how we performed in 2021, I think you'll see that will have an impact on our performance in 2022. And so I'd say pricing will be an impact, but of the 2 segments, I think pricing will have a greater impact on our Decorative Architectural segment as compared to our Plumbing segment because if you just consider the way brass have inflated in paint, it's been much more significant than the way the brass have been planted in plumbing. So as we go through the year, we've had some pretty tough comps in the first part of the year, it gets a little bit easier in the back half of the year.

Got it. So I guess, on that topic then, speaking about the margin in plumbing, I mean, there still was clearly pressure in the fourth quarter there. I think a lot of investors are kind of looking at Q4 and bridging that to 2022 and the margin recovery you're guiding to. So can you kind of speak to what were the sort of discrete pressures in Q4 that you think you can sort of recover as we move into 2022?

Yes, there were a couple of things that impacted our Q4. We have been talking very clearly since our third quarter call that we were facing this price/cost lag, and then we thought we would exit the year price cost neutral. And as we went through the quarter, we were trending in that direction. Then what happened is about the Thanksgiving time frame, we saw a pretty significant increase in transportation and logistics costs. And so that prevented us from exiting the year on price cost neutral. As we go into 2022, in the first quarter, we think we'll now exit first quarter of '22 price cost due in the Plumbing segment because we put a fair amount of pricing at the end of the quarter, and we've put in additional pricing at the beginning of the year to help offset some of the transportation and logistics cost. So I think what you're going to see sequentially is an improvement margin-wise in the Plumbing segment from Q4 to Q1 just because of the pricing that we put in at the very end of the year.

Got it. That's helpful. And so on that topic, pricing being implemented at the end of the year in plumbing, is this sort of a lag to that? Does any of this pricing kind of get set in backlogs for a little bit? Or can you be kind of at run rate pricing by Q1?

There will be a bit of a lag as we go into it. But I think as you go sequentially through the year, that lag then just slowly dissipates.

Okay. And then just speaking specifically to those transportation costs, is it -- is it that you can offset it all with price? Or are there any type of surcharges that you do as well?

We take a look at it in a variety of ways, depending on the nature of our business, as you might imagine, shipping truckloads of faucets to one of the major home center retailers is, one, -- takes on one form of pricing, shipping our hot tubs to small local dealers take on a different form of pricing. So we'll deal with that in the most appropriate way just given the nature of our various businesses.

Got it. Okay. That's helpful. And then so sticking with plumbing, I think you guided the international business to low single-digit growth in 2022. Can you kind of speak to what you're seeing there, sort of a bracket around the potential outcomes in the international business?

It's going to be really market by market, Matt, as you might imagine. Hansgrohe sells into more than 140 countries around the world. And so as you might expect. Central Europe, we saw a very good growth through the pandemic. We saw a little bit of moderation there, particularly in Germany, in the fourth quarter. And so we're keeping a close eye on that. That said, we've seen other markets that have performed pretty well. We see the U.K. bounced back very nicely in the fourth quarter. China has actually been a very good story for Hansgrohe throughout the pandemic. They saw a little bit of a rough patch in the very -- first quarter of the pandemic in the first quarter of 2020. But since that time, they've seen very good growth and they expect to continue that kind of growth going into '22. So a bit of a market by market dynamic, but the bigger markets. Germany, a little bit of moderation. China U.K., France is probably pretty good as we go into 2022.

Got it. And then so sticking with plumbing, but to go back to the margin side, I wanted to ask just about the materials. So what you're seeing in base metals, we -- I think looking at the commodities we can see that there was some inflation towards the end of 2021. How are you kind of thinking about the shape of just material inflation as part of your margin guide?

Well, we think -- we exited 2021 on an annual basis with kind of high single-digit inflation. Fourth quarter is probably more like low double-digit inflation. And that's kind of across the company. As we go into 2022, your point is right, copper and zinc have inflated a little bit toward the tail end of the year. But that said, it's up year-over-year, but not as significant as maybe the paint brass had been. And so to the extent that we continue to see this inflation, we'll pass through additional pricing as required.

Yes. Okay. And then so before I jump to Decorative, you had some pretty strong comments around e-commerce. It seems like that's becoming a bigger piece of the business. Are you guys sort of channel agnostic there? Or how do you think about kind of the -- your own margin profile with regards to growth in e-commerce?

