Masco Corporation (MAS) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Thanks for joining us. My name is Michael Rehaut. I'm the senior analyst covering the Homebuilding and Building Products space for JPMorgan. We're kicking off day 2 of our 17th Annual Homebuilding and Building Products Conference. I want to thank all the companies yesterday for participating, and we have a nice line up today as well. We're going to kick off today with Masco Corporation, and pleased to have with us Rick Westenberg, CFO. As with prior presentations, this will be a fireside chat, but I'll turn it over to Rick initially just for a few words on Masco to set the stage, and then we'll dive into the fireside and also have time at the end for questions from the audience. So Rick, thanks for joining us.

Great. Thanks, Mike. Good morning, everybody. It's great to be here at the JPMorgan Builders Conference. And really appreciate everyone joining this morning here in person as well as via webcast. What I thought I would do is just provide -- just a couple of minute overview on Masco for those that may not be as familiar with the company. So Masco is an approximately $8 billion building products company that's really focused on the repair and remodel sector of the industry, primarily in North America, about 80% of our business is in North America, but we do have a global footprint. About 20% is international. We are organized in 2 primary segments. One is plumbing, which is anchored by our Delta, Hansgrohe as well as our Watkins Wellness businesses. In 2023, we generated just shy of $5 billion of revenue in that segment, but 18% margin. So really healthy margins. As I mentioned, we've got an international footprint. It's really anchored by our Hansgrohe international plumbing business, which operates in over -- sells product in over 150 countries. So for us, something that's not fully appreciated. Our second segment is the Decorative Architectural Products segment, which is anchored by our Behr brands. So the vast majority of our Decorative Architectural Products segment is paintings or coatings business. Again, anchored by Behr, which we partner very closely with the Home Depot. We've been partners with the Home Depot for over 40 years. In addition to coatings, we have a lighting business as well as building hardware business. It had just over $3 billion of revenue and 17.8% margin. So again, strong margins. In terms of the Masco portfolio overall, it's really the foundation on strong brands, as I mentioned, a few of them. Strong brands, product innovation and customer service, really focused on above-market growth and margin expansion. We also -- in terms of capital allocation strategy, we have a very consistent and disciplined capital allocation strategy. It's focused on, first and foremost, reinvesting in the business to drive growth. Second is an investment-grade credit rating. And then third is a resilient dividend. We have a 30% payout ratio in terms of our dividend. And we've grown the dividend 11 years in a row. And then fourth is returning the all available cash to shareholders, either through the dividend or through share buybacks. We've guided this year to return approximately $600 million to shareholders through share buybacks. That is in the absence of any M&A activity that we may have, which I'm sure we'll talk about, Mike. But anyway, that's just really a synopsis of Masco overall, and really excited to be here again this morning.

Great. Thanks, Rick. Appreciate the overview. So just jumping into the fireside chat here in terms of the questions. First, I wanted to hit on the macro growth -- the market growth backdrop for '24 and potentially even next year, obviously, not asking for any type of guidance, but you continue to expect for this year the repair/remodel market to be flat to down low single digits. I was wondering if you could kind of just review the drivers of this year's market dynamics and what might change potentially to lead to growth next year?

Sure. So Mike, as you indicated, we've guided our expectations for the R&R industry here in North America is flat to down low single digits. For clarity, we do expect our international business or international industry to be down low to mid-single digits. So a little bit more of a headwind there in the international markets, particularly in China. What I would say in terms of where we're headed, just a couple of things. First is, as I think people appreciate there was a significant pull forward of R&R activity, particularly in '21 and '22. And we're seeing the repercussions of that, a little bit of a hangover of sorts with regards to the pull-forward activity. And we're starting to cycle through that. We've seen that in our own business. So last year in 2023, the first 3 quarters of the year, our revenue was down 10%. But in the last 6 months, so Q4 of last year and Q1 of this year, it was down 2% to 3%. So we're seeing that stabilization as we cycle through that pull-forward impact. And in fact, we're seeing a little bit of pent-up demand with regards to the higher interest rate environment that I think we all recognize may be higher for longer. But the stabilization is there. And what we're seeing is improvement in terms of the orders return to more normal seasonality. So a stronger Q2, a stronger Q3 and the sort. So kind of return to normalization. But I think importantly, as we look forward, is really the strong foundation of the industry. The fundamentals are very strong. You've got -- what we've experienced is strong home price appreciation over the last few years and is therefore a strong home equity and people feeling confident to reinvest in their homes, which is a strong secular trend. Secondly is the age of the housing stock, every year it gets older. But importantly, there's about 1.7 million homes -- incremental homes that will enter what is often called the primary modeling age of 20 to 40 years. And why that's important is because homes in that age bracket tend to spend 15% to 20% more discretionary remodeling products -- projects. And we're anticipating or there's estimated that there'll be about 20% more homes in that category than there were in 2025 than they were in 2020. And then you've got the secular trends in terms of the millennial home ownership as well as household formation. And so it really bodes well. And what we're anticipating, and it's really a triangulation of data points, is that we would expect that ultimately the industry here in North America to return to more normalized growth in the 3% to 5% annualized growth space.

