The Masco Corporation held a conference call to discuss their second quarter of 2023. Renee Benedict, Director of Investor Relations and FP&A, welcomed everyone and gave instructions for the call. Keith Allman, President and CEO of Masco, and David Chaika, Masco's Interim Chief Financial Officer, were also on the call. The statements provided during the call were forward-looking and non-GAAP financial metrics were used. Keith Allman was pleased with the company's performance in the first half of the year.

The second quarter saw a 10% decrease in sales, but the operating profit only declined by $10 million due to cost recovery and improved operational efficiencies. This resulted in a 3% increase in earnings per share and a 140 basis point expansion in operating profit margins. The North American and International Plumbing segments both saw a 12% and 8% decrease in sales respectively, but the Plumbing margin expanded by 270 basis points due to pricing actions and operational efficiencies. The company is focused on returning the Plumbing segment's operating profit margins back to the 2019 level of 18%.

Watkins executed on its bolt-on acquisition strategy by acquiring Sauna360 to expand its wellness product offerings and leverage its dealer network. In the Decorative Architectural segment, sales declined 8% against a strong 15% comp. PRO paint declined mid-single digits against a 40% comp and DIY paint sales declined low single-digits against a low teens comp. Watkins secured additional shelf space, launched new products, and invested in its PRO paint business, demonstrating the strength of its Behr brand. Watkins will begin distributing product from its new paint distribution and manufacturing facility located in Central Ohio in September and producing paint in the first quarter of next year. It continues to generate strong free cash flow and maintain a solid balance sheet.

This paragraph explains the company's outlook for the remainder of 2023, which includes returning $89 million to shareholders through dividends and share repurchases, and an anticipated earnings per share range of $3.50 to $3.65. It also discusses the structural factors that will drive increased repair and remodeling activity, such as high home equity levels, the age of housing stock, and homeowners staying in their homes longer.

In the second quarter, sales decreased 10%, with lower volumes decreasing sales by 12% and net selling price increases of 4%. Despite the sales decline, gross margin expanded 320 basis points to 36.2% and operating profit was $404 million, only down $10 million compared to the same quarter the previous year. Operating margin expanded 140 basis points to 19% and EPS increased 3% to $1.19 per share. The company is in the final stages of selecting a CFO and anticipates naming one shortly.

In the second quarter of 2023, Plumbing sales decreased 11% (10% excluding currency), with North American Plumbing sales decreasing 12% in local currency and International Plumbing sales decreasing 8% in local currency. The segment operating profit was $245 million, up $7 million year-over-year, and operating margin expanded 270 basis points to 20%. Decorative Architectural sales decreased 8% against a strong 15% comp. Paint sales declined mid-single-digits and propane sales decreased mid-single-digits, with a two-year stack comp of over 30%. Operating profit was $180 million with operating margin of 20%, impacted by lower volumes, higher input costs, and growth investments, partially offset by higher net selling prices.

Masco is expecting modest low single-digit deflation in the second half of the year for paint raw material costs, and low single-digit inflation for the full year. The company has a strong balance sheet with net debt-to-EBITDA of 1.8 times and approximately $1.4 billion of balance sheet liquidity. Working capital as a percent of sales is expected to improve and be approximately 16.5% at year-end. Masco plans to deploy up to $500 million for share repurchases and acquisitions for the full year, including the pending acquisition of Sauna360 for approximately €125 million. For the full year, Masco expects sales to decline approximately 10%, and margins to be approximately 16%. In the Plumbing segment, sales are expected to be down in the range of 10% to 12%, and margins to be approximately 17%.

In the Decorative Architectural segment, 2023 sales are expected to be down 8-10%, with a 17% margin and an EPS estimate of $3.50 to $3.65 per share. This assumes a 226 million average diluted share count for the year and a 24% effective tax rate. The improved 2023 outlook is driven by the outperformance in the second quarter, however, the second half expectations remain unchanged due to a slowdown in Europe.

David Chaika and Keith Allman discussed the performance of the company in the first half of the year, noting that the top line was as expected, but the margin performance was better than expected. They also discussed the expected pressure on volumes and growth investments in the second half, and the diminishing price cost realization. Finally, they discussed their ability to get price increases due to their strong brands, innovation pipelines, and value to the consumer, and how the outlook for pricing will depend on where commodities go.

In response to a question about why the company's better-than-expected margin performance in the second quarter was not expected to continue into the back half of the year, Keith Allman pointed to three factors: volume pressures in Europe and North America, the lapping of the biggest chunks of price increases from 2022, and continued investment in the business.

The company is investing in its Plumbing, Decorative Architectural, and PRO paint businesses in order to gain market share. This includes the European Plumbing manufacturing plant and the new facility in Central Ohio. PRO paint in particular has been performing well despite a strong year-ago comparison. The company estimates that the PRO paint business will be around $900 million in 2022, and they are looking for opportunities to continue to grow the business.

