Masco Corporation (MAS) Earnings Call Transcript & Summary

[Audio Gap] building products. I'm really pleased to have John Sznewajs here, CFO of Masco Corp. So before we get into the questions, John is going to give kind of an opening overview of Masco for those that are newer to the story. Before we even get to that, we're going to do our audience response questions, so I'll try to run through those quickly. Always interesting to see. So number one for this audience, you currently own Masco. Overweight, market weight, underweight or no.

[ Is it real fine. ]

It's going to come right here.

Well. [indiscernible] Let's see. Seem to have a friendly crowd, we will have...

All right. We have an audience of new investors. Next question, please. Your general bias towards Masco right now? Positive, negative or neutral? Not a lot to answer.

Anyone? Can I answer this?

All right. Leaning neutral, a little more leaning negative, I guess. Okay. Next question, please. Through cycle EPS growth for Masco will be above, in line or below peers in your opinion? Generally in line with or below peers for this audience. All right. Next question. In your opinion, what should Masco do with excess cash? Bolt-on, larger M&A, share repo, dividends, debt paydown or internal investment? Okay. We have a mix, but no one thinks larger M&A. That may be the answer. Next question? What multiple of '23 earnings should Masco trade? Below 10 or above 21 and everything in between? Weighted towards 13 to 15. All right. Next question, please? The most significant share price headwind to Masco today? Growth, margins, capital deployment or execution/strategy? Growth and margins, simple. Okay. I believe the next one is the last question. Does ESG play an active role in your decision regarding Masco? Yes, positive; yes, negative; no or no, but will in the future? At the moment, no, for this audience. Okay. So with that, John, thank you for being here. Happy to let you give the elevator pitch on Masco, here for those less familiar.

Yes. Thanks, Matt and good afternoon, everyone. Because we have an audience that largely does not [indiscernible], I thought maybe it does make sense to just a quick overview of who we are and what we're all about. So Masco is one of the leading building products manufacturers here serving the North American and international markets. The 2 product categories that we serve are the plumbing market, and we're one of the largest players in the plumbing market here. Domestically, we have brands like Delta Faucet here domestically. Our international brand is Hansgrohe. And our revenues on the plumbing side of our business, I call it, roughly $5 billion -- just north of $5 billion. And then the second product category that we're in, as we call, Decorative Architectural. Largely, that's paid. We make manufacture the Behr. The Behr brand of paint is sold to The Home Depot. We've had great exposure there over the years. Great DIY business historically over the last decade or so, who really works in partnership with The Home Depot to create a Pro brand. We've grown that from effectively zero, call it, a decade -- just over a decade ago to something now that finished out 2022 just north of $900 million in revenue. So great growth in partnership with The Home Depot with this pro paint initiative that both of us are driving. And so if you think about what distinguishes Masco from a lot of our peers, I'd say, it's 2 or 3 things. One, if you look across our portfolio, I think we have perhaps the best portfolio of brands in the industry with Delta, domestically Hansgrohe and Behr. Then we've got a variety of sub-brands that appear -- appeal to Pro contractors. So that's really important. The second thing that we do to support those brands as we drive a lot of innovation. So innovation accounts for roughly 30% of our sales -- accounted for roughly 30% of our sales in 2022, which means we're churning or introducing products on a very regular cadence, which drives footsteps whether it's to websites on behalf of our channel partners, to our channel partners, retail outlets or to some of our local dealers and distributors that we sell products through. Actually, the third thing that distinguishes us from the competition is the amount of cash flow that we generate. Typically, in a normal year, we have 100% free cash flow conversion, and so we deploy a lot of that free cash flow back to shareholders through share repurchases and/or dividends. We have been paying out a very consistent dividend at a 30% payout ratio, and the balance goes to share repurchases. In the last couple of years, we've done over $1 billion back to shareholders through share repurchases and dividends. So a very active program. We're selectively then also adding on to our very strong businesses through high-quality, small bolt-on M&A opportunities that appeal to us and to our customers through product line adjacencies or channel adjacencies. So it's -- we're really pleased with how the portfolio is shaped today, the cash that we generate and then how we deploy that capital. So Matt, I think that's a good high-level view of who we are and what we look like, so [indiscernible] for some Q&A.