Great. And maybe just a little more granular driving into second half of this year versus first half. You continue to expect to outperform the market this year overall by 1% to 2% sales down slightly year-over-year in the first half versus a modest growth outlook in the back half. So when thinking about that back half growth, is that simply a function of comps? Or does the -- do you see any inflection in market demand or other trends driving that back half improvement?

Yes. So there is a dynamic of comps with the decline in the industry that I indicated really and started in late 2022, and we saw that throughout 2023, sets for more favorable -- set up for more favorable comps, particularly in our international market as we think about the second half of the year. But importantly, it's -- what we're seeing in the business, as I mentioned earlier, is stabilization. And so the industry and our business has declined at a decreasing rate. And what we're seeing is some favorable trends, not only stabilization but some opportunities. So I think just to mention it as a data point, in Q1 in North America, our Delta Faucet company wholesale business actually grew and Delta grew overall in Q1. So that's shaping up to be favorable, and we're seeing that solely manifest itself across the industry. I think it's a matter of timing. As I mentioned, the fundamentals are strong. And so it's not a matter of if, but when. And so we're tracking it very closely. Things are encouraging. I mean we see 2024 really as a kind of a transition year. And we see things stabilizing here as we progress during the course of the calendar year.

Great. So maybe shifting a little bit to even longer term goals around growth. You've said your organic growth goals at 3% to 5% annually on a longer-term basis. And part of that is outperforming the market a little bit. How do you break down that growth goal by segment, kind of thinking about plumbing versus Decorative Architectural. And what do you see in terms of the opportunity for share gains in each of those segments?

Yes. No, I appreciate it. Yes. So in terms of our expectations of 3% to 5% growth, we haven't specifically broken it down by each of our segments. But it's fair to say that our growth expectations are fairly similar within that range for both our segments. And what I would say is, as I mentioned in my opening comments, we expect above-market growth. And that's something that we're very focused on and really a function of our brands, our products and our service. What I would say specifically in terms of where we're focused on driving growth and above-market growth or there are kind of 3 specific areas. One is in North America plumbing and specifically in the wholesale business, where we're investing in terms of displays, product innovation, et cetera. And so we're seeing, as I mentioned, growth already here in Q1, but that's really a longer-term focus of ours. Second is in the international space, Hansgrohe specifically. And in terms of that, we've seen performance against our primary competitor really outperform in terms of our performance on a global basis and specifically in Europe. And although the industry is down, as I mentioned before, we're gaining share in that environment, which is encouraging and sets up well when the market does turn to grow. And then third is really in the coating space and the Pro specifically. And we've been able to, with our partnership with the Home Depot, really invest in the pro paint space. We can talk more about that. But the pro paint space is an area that we've seen significant progress. We've actually grown 60% on a stacked basis over the last 3 years through 2023. And so that bodes well in terms of the initiatives that we put in place, and we're continuing to double down on those and grow in the pro paint space. So those are the areas that I would highlight as we're focused on in terms of growth and above-market growth specifically.

Right. No, that's perfect. And actually kind of leads to kind of a subset question around that pro paint opportunity that I wanted to zero in on a little bit more. So if obviously, a lot of success. And I think when you look at the last 2 or 3 years, arguably being able to not just capitalize on some challenges more broadly that the market saw in terms of some of the competitors out there but hold on to those gains, which is equally as impressive. And so thinking about the next 2 or 3 years for the pro paint efforts, maybe if you could dive a little bit more into what the playbook is to continue to gain share. During the first quarter, pro paint was roughly flat. It's similar to DIY. And I think exceptionally a lot of people think about pro paint still having a little bit of a stronger growth profile relative to DIY. So maybe just kind of talk about what the opportunity is and for Pro, what would that translate to an ongoing growth rate over the next 2 or 3 years? And again, how to get there?