Keith Allman and David Chaika discussed the growth opportunity for loyalty in the DIY market. They discussed how they have gained significant share in the market over the past three years and how they monitor customer experience with their product. They also discussed how they plan to continue to focus on improving their capabilities and services, such as buy online and pick up in store, an expansion of their delivery options, and their PRO outside sales force. They also mentioned how their capacity is a component of their growth, such as their new plant in Ohio. Lastly, they discussed how the margin for this business is lower than their core business due to additional resources, such as people and PRO sales reps.

Keith Allman answered Stephen Kim's question about the net price/cost in the Plumbing segment. Allman stated that they have seen an improvement in the first half and they will lap the majority of their price increases in the third quarter. They also have a couple of incremental price increases late in the year. Allman also mentioned that they do not have a specific view on the market in 2024, but they do believe that the recovery will happen soon.

Dave Chaika explains that the negative mix effect in plumbing is due to geographic differences, with core European markets seeing more softening than international markets. In North America, there is a slight mix impact due to the spa business, which has been pulled back on lower price point, more mass or retail-oriented products. However, there has been no significant trade down across other product categories.

Masco is expecting DIY paint sales to decrease in the high single digits in the second half of the year due to decreased existing home turnover. In response, they are opening a new paint facility to improve service levels and potentially lead to additional shelf space wins or PRO expansion. There will be start-up costs associated with the facility in the second half of next year.

Dave Chaika and Keith Allman discussed the cost implications of a new paint facility, with Chaika focusing on the startup costs while Allman discussed the facility's ability to maintain industry-leading delivery performance and logistical costs. Allman then addressed Susan Maklari's question about inventory levels and sell-in versus sell-out in the plumbing channel, noting that it has been consistent.

Keith Allman states that inflation peaked in the second quarter of 2022 and has been moderating since then, with container costs coming down and copper and zinc prices dropping below the 2022 average. All-in deflation in plumbing is expected to be low single digits for the full year, while certain paint input costs have moderated sequentially.

Keith Allman explains that Masco is focused on driving total cost productivity and continuous improvement to enhance margins. He also notes that the company has strong innovation and brands that allow them to price effectively, but the biggest lever for improvement is incremental volume.

Watkins has acquired Sauna360, a Finnish sauna company, for €125 million. This acquisition is part of Watkins' strategy to leverage their dealer network and add to their wellness business. It is expected to add 1% growth and be modestly accretive to EPS. The acquisition will be funded with cash and possibly short-term borrowing. Watkins believes this acquisition will help them stay at the forefront of their industry by offering new products and services.

David Chaika explains that the strong operational margin performance in the first half of the year was due to better price realization, cost-out initiatives, and increased operational efficiencies. There was some deflation, but it was expected, and there were some one-time expenses that were pushed out into the second half of the year.

David Chaika and Keith Allman discussed the company's performance in lighting and hardware, which was down 20% in the second quarter due to market softness. They expected the businesses to perform in line with their low double-digit volume decline expectations of the R&R market. Chaika also noted that the third quarter would have more modest year-over-year expansion from the second quarter, while the fourth quarter would have more year-over-year expansion due to lower volume.

In North America and Europe, plumbing experienced volume challenges, with Europe being down 3% in Q1. However, the company was able to drive good price/cost realization, get the supply chain in tune, and provide service levels, productivity, and cost efficiency. The North American Plumbing business was more challenging, especially due to the spa business, but there was slight better performance in the PRO channel than in the DIY channel.

David Chaika and Keith Allman provide insight on the expected performance of the company in the second half of the year, with a slight headwind on the margin side due to growth investments and additional marketing. Adam Baumgarten inquires about the difference between the company's expectation of low single-digit inflation and a competitor's expectation of high single-digit decline in raw materials. Allman explains that the difference is due to different levels of vertical integration and supply chains.

David Chaika states that consumer behavior is choppy, but overall they seem to be strong. Keith Allman adds that industry-wide promotional levels have been moderate and similar to last year, but there have been some more selective events and promotions on certain items.

David Chaika discussed the consumer spending across industries and noted that there has been a pullback in home improvement spending likely due to affordability being pinched by rising rates. He also commented on the M&A environment, noting that it has been slower over the past year and that sellers are not as competitive. Lastly, he discussed PRO paint and how it has had tremendous share gain with Home Depot, but that it has been leveling off lately.

Keith Allman and Keith Hughes from Masco discussed the services they offer PRO painters, such as different delivery options, loyalty programs, and improved service. They have seen success in their efforts, and the COVID situation allowed them to get their product to more builders, with high Net Promoter Scores. They plan to continue to focus on service and innovation in order to grow faster than the market. The call concluded with Renee Benedict thanking everyone for joining.

This summary was generated with AI and may contain some inaccuracies.