Okay. So maybe we'll just kind of start with sort of the news hot off the press, your guidance. Maybe we'll focus on the repair and remodel market, given that's Masco's bread and butter. You had Home Depot out yesterday talking to flat comps, maybe kind of a low market decline in volumes this year. You had your peers down in Chicago, talking about kind of mid-single-digit market declines. Then you had Masco guiding to a low double-digit market decline on repair and remodel. So very simple question is, is kind of what are you guys seeing out there? And how did you kind of come up with the underpinnings of that guide?

As we were looking at the market as we were finishing up the fourth quarter and then also beginning of the first quarter, it's just taking a look at the dynamic that we were facing and what the broader economy is facing, the higher interest rates, how it's impacting the consumer. And then taking a look at the very specific aspects of some of our business. We felt the high single digit -- I'm sorry, the low double-digit decline in the R&R market, broadly speaking, was the right call. Because if you look at the composition of our portfolio, we called our paint business down, call it, high single digits for our DIY paint, mid single digits for our pro paint initiative. That says, we've got some other components of the business on the plumbing side that we're going to feel a little bit more pressure. And specifically, we have hot tub, our spa business that's in the portfolio. That's about 15% of our Plumbing segment revenue that we believe will decline more than the guide that we gave for the market. And that's huge because it's a high-ticket item, highly discretionary. Consumers pulling back on discretionary spending, we think that one is going to get impacted. So that's driving. And then we looked at other aspects of what's going on in the broader economy that get us to our low double-digit decline. That said, we will have a little bit of pricing to offset that market decline. So thinking about our business, we're guiding, we call it down roughly 10% from Masco.

Got it. Okay. That's helpful. So sort of the overall market decline, but it's still -- if I'm hearing you correctly, kind of weighted towards your exposures within that.

That's right. As you think about the competitors that have come out, everyone's got a little bit different view of the market. And I would tell you, I've been with the company for a long time. This is a fairly challenging environment to forecast.

Right. So going to the Plumbing business, as you mentioned, spa and sort of the impact there. I think you guided plumbing down 10% to 14% this year. And so I guess it would be helpful if you can kind of outline just what -- where was spa 3 years ago, right? What could that impact kind of look like this year and sort of just how that's kind of playing into the 10% to 14%...

Yes, sure. So going into the pandemic, it was a nice solid piece of our Plumbing business, but we've seen enormous growth in that business during the course of the pandemic. And for the last 3 years, we've seen 50% growth in that business. I mean just enormous comps that we've been facing. And so as we think about the consumer cooling off, it's natural when you see that kind of outsized growth that kind of reverts a little bit more to the mean. And so we'll see that pull back. Now we still think it will be above 2019 levels here in 2023, but still down comparatively from '22, which was a record year for that business.

Right. Right. But ultimately, I mean you're implying it will be down sort of more than the 10% to 14%...

That's correct. Basically okay.

Okay. Got it. And then so I'm kind of stick on the same topics on Plumbing top line. You've obviously got a big international business there with Hansgrohe, split between Europe and really the rest of the world. I think you guided to down high single digits for your international expectations. So kind of how is that breaking out between Europe and Rest of World? And just as you've -- have you started to see that already? Or is it still an expectation that, that will kind of soften further?

