Masco Corporation (MAS) Earnings Call Transcript & Summary

Good morning, everybody. I am Tim Wojs. I cover building products here at Baird, and we're happy to have Masco join us again at our Global Industrial Conference. Masco is one of the largest manufacturers of plumbing and architectural coating products, i.e., paint in the world. So from the company, we have CFO, Rick Westenberg, up here with me. And then we have Robin Zondervan, who is VP of IR and FP&A in the audience over here. So the format is going to pretty much be a fireside chat. Feel free to raise your hand if you have any questions, and we can get to those. But thank you, Rick, for being here.

Thank you, Tim, for having me. It's good to be here at the Baird question and the recognition for all the efforts that the Masco company and the team has done in terms of reshaping our portfolio. And actually, most recently, we just, as you know, divested our Kichler Lightening business. So another move to really streamline the portfolio. And really, the intent of that has been to reduce the exposure to the cyclicality of the housing industry. Our portfolio now is focused primarily on repair and remodel or R&R. About 90% of our business is R&R related, so that's about 10% new construction. And what that enables us to do is -- and our investors to do is to participate in the housing business, the Building Products business without as much cyclicality and having to guess the ups and downs of the housing cycle. It allows more stability in terms of our earnings profile and allows us to deliver what we're targeting to deliver, which is 10% EPS growth kind of through the cycle. As you indicated, we are effectively a plumbing and coatings business. We also have a wellness business, walk-ins wellness. And going forward, that's really where our focus is, is to leverage our really strong brands. Our innovative portfolio of products as well as our service level to deliver above-market growth and margin expansion, which I'm sure we'll talk more about.

Yes, yes, we will. I guess you should think about 2025, everybody is going to ask you that question. But you don't have to give guidance, but I mean, what are some of the kind of key metrics or key swing factors that investors should kind of think about, whether it's finally seeing some growth return to the R&R market, price cost, those types of things.

Yes. As you mentioned, we're not commenting on 2025 at this point. We'll provide our perspectives on 2025 during our Q4 earnings call in February. We're finishing this year, though on a pretty stable environment. We're projecting in terms of our plumbing business to be plus or minus low single digits. And our Decorative Architectural Products business to be down mid-single digits, that includes the divestiture of Kichler. I think in terms of -- if we look towards 2025, obviously, there's the macro environment with regards to interest rates. Obviously, the Fed has made a couple of cuts over the last several months. It hasn't really translated much materially into mortgage rates at this point or HELOC rates. And so that's going to be a factor in terms of not only the continued Fed fund cuts, but also how that translates into interest rates. That, in turn, will have an impact on existing home sales and new construction. Again, Masco is less exposed to those factors, but it does contribute in terms of the overall R&R market. And then consumer confidence, I think, is a big driver with regards to expectations. And the consumer confidence has been resilient, given some of the ups and downs that we faced. But it's not as high as it could be. And I think that's really what we're seeing as we've pivoted here from an impact of the pull-forward impact of COVID, working its way through the system, and we're seeing that work its way through to now pivoting more towards the deferral. And people just given the confidence in the outlook, there's deferred of R&R spend. And we think that bodes well as things pivot. And I don't have a crystal ball in terms of 2025, but longer term, we're pretty optimistic with regards to the fundamentals of the business. And we expect the R&R business, the industry and for us in terms of our participation in that to grow at a more "normalized" level of 3% to 5% when things get back to normal growth levels.

And is it -- do you need existing home sales to come back? Does the market need that to come back? Does it need lower rates, or can this pent-up demand that you and others in this industry have kind of talked about, can it get released without rate component?

I think it can, but lower rate in the existing home sale increase will be beneficial. And I think it's a good lever on the growth.

Okay. The election has been topical. Obviously, it's 1.5 weeks after or week after. How do you -- I guess, what's your preliminary analysis on the impact to Masco's business? And maybe just give us a little review on the components, where they're made, where things are assembled and kind of any sort of offsets in terms of kind of global component or finished goods activity.

