The operator, Jerry, welcomes everyone to Masco Corporation's Third Quarter 2023 Conference Call. Renee Benedict, director of FP&A and Investor Relations, introduces Keith Allman, president and CEO, and David Chaika, Vice President, treasurer and Investor Relations. The third quarter earnings release and presentation slides are available on the company's website. The statements made during the call will include forward-looking statements and non-GAAP financial metrics. Keith Allman thanks everyone for joining the call.

In the third quarter, Masco Corporation demonstrated strong execution and the earnings power of their business model despite a challenging environment. The company's sales decreased by 10%, with volume down by 12%, but they were able to partially offset this with pricing actions and favorable currency impacts. The company also saw a decline in operating profit of only $2 million and an operating profit margin expansion of 170 basis points. In terms of their segments, plumbing sales declined by 11% in both North America and internationally, with demand remaining soft in both markets. The company expects their overall international plumbing market to be down by high single digits for the full year.

Despite a decline in overall sales, the company saw a 230 basis point increase in plumbing margin due to pricing actions, cost savings initiatives, and a strategic acquisition. In the Decorative Architectural segment, sales declined 10%, with DIY paint sales down and propane sales slightly down. However, the company has captured significant market share in the propane market through the strength of the Behr brand and its partnership with the Home Depot. The company also returned $109 million to shareholders through dividends and share repurchases and maintains a strong balance sheet. The outlook for the remainder of 2023 is positive.

The company has strong execution and expects earnings per share for 2023 to be higher than previously anticipated. They will focus on controlling costs and driving margins back to pre-pandemic levels. The company believes in the long-term growth potential of the repair and remodel market and will continue to invest in their brands, capabilities, and people. They plan to provide an updated outlook for 2024 and thank their employees for their hard work. Sales decreased in the quarter, but the company remains focused on adjusted performance and excluding currency, sales decreased by 11%.

In the third quarter, North American and international sales both decreased by 11% in local currency. However, the company's focus on operational efficiency led to a 430 basis point increase in gross margin to 35.8%. Despite the decline in sales, operating profit only slightly decreased to $348 million, with a 170 basis point expansion in operating margin. This was due to pricing actions, lower freight and commodity costs, and cost saving initiatives, offset by lower volumes. The company also received an insurance settlement related to a severe weather event in Texas, which has been excluded from their results. In the plumbing segment, sales decreased by 10% and operating profit increased by $5 million, with a 230 basis point expansion in operating margin. In the decorative architectural segment, sales decreased by 10% and the completion of the Sauna360 acquisition had minimal impact on results.

In the third quarter of 2022, paint sales and propane sales declined, but the company has gained and retained significant market share over the past three years. Operating profit improved due to cost saving initiatives, but was impacted by lower volumes. Raw material costs for paint are expected to have modest deflation in the fourth quarter. The company's balance sheet remains strong with net debt-to-EBITDA at 1.7 times and $1.6 billion in liquidity. Working capital improved, leading to a $408 million improvement in net cash from operating activities compared to the previous year. The company plans to deploy approximately $500 million for share repurchases and acquisitions for the full year, including the recent acquisition of Sauna360.

Masco Corporation expects to deploy up to $225 million for share repurchases in the fourth quarter, bringing their full-year share repurchases to approximately $350 million. They also provide an updated outlook for the year, with sales expected to decline by 10% and margins expected to be approximately 16.5%. In their plumbing segment, sales are expected to decline by 9-10% with improved margins of 17.5%. In their Decorative Architectural Segment, sales are expected to decline by 8-10% but margins are expected to improve to 17.5% due to cost-saving initiatives. The company's 2023 EPS estimate has also been increased to $3.65 to $3.75. The call is then opened for questions from analysts.

Michael Rehaut asks Keith Allman about the increased guidance and how it is driven by the higher margin outlook. He also asks about the drivers of the margin, including cost saving initiatives and raw material trends, and if there will be any carryover benefits in 2024. Allman explains that the main drivers of margin are variable cost productivity and continuous improvement, and they expect to see benefits from price increases and potentially lower commodity costs in 2024. Rehaut also mentions a competitor's early thoughts on the market in 2024 and asks for Allman's thoughts on the current trends.

In this paragraph, Keith Allman discusses the company's outlook for 2024 and how it aligns with industry experts and economists. He predicts a flattish year for R&R, but believes the company will outperform the market and continue to grow and expand margins. He highlights the company's leading brands, innovation pipeline, and strong channel positions as key factors in their ability to retain and gain market share. Allman also mentions their focus on margin execution and expects to see margin enhancement through market outperformance and incremental volume.

In the paragraph, the speaker discusses their company's focus on lean operations and cost productivity. They also mention their plans to outperform in a flattish market and their belief in a rebound in R&R spending in the future. The speaker also mentions the company's readiness for the volatile market and their investments in brand service innovation. The speaker declines to disclose specific information