So our view is we need to be present wherever consumers are shopping, right? And so if they've changed the shopping -- or buying behaviors to be more focused on line it will be there. And -- we've made a fair amount of investment both in Delta Faucet and people, process and technology. And then we supplemented that in late 2020 with the acquisition of Kraus, which was the leading digitally native brand for faucets and sinks. And so that's been a great success story. That company has a lot of delta, do a few things. We brought to market recently towards the tail end of the year, online of Delta branded sinks that Kraus help enable us to bring to market. So yes, so we are a bit agnostic. We just go where the demand is the greatest, and we'll be there.

Right. Got it. So on the spa business, I know there's been challenges with basically running at high levels of capacity utilization over the past year. And I guess I'll kind of layer on to this question, what you're doing with capacity in plumbing. I know you're adding spa capacity, right, as well as capacity in Hansgrohe. So maybe just focusing on the spa side, what's it going to take to kind of knock down those backlogs? And how should we think about sort of the flow-through of this new capacity coming online?

Sure. So you're right. I mean we are investing in capacity in our plumbing segment, both in Hansgrohe, over Eastern Europe in Serbia as well as in Watkins, our hot tub business down in Mexico. And we've had significant backlog. I would say that the backlog that we're experiencing aren't any, any other competitors experiencing in the industry. There's just a high level of demand for hot subs at the moment. And so we're carrying a pretty significant backlog as we enter into 2022. And so the capacity that we're bringing online here, we'll start to get the benefit of that toward the end of this year. So that should help alleviate some of that. But we also see the wellness trend broadly speaking, is a growing trend that the U.S. consumer is embracing in. It's not just the U.S. consumer seeing good demand across the globe for hot tubs. And so we want to make sure we have ample capacity to meet what we think is a growing trend as consumers spend more time in their backyards than in their homes, seeking wellness so -- at a local level. So we're pretty excited and enthusiastic about what the future holds for Watkins.

Yes. Got it. So maybe we'll jump to the decorative segment here. I believe the guide for '22 is 6% to 10% organic growth. Maybe just focus on coatings for a second. So I think Keith mentioned DIY market growth mid-single digits this year and PRO up double digits. Clearly, there's been a story of share gain, right? But I wasn't quite clear if there's an assumption of sort of further share gain within that guide? So how are you guys thinking about sort of the coatings market overall growth and just where your own growth compares to that?

Yes. So one of the things that we challenge all of our businesses do are 2 things. One is grow above market. So obviously, that means implies some share gain. And then also, expand operating margins. And we're not talking about hundreds of thousands of basis points of margin expansion, but rather [ growing out ] 10s of basis points of margin expansion. And so what's implied in our guide for the year, we do think both on the DIY side as well as the Pro side of the business, we can outgrow the market, given Behr's market position, given relationship with our channel partner, the Home Depot and given the investments that both we and they are making in both sides of the business. And if you listened to Home Depot's call yesterday, they talked about their continued growth. A lot of that growth is going to be coming from the PRO and the investments they're making to attract, routine and grow the PRO and we're going to invest -- continue to invest alongside them in growing our PRO initiative.

And so I mean, I guess, we had to jump on to that topic, there was obviously the competitor news with what your channel partner did with their PRO business. I'm curious if you can kind of outline it sounds but you guys didn't feel like there was any shelf space lost and perhaps this is Home Depot just expanding the whole aisle. But how do you kind of view your longer-term position in the PRO business just in light of what seems to be some addition of a competitor there?

We like how we're positioned. So let me make sure a couple of things are clear. One, we didn't have to lose any shelf space as a result of this announcement. It was a substitution of product on the competitor side as opposed to us losing share. In fact, through the course of 2022, you'll see us pick up a little bit of shelf space as we've entered into some newer adjacencies. We're coming out with the lines of aerosols, Cox and sealants in interior stains where we've only been participating next year stain. So you'll see those roll out over time in 2022. So we really like how we're positioned with Home Depot. But because of the strength of our Pro business, our point of view is the more PROs and the aisle shopping at Home Depot, the better because we think without a doubt, we've got a very good chance of converting that PRO to Behr paint as they walk down the aisle. Because as you may know, we have sales forces both located inside of Home Depot as well as we have external sales force calling on contracts such as driving them into Home Depot. And so we like the dynamic of additional PROs coming into the store. So we just think that's a game we'll win.