Yes. So it's obviously a common question given what has happened over last week. What I'd say there's, I think, 3 categories that people are focused on with the election results. One is tariffs, second is tax policy and then third is regulation. I think probably the primary focus of your question, Tim, is really on the tariff implications. And let me address that. So Masco has done a lot to reduce our exposure specifically to China. And so to dimension that in 2019, when the Section 301 tariffs were first implemented or raised to 25%, Masco had indicated that we had about an $825 million exposure from imports into the U.S. from China. We subsequent to that over the last 4 years or so, have reduced that by about 40%. So both in terms of proactively resource changing or sourcing footprint as well as the divestitures. So I mentioned the divestiture of Kichler. That also factors into the reduction of our exposure to the China import dynamic. So we've been able to reduce it by 40%, and we continue to work towards further diversifying our geographic sourcing footprint. So that's a priority, and it becomes an enhanced priority given the outcome of the election. But -- so it leaves a meaningful exposure. So that's still something that we're focused, and we'll be ready to respond. Obviously, we don't know what the policy will be or when it will be implemented, but we continue to focus on our sourcing footprint as well as continue to drive cost reductions. And depending on the extent of any tariff action, pricing would be part of the equation as well. So we can't switch a light switch and change our sourcing footprint, but it continues to be a concerted effort. The team is working through, as we speak, effort to continue to mitigate and diversify the footprint.

And is your footprint -- I mean it's a global kind of plumbing industry -- component industry. Is your footprint much different than your peers, or is everybody kind of in the same boat, at least based on your...

Yes. So our understanding is very similar. I think we're largely in line, and you probably heard from some of our competitors that they've been doing similar actions with regards to diversifying their footprint. But we think we're pretty evenly lined up, and we've got a pretty good trajectory. But I think it's a good point, Tim, because this is an industry dynamic. This isn't a Masco-specific issue. This is an industry issue and a broader economic economy issues. So we think we're pretty well positioned. I think there are some, particularly in the private label space that are perhaps more exposed to an enhanced tariff regime. So -- but I think we're we're reasonably well positioned relative to the others in the industry.

Okay. Any questions from the audience?

What are you sourcing from China, specifically?

Yes. So most of the sourcing is on the plumbing side of the business. So very limited on the coatings. So it's primarily components, some finished product, primarily in plumbing and hardware is really the componentry that we're sourcing.

You called out during the quarter that retail and e-comm [ work obviously trade ], which I guess is a reverse support. Can you elaborate on that, and how you think about relative growth rates.

Do you want to repeat that for the webcast?

Yes, I know. Thanks for the reminder, Tim. So the question is, we commented in our recent Q3 earnings call, that retail and e-commerce did reasonably well on a year-over-year basis and that contrasts a bit with regards to what we had seen more recently kind of in the first half of the year, where wholesale was on a channel mix perspective was performing a bit stronger than retail. And that's an accurate portrayal. So in the first half of the year, we saw wholesale. And again, let me provide some context. Our expectation from a plumbing perspective is that we'll be -- our revenue would be plus or minus low single digits. And so we're talking about matters of modest degrees. But in the first half of the year, wholesale held up a bit more robustly, and that was really on the strength of the consumer. What we saw here in Q3, specifically is retail performed a bit more resilient. But again, it's a matter of degrees. So I think generally speaking, for the full year, we don't see a meaningful difference between the channels with the exception of e-commerce. E-commerce has been a continuous and consistent growth engine for us, particularly on the plumbing side and particularly at Delta. And so that will be growth on a year-over-year basis on a full year perspective. And just given how -- we believe we're the leader with regards to e-commerce in the North American plumbing space. And so we're really poised to build on that lead.

Does the experience with Kichler change how you guys think about M&A going forward into the end markets, multiples, any of that? And then secondly, can you just comment on thoughts on the PPG divestiture, and what you think that might do to the environment?