Yes. I would tell you, Matthew, that our international plumbing business has been a bit of a positive surprise for us. Going into '22, even we thought that we see more softness in that business, but the business has really held up well. And maybe just to give you a little bit of a profile what Hansgrohe is all about. To Matthew's point, our core business is headquartered in Germany. We've got strong sales in the Central Europe. That said, Hansgrohe also sells into 140 markets around the world. So -- these ones are our first and only truly global brand that we have. With that, we saw a good growth in China last year, good growth in India last year in a lot of the peripheral markets that it sells into. And clinically, essentially Europe held in there better than we anticipated in 2022. Some of that's due to the innovation that Hansgrohe brings. They put out a lot of innovation into the market on an annual basis. Part of that is due to some competitive dynamics where they outperformed some of their competition, and we're able to gain share in what was a tough market in Central Europe. As we roll the tape forward into 2023, as we look at the world and how it's shaping up, we do still think the market will be down high single digits, as you mentioned. That said, we do think Hansgrohe outperform that. Because of the performance that they put up in China last year and the strength that they're seeing in some of these other markets as well as the fact that the markets in Central Europe for them still remain favorable, the dynamics look like they can continue to pick up a little bit of share there this year. So we think Hansgrohe will do well this year.

Got it. So you mentioned that there's kind of a positive price offset to the overall guide but sticking with plumbing. I know we've seen publicly that Delta had a price increase out for April. So what are -- how are you thinking about carryover price versus kind of incremental price within that 10% to 14% plumbing guide this year?

Yes. So certainly, to your point, we do have some carryover price from actions that we initiated last year, and that's probably going to be the majority of the pricing that we've enjoyed this year. That said, there will be some select pricing actions. So a couple of our businesses -- Hansgrohe has gone out with pricing already earlier this year, that's -- they would do so traditionally. They typically go to market with price in the first quarter. And then to your point, Delta is going out selectively with price early in the first part of this year. So by the time that gets rolled in, it will be -- while it impact this year, the bigger component of the pricing impact this year will be from a carryover aspect.

Got it. So some of that should continue to carry into '24?

Correct technically. Okay.

Okay. That's helpful. So as I stick with plumbing and jump down to the margin side, I think if I do the back of the envelope, the margin guide suggested sort of a mid-teens decremental margins. So not as harsh as what you're guiding to the whole business, so what are some of the things you're doing to kind of manage that decremental margin in 2023?

Yes. So typically, what you would see on lower volumes from us is, we've got high contribution margins across our business. So company-wide average for contribution margin is roughly 30%. And so you expect that amount to hit the P&L given the volume declines that were kind of foreshadowing. The offsets there are really 2 things, Matthew. One is the carryover pricing that we talked about just a couple of minutes ago. So that helps mitigate the impact of some of the volume decline. The other thing that's going to help us in 2023, [indiscernible] we had some supply chain issues and operational issues in some of our facilities in 2022. We've gotten on top of it but will really be in the rearview mirror by the end of the first quarter here. So with the absence of those headwinds and our plants back operating like the way we want them to be operating that will create some tailwind, also mitigate the impact of the lower volumes this year.

Got it. Okay. That's helpful. And so I think when we talk about the cadence of the year, I think you guided to Q1 sales, and -- I believe, in dollar terms, sort of similar to what we saw in Q4. And so kind of as we think about the cadence of the year beyond Q1, is the assumption that this is -- the larger declines are more front-half weighted? Or is it kind of evenly spread? Maybe sticking with the plumbing segment now you are talking about? Is it kind of evenly spread through the year or maybe kind of lessen in terms of declines in the back half?

I'd say, we'll follow the cadence of our accounts. We've some pretty good comps in the first quarter of last year that we're up against, both on the paint side and the plumbing side of the business. And so as you think about the business going through the course of the year and the cadence it develops, is the comps get easier through the course of the year, the performance should get better, both from a topline perspective to be less of a negative. And then -- but we also think that starting in Q2, on a year-over-year basis, margins should improve each quarter as we roll through the year.

Got it. Okay. That's helpful. So we'll jump to decorative. As you mentioned, on the paint side, you're talking about the DIY market down high singles. Pro down mid-singles. I guess just a very easy question is that, that's a market comment, how does Masco growth compare to...

Yes, that's a market comment, and we do think we can outperform the market in that environment, Matthew, just given the strength of our brand, given our strength of the relationship with Home Depot. And given Home Depot's performance, obviously, they put out their guide last -- yesterday. And we think we can -- between us and that partnership, we can outperform the market.