That's great color. And so I mean, at least on a dollar basis, the PRO business was growing 50% in the quarter, I think it was 45% in Q3. So as we kind of get to the other side of this and presumably, there's remaining stronger growth as part of the guide for the first half of the year at least. But as we start to comp that in the second half, where do you think the PRO business settles out? Do you think that everything you just mentioned that you simply expanded the addressable market for Behr PRO? Or is there kind of a reset period where that sort of normalizes if and when for example, homebuilders can finally go get PRO paint from where they used to get it?

Yes. I mean -- I think there's a couple of things there, Matt, to consider. As you may know, Behr has done a great job according to PRO over the course of the last couple of years. And our goal is to continue to get more and more shareable from that all PROs. It's very rare where a professional painter has 100% of their buy allocated to one paint manufacturer. And so that's our objective. I think the other thing that was helpful over the course of the last couple of quarters because of the tight supply constraints in the paint industry, and the fact that we had probably better sources of supply than many others, we were able to get Behr paint in the hands of PROs for the first time. And I think that, again, will inure our benefit over time because what they experience it, they have maybe a perception of it before they try it. They try it, they like it. I think we can then help retain and continue to get a bigger share of those wallets only. So we have a lot of first time PROs in the last 6 months, tried Behr paint. So like the fact that happened. And we think we can continue to grow with those new found Behr customers.

Yes. Got it. So jumping to the margin side in Decorative. I believe the guide was for basically a step down in margins since 2022 to 18%. And then obviously, investors look at 2021 and think you overcame significant inflation and supply chain headwinds and we're able to maintain effectively higher margins. So just thinking about to the extent you're able to execute through all that, why would the margin necessarily step backwards in 2022?

Yes. So this is a great question. This is one that we get a lot in -- there's a lot to understand here about the relationship between Behr and our channel partner, the Home Depot. And effectively, what happens is we get cost recovery -- dollar cost recovery on inflation in brass. And as you think about what happened in 2021 and how paint brass kind of accelerated, we -- as I mentioned earlier, I think we had north of 20% inflation in paint brass in the fourth quarter, and we expect to see that same kind of pace of inflation to continue in the first part of the year. That being said, as you consider what happens if you get dollar cost recovery, effectively, what happens is your sales go up and you hold your operating profit dollars constant. So let's take an example of -- if we get a 5% price increase on our -- in our decorative architectural segment, that translates into about 100 basis points decline in margin. But I said there's no profit deterioration, so profit dollars remain whole. But it's just the nature of the relationship between ourselves and Home Depot. And what then happens is in deflationary times, that relationship online, you start to see margins expand similarly because there will be -- prices will come down, there will be pricing rollbacks from us. And but you'll see just the way the math works. Margins will either decline or compress in inflationary environments and then you'll see some margin expansion in deflationary environments.

Okay. That's perfect color. So I think overall in the business, you spoke about making additional investments or incremental investments in 2022. I think in 2021, the number was $40 million. I don't know if you gave a hard number for 2022, but just how do we think about sort of the ballpark magnitude of these investments in '22? And is there any kind of cadence to the timing of those investments?

Yes. I think we're going to continue to -- like I said, we're going to continue to invest in grow the business. If you consider our accounts 2021 versus the 2-year stack versus 2019, the revenue is up 25%. And the good news is we've held a lot of our SG&A dollars. SG&A as a percent has come in nicely, partly due to us continuing to contain costs while sales have increased pretty significantly. . And so we put a little some of that $40 million back in, but not all of it back in 2021. So I think a portion of that will come back in the first part of '22. And then from there, we'll see how the market develops. I mean -- we continue to see strong growth and we need to support our brands either through investment or additional feet on the street. Whatever it takes, we will continue to make the appropriate investments. But trust me, [indiscernible] the -- that investment is not going to go into our business indiscriminately. We want to make sure that we're seeing the revenue getting generated from the investment that we're making.