Yes. So the question for those that may not have heard as I mentioned a couple of times, the divestiture of Kichler, which is a Lighting business, which represented about 3% of the sales. How does that reflect with regards to our thoughts on M&A going forward? And the second part of the question is our thoughts on the PPG divestiture of their decorative architectural products here in North America. So on the first one, on the Kichler divestiture, again, it was a relatively small transaction, about 3% of our sales. But what it does is it really streamlines our portfolio and really aligns it with kind of the 3 core business areas, the plumbing, painting and wellness. And that's how we think about it from an M&A perspective going forward. We're focused primarily on bolt-on acquisitions. So for example, the Sauna360 -- Sauna transaction that we did last year as well as steam showers, et cetera. Those are bolt-on transactions, and how we're focused in terms of cultivating our M&A pipeline is really with those particular segments in mind. So plumbing and decorative architectural products. And so we're not adverse to a bigger transaction as long as it fits within those categories. But for us, it's really focused on finding the right type of opportunity that is strategic in nature. So within one of our pillars that has the either within our core business, adjacent business or technology enablement. And that is something that has a financial profile that is consistent with our expectations at Masco. So that's a little bit of our focus in terms of M&A going forward. As it pertains to PPG, as we've commented in the past, we took a look at those assets. We obviously made a decision not to pursue that. It just wasn't something that we ultimately found a fit for. And -- but at the end of the day, we're really focused on our Behr paint business and continuing to be successful in competing against the likes of PPG and sure one another in the industry, both on a DIY and propane business perspective.

Maybe on that point, Rick, maybe just sticking with decorative architectural. Could you just talk about your overall relationship with Home Depot. I think sometimes, and real specifically on the Behr side, sometimes people are just kind of uncomfortable with the client concentration maybe that you have. But the relationship does seem a lot more symbiotic than maybe it does appear on the surface. So maybe just kind of maybe frame that relationship and maybe that's more of an asset than a liability kind of -- as a relationship in general?

Sure, Tim. I appreciate the question. And we do get it quite frequently. So just for the broader group's context, we've got over a 40-year relationship with the Home Depot. And it is a customer-vendor relationship, but I would characterize it more as a partnership. And for us, it's also an exclusive relationship, meaning the Behr brand is exclusive to the Home Depot. And it is symbiotic as if I can borrow your words, Tim, in terms of the relationship. And we represent about 80% of Home Depot's paint sales. And so we are a huge component of their coatings share of aisle. And so for us, it's -- we're committed to being strong partners with the Home Depot and growing profitability together. And so we represent a huge portion of their paint sales. We also drive a lot of -- and paint in itself drives a lot of foot traffic into the Home Depot. And so there's benefits that accrue with that consistent relationship and having the Behr brands synonymous with the Home Depot. And the Behr brand has been a preeminent DIY paint brand, but it's also become a growing pro paint brand. And to touch upon that for a moment. The Home Depot, as I'm sure you're aware, is really focused on growing in the paint -- sorry, in the pro space and paint is a key lever to that. And so we partnered with the Home Depot, really focused on the pros that paint, and so for us, it's really a beneficial relationship because for the pro construction or contractor that's looking for one-stop shopping, they can go into Home Depot, which is the leader in their industry and buy various products including paint. So it's symbiotic and the fact that there's -- the paint drives traffic into the Home Depot store and the Pros that are in the Home Depot store will naturally pickup paint and Behr being a really reputable strong brand kind of drives that hand in hand.

You picked up a lot of share in Pro during COVID, and you kept a lot of it. So now you're your Pro business is what $900 million.

Yes, $900 million.

Roughly around there. What's the go-forward kind of initiatives with Pro to continue to grow that part of the market? Because obviously, you have a lot of [indiscernible] with Pros. But how do you think like outside the store. Home Depot start get into other distribution outlets outside of the orange boxes and doing more within kind of Pro distribution. So what are some of your initiatives at Behr to continue to kind of grow that paint business and take share?

Yes. So for context, the 3 years leading up to 2023, we grew our pro paint business by a stack comp of 60%. And so that far outpaced the market and led to market share gain. This year in 2024, we're expecting low single-digit pro paint, which we think is in line or slightly better than the industry, so really consolidating our share gains. In terms of the initiatives that we're doing, and again, it's a partnership with Home Depot, so we're doing it hand-in-hand with them. As I would really cite 3 initiatives. One is increasing and leveraging pro sales reps that are focused on the pro and on paint. So that's a key driver and just driving throughput through that avenue. Second is delivery options. So for example, buy online, pick up in store or on-site delivery to reduce the friction for pros paint or professional pro painters to be able to interact with a big-box in terms of being able to deliver on the paint and the Behr paint. And third is loyalty program. So really in the spirit of consolidating our share gains and retaining the propane or the loyalty program is obviously an instrumental part of that. And so we're aligned 100% with the Home Depot with regards to those initiatives and continuing to leverage that to make headway. I think as I mentioned before, the Home Depot is focused on the Pro and some of the acquisitions, for example, SRS is consistent. We're -- in terms of our focus on the Pro and leveraging the big-box and other channels that may be pursued.