Right. Understood. And so you're making a lot of investments. It sounds like on the Pro side this year still. I think about a few years ago where you were really ramping up the program, right? You're now $900 million. You're adding in all these reps in stores. So what's kind of the next leg of these investments you want to make behind Pro with The Home Depot and kind of where do you see that evolving?

Sure. Actually, it's been a great run with this Pro initiative that we've been driving with in conjunction with them. Like you said, $900 million in revenue. That said, that's still only about 10% market share in the Pro segment of the market. And so there's still, we think, a lot of runway. So the investment that we're going to make in the next several years will continue to be in a couple of [indiscernible] additional headcount in terms of sales force, both external salespeople in the field calling up on contractors to drive them into The Home Depot. But then also, we're going to continue our plan having our employees inside Home Depot stores to work with the Pro contractors when we get in the store to get them in and [indiscernible] job site. So that's the first thing that we're investing in. The second thing we're going to be investing in this year is a loyalty program, and Home Depot talked a little bit about this on their call yesterday. We'll be a participant and a supporter of that. So we're going to make some investments to support that to make sure there has been a lot of share over the course of the last several years. We want to make sure that share gain that we have is sticky [indiscernible] last year. And the third thing is going to be kind of more programmatic. There are some things that we've done over the course of -- the last couple of years that we've tested and we want to continue to test the things that are important to the Pro -- it seems like job site delivery that we've been issued on a couple of markets in '22, and we'd like to expand that program to more markets as we roll into '23 and beyond.

So on that point, the share gain you've made in Pro and especially, over the past year, you just said, look, between improving the Pro's customer experience at home centers and the loyalty program, that's kind of meant to hang on to some of that share gain. I guess sort of what are you seeing down at the field level? Are there just some pros that you know what is going to go back no matter what? Or how do you think about that kind of ability to really stick what you gain?

I think as you speak to the main [indiscernible] -- this is the good -- the best thing that happened over the course of the last year is that we had a lot of new pro painters trying Behr paint. And what they learned is, they'd like to [indiscernible]. And so based on that [indiscernible] have 100% of [indiscernible] anyone main supplier. So really what we're [indiscernible] share of wallet with that pro contractor, and by getting them the experience, by getting them in partnership into The Home Depot. A lot of these pro contractors are not just painting, but they're also doing small repairs in the house. And so it's a very convenient place for to shop. [indiscernible] but they can get their wallboard, 2 x 4s, whatever else can they need to complete the job. And so it's -- I think those are -- the program is working like we expected and getting these new contractors into the stores has been a real successful. We think we held on to a lot of that share that we keep.

Got it. So jumping down on the margin side and decorative. I mean I think the guidance is for [ 16% ] this year. I mean the segment historically had been high teens, even above 20% at various points, slightly different mix. So just -- and I guess, it's implying kind of a 40% decremental, again, back of the envelope. What are some of the puts and takes there and you have this high single-digit decline in the end markets of pro and DIY? And just how do you think about the ability to kind of get margins back to where they used to be in that segment?

So there's a couple of things that are impacting decrementals this year that you guided. One is, obviously, the volume decline. There are 2 factors that weigh into it. One is investments that we just talked about in the Pro. So we're -- despite the fact that we're seeing declining volumes, we want to make sure that we continue to invest in this program because we're going to exit whatever this downturn looks like in a stronger position in [indiscernible]. There is a third piece of it, kind of a nuance piece in the cost recovery aspect of our relationship with our channel partner and that is, if you consider when we put through pricing, we get the cost recovery on the inflation. So I'll give you an example. We put through a 10% price increase into this seg -- into our paint business. Because the segment margins to decline by 180 basis points because we were just recovering the cost of that inflation, not the margin on that inflation. So that -- given the fact that we've got some carryover pricing happening in the decorative architectural segment, that's going to weigh on the decrementals again in the segment.