Sure. So as I alluded to, some of the success that we've had historically, at least in the past few years. And maybe for context, Behr brand in terms of paint has historically been known as a DIY paint brand. And it holds a significant share in the DIY paint segment. We believe it's about 33% market share, roughly speaking. We've grown the pro paint business from close to nothing to what we estimate is about a 20% share in the last kind of few years, really anchored off the growth that we've experienced over the last 3 years. And to dimension that, our pro paint business is about a $900 million business. And the overall we think addressable Pro industry is about $5 billion here in North America, so just shy of 20%. And so we see that as an underrepresentative share and an opportunity. Now obviously, we need to invest and go after that opportunity. And the areas that we're focused on in partnership with the Home Depot is, first, is really making sure we've got the resources at the retail stores. The sales reps, the product rep to really reduce the friction in terms of the purchasing experience. Second is make it convenient for the pros. And that it is really enabling more convenient in more flexible delivery options, order online, pick up in store, on-site delivery, those types of mechanisms. And third is the loyalty program to make sure that we -- as we gain share that we retain that share. And I think we're really optimistic in terms of the progress that we've made and what that translates into going forward as we recognize the successes and focus on growth to grow their share, but also the business overall.

Great. Shifting to margins. Your long-term goals for margins for the company, plumbing at -- and decorative at roughly 20% and 19% to 20%, respectively, which is approximately 100, 150 bps above our '24 estimates. So I guess the question is, why not hire extensively, what are the incremental margins for both businesses? And are there structural limits to the profitability by segment in terms of either product reinvestment, your relationship with Home Depot that perhaps prevents a higher level of profitability over time.

Sure. So maybe for context and background, the margins you mentioned, which I'll come back to, are margins we put out for 2026. But for some context, and I'll talk about Masco overall. In 2022, our margins from operating profit margins for Masco were 15.6%. And before the pandemic, they were anywhere between 15% to the mid-16%. Fast forward to 2023, we achieved 16.8% operating profit margins. And we've guided to approximately 17% margins here in 2024. And as you alluded to, Mike, we have put out long-term margins for Masco of 18.5% in 2026. And so it really represents from 2022, about almost a 300 basis point margin expansion. And relative to where we are, call it today, about 150 basis point margin expansion. And so we feel really good about the progress that we've made and that we intend to make, and we're committed to making over the near medium term. And the reason we put those margin targets out there for 2026 was to be able to communicate the margin potential of the business. We intend to grow above market as well as expand margins, and we wanted to make sure that, that was clear and understood. What I would say is that in terms of our incremental margins, what we call oftentimes our drop-down margins are about 25% to 30%. And that's a big part of what's going to help drive the margin expansion that we see between now and 2026. And so no, we, of course, will reinvest that in the business because we want to grow above market and grow margins at the same time. And so I think that helps dimension the opportunity that we have in front of us, particularly as the market turns back to a growth dynamic here in the 3% to 5% range over the next couple of years.

Appreciate it. Wanted to shift also to focus in a little bit on the acquisition strategy. M&A bolt-ons, I believe, looked at as contributing 1% to 2% of incremental growth, I think, in terms of the algorithm over time on average -- I'm sorry, 1% to 3% actually I have here. So I just would love to dive into this a little bit. Maybe just talk about the opportunity by segment and if there's the potential for any larger acquisitions over time as well.

Yes. So Mike, as you stated, our growth algorithm is generally 3% to 5% organic growth, which we've mentioned, plus an additional 1% to 3% inorganic growth. And we have a range because, as we all know, M&A activity is lumpy. But it's an important part of our growth algorithm. Our focus in terms of acquisition targets are really bolt-ons. Bolt-ons, we mean by bolt-ons are businesses or companies that really fit and are consistent with our strategic philosophy but importantly, within our product portfolio. We are not looking to add an additional line of business. A third leg is often referred to. Our focus is on acquiring companies that are -- we can bolt on to our existing businesses A couple of examples of that recently was the Steamist acquisition in late '21, early '22, which bolted on to our Delta business. And then more recently, in 2023, the Sauna360 acquisition that closed in the Q3 of 2023. That is a finish on a business that we bolted on to our Watkins Wellness platform and has been an excellent addition to the portfolio. But is really going to leverage the existing business and dealer network that we have here in North America. As it pertains to larger acquisitions, we're not averse to a larger acquisition, but that is in our mainstream focus. It will be more opportunistic.

Right. So talking about not adding a third leg, I think one of the questions that we get from time to time is the Kichler acquisition that has since being acquired, gone through some ups and downs. And so kind of curious on your take of Kichler at this point in terms of how it's performing, it's fit in the portfolio. At the time of acquisition, it had about $450 million of -- so as I was asking about, the Kichler acquisition. So has had some ups and downs wanted kind of your updated thoughts around the performance of the business, how it fits or still fits or may not fit in the business today as part of the portfolio. At the time it was acquired, it had annual revenue of $450 million. So I'm just trying to get a sense of maybe the size of it today as well? And again, any kind of thoughts on its fit within the company.