Okay. And then on the DIY business, I mean, obviously, COVID was a big surge and then whatever came after it, maybe retrenchment, you have existing home sales at 30-year lows. Where is the volume on the DIY business today relative to pre-COVID? And I would think that that's a pretty kind of linked business to existing home sales. So it does seem like there is a little bit of embedded cyclicality maybe within the DIY business in paint, if we would see an uptick in things like existing home turnover.

Yes. So [indiscernible], a couple of dynamics that have been at play. So obviously, the -- we're all aware of the -- is there a mic issue? Okay. A real pull forward of R&R activity and specifically DIY activity during 2020 and 2021. And we're seeing the repercussions of that or the hangover effect, so to speak, of that. And that's starting to stabilize. But what I would say is DIY is -- and as a consequence of that pullback in terms of your question as in terms of the relative volumes, we're down, and the DIY industry is down from a paint perspective about double digits relative to 2019. So it is down notably. But we're seeing ultimately, a return to stabilization. We're expecting 2024 to be down high single digits, in line with the industry. And we don't have a crystal ball when it turns. But as we work through that pull-forward effect as I mentioned before, with regards to the COVID, R&R and DIY pull-forward effect. We'll see some stabilization in return to growth. And Behr specifically is really well positioned as a preeminent DIY paint brand to take advantage of that. We think the fundamentals of the R&R industry are strong. So I mentioned before, the home equity value, the age of the housing stock, existing home sales, as you alluded to, Tim, as at multiyear lows, and that is a key driver of DIY paint sales because, as you would imagine, as people prepare to sell their homes, they tend to paint their house at least select rooms. And then those that purchase the house will paint. So you've got really a double benefit in existing home sales. And so that is something that has suppressed DIY here in the near term. But as that rebounds and normalizes will be a catalyst for growth as well. To be fair, we're not expecting outsized growth with regards to the DIY paint business, but we do think we're well positioned to outperform the market when it does return to growth.

Any paint questions?

You have opportunity do you think to expand distribution and SRS [indiscernible] has been acquired?

So that's a good question. So SRS -- sorry, the question is, do we, Masco or Behr, have an opportunity to expand distribution really through Home Depot via the SRS distribution acquisition. We'll see. I think at the end of the day, SRS is really focused on pool landscaping roofing. So it doesn't really touch the paint category. But what I would say is a broader dynamic, the Home Depot and their focus on the Pro and focus on being available for the Pro and accommodating the Pro from a distribution perspective. I think both well in terms of the flexibility that we'll demonstrate in terms of accommodating whatever the Home Depot believes is the right channel approach to the Pro. And so I think that just is upside opportunity for us from that perspective.

Maybe just switching over to Plumbing quickly. How do you feel about your Plumbing business relative to the category overall. I mean it does -- at least when we look at statistics, it does seem like you guys are gaining share. So I guess; a, do you believe you're gaining share? And then b, kind of where -- which areas of the market do you feel like you're growing faster?

As a general matter, we feel really good about our Plumbing business and all elements of it, quite honestly. It's been an area of strength for us in terms of outperforming the market, which I'll talk to in a moment, but also margin expansion. We've increased our margins by -- we're expecting to increase our margins by 100 basis points each of the last couple of years. And so -- and that's in a challenging environment. So it really -- in terms of not only how we're positioned in the market, but also the underlying performance and earnings potential of the business is really -- we're really pleased with it and optimistic that that will continue going forward. In terms of kind of area by area, our North America plumbing, so our core plumbing, for example, Delta, we think is performing at or better than market. I mean it's tough to tell because the the share information isn't as readily available. But based off the data points that we have, we believe we're performing in line with or potentially better than the market. And we certainly have been over the last number of years. From an international plumbing perspective, I think it's a lot more clear that Amazon and others in terms of traditional e-commerce. And so it really has been a strength for the Delta brand specifically, as I mentioned before, and something that we're a leader and plan to capitalize on that, Amazon and others in terms of traditional e-commerce. And so -- it really has been a strength for the Delta brand specifically, as I mentioned before, and something that we're a leader in and plan to capitalize on that leadership position.

Great. We're out of time. So please join me in thanking Rick and the Masco team for being here with us today.