Got it. Okay. So that was going to be my question. It's mainly carryover pricing and that's kind of therefore in the guide. I mean what are you then seeing on the sort of underlying raw materials for paint? And what might that mean for pricing cost in the segment?

Yes. To this point, we've not seen much movement in pricing in the inputs to paint. Things have been kind of sticky where they're at. We haven't seen any material move down at all nor are we seeing any incremental inflation in the cost. So it's been pretty stable at this point.

Okay. Got it. I should have asked that question for Plumbing.

We can talk about that...

[indiscernible]

Yes, it wasn't probably have come down a little bit. We do think that we'll see some modest -- perhaps low single-digit deflation in plumbing this year. As you've seen, the 2 big inputs of our plumbing business are copper and zinc. You've seen those come off the second quarter of 2022 highs. It's picked up a little bit here in the first part of '23 [indiscernible].

Okay. So there's some modest -- it's a small benefit effectively.

Yes.

Okay. Got it. And then -- so then we'll come back to paint. I mean -- so I mean, like thinking of what The Home Depot said yesterday, they're investing a lot, right? They're investing in associates. How do you think about when you see a customer making a lot of investments in a challenging market environment like this? Do you think of it as -- does it come back to Masco? Does it come back on them sort of pressuring suppliers in any way?

To this point, we've not seen the investments that they're making. What we know is we have to be in the best position to serve our customer, no matter what their strategies are, and so we are not taking our foot off the pedal on things like innovation. We're continuing to invest in innovation. We're continuing to invest in service with our businesses to make sure that we can meet our customers' timelines for deliveries and the like. We're continuing to invest in people, and we actually -- as you know, we can invest in capacity. So in the case of our paint business, for instance, we're putting up a plant in Ohio to ensure that we're in a position to best serve Home Depot and our customer base.

Got it. So with a couple of minutes to go, before I continue with the full room, does anyone want to ask John a question from the audience? Okay. I will continue then. How are you thinking about sort of customer inventory positions across plumbing distribution and paint retail? And so does it feel like destocking may continue or you're kind of close to...

Yes. We think we're closing, and we don't see much destocking actually quite honestly in the fourth quarter of '22. So we think the inventory positions, both at the retail and through our wholesale customers, are in good positions. Our sell-through is possibly going to sell in. So it's -- we're not seeing anything like -- in our product categories. And as you know, we manage our -- particularly, in the paint side of the business, we manage all those inventories very closely based on the seasonality of that business.

Got it. So kind of, I guess, a higher-level question. You've got the annual 10% EPS growth guide, and I think Keith said on the call that the idea is paint should kind of get its margins back to where it was at some point. What do you think it will take to kind of -- as part of that long-term growth guide, what do you think it will take for the paint profitability to kind of return to those prior levels?

I think some of its execution on our part. We got to continue to serve [indiscernible] and get some of the productivity to our facilities. I think that's a big component of it. It is driving better execution, whether it's top line or bottom line. I think one is the part that's going to get us there.

Got it. And then so on the capital deployment side, the -- you mentioned your targeted M&A in the right places, quality businesses. Obviously, you've got the share repurchase program still out there. Kind of how are you thinking about where you want to be from a leverage position? And at what point do you kind of hit the gas pedal again on either share repo or finding some M&A?

Yes, sure. So right. The balance sheet is in great shape. Net debt to EBITDA is at 1.8x at the end of the year. And so as we think about M&A, we've got the firepower to use our balance sheet if we want to put the right -- single acquisition or a series of acquisitions were to come along with it, we can use the balance sheet to put additional leverage on that. That said, we do want to maintain an investment-grade balance sheet. So we will make sure that we keep our discipline around it and that gives too much of our capital for M&A. But at this stage of the game, I might [indiscernible] that far out on the balance sheet.

Got it. Okay. Well, with that, I should have mentioned at the top, John is on his victory lap as a public company CFO. So May 2nd?

May 31.

May 31, excuse me. So thank you, John, for coming on your victory lab here, and thanks, everyone, for joining today.

Thank you, Matthew.