So again, at a high level, thinking about the margin guide for 2022, 19% Plumbing and 18% and Decorative. You've laid out the long-term EPS growth algorithm and I think the quote you had given in prior calls was that the expectation was for tens of basis points of margin expansion. So if we think about the margins that you're guiding to this year, is that sort of a structural kind of base level and you can continue to expand from these levels as we think about the out years? Or -- are these kind of the margins you're happy to run with and invest for growth on top of that?

No, no. I think from my perspective, we're going to continue to expand margins from here. And that's -- to your point, we finished 2021 to 17.4%. We're guiding 17.5% for this year. So that's the first evidence of continued margin expansion. But as I mentioned earlier, the things that we're trying to drive our business is to do is grow above market and expand their margins. Part of that comes from volume leverage, right, as you continue to, but part of that also comes from continued productivity initiatives within our operations. And so we, the leadership team of Masco, continually talk with our businesses about how they're driving productivity within their own business so we can continue to expand our margins.

Got it. No, that's helpful. And so jumping to the capital allocation side. Just a question on the share repurchase. Just to clarify, I think the guide for 2022 was $600 million, or at least $600 million, which has actually stepped down from the prior year. So you kind of speak to -- obviously, we're talking about adding capacity. So that would be one answer. But what are some of the reasons why there might be a step back in share repurchase this year?

Yes. There's a couple of reasons for that. The $600 million is right, the number that we gave out. If you consider what happened last year, one, we got some extra cash last year due to the sale of our former Canada business, and we got our preferred redeemed outs. We got an extra, call it, $160 million there. . But at the same time, to your point, Matt, we are investing more in additional CapEx. So we guided about $250 million for CapEx this year with an incremental $125 million compared to what we had in CapEx in 2021. And then we also recently just announced a further increase in our dividend. So if you take the incremental $125 million I have another $40 million or so for the incremental amount of the dividend, to call that $165 million plus the $165 million we got it's about $300 million. It's roughly the difference between 2021 and 2022.

Got it. So with a couple of minutes left to go, I just wanted to ask if anyone in the audience wanted to ask John a question? Yes, sir?

[indiscernible].

Yes. So the question was, how do we think about return on invested capital over the long term, given the fact that we're at pretty elevated levels in 2021? And our goal in management is incentivized to continue to increase our return on invested capital. So even though we are looking at some acquisitions, which tend to have a little bit of a dampening effect on return on investment capital, most of those are smaller bolt-on transactions that have generally have higher returns because we can integrate them into one of our existing businesses. And so our goal and our objective is to continue to round out further expansion in ROIC is an important metric for us, and -- that's how we're incentivized and the team is very focused on that metric.

Anyone else in the audience?

[indiscernible].

So the question was, as we take a look at the CapEx that we've outlined for 2022, effectively, are reallocating any of that growth capital to our paint business? And that's something that we're evaluating. To your point, we've had experienced very strong growth in our paint business over the course of the last couple of years. And we are running at very high levels capacity right now in our paint business, but that's something we're continuing to evaluate this year.

So I wanted to ask about Kichler. I think there was another write-down in the last quarter, and correct me if I'm wrong, but I believe that was the second write-down. Does that signal anything about how you view kind of the growth and margin potential of this business as we think about 2022?

No. It really doesn't mean there's -- the nature of that write-down was probably a little bit of performance and a little bit of a math exercise just given what's going on as we look at the carrying value of that business, given some of the fundamental issues that business has faced since the time of acquisition, which to refresh everyone's memory, we're a pretty significant tariff headwinds in 2019 and then followed by some pretty significant supply chain challenges. That said, as we exited the year 2022, if you look at the fourth quarter performance of that segment, the margin expansion that you saw in the fourth quarter was largely attributable to Kichler's improved performance. And so it really doesn't fundamentally change the business. The management team at Kichler done a terrific job of restructuring that business given the market dynamics. We've consolidated one of our existing distribution centers into several others and closed in one. We've done some rightsizing of headcount there, and we invested heavily in continuing to innovate in the space. So we like how that organization is now positioned. But it's a function of just how year-end came together, and that's why we took the write-down.

Understood. All right. Well, with that, we're right up on time. So John Sznewajs, CFO of Masco, thank you very much for joining us. Much appreciate it, and thank you all for coming down here in person.

Thank you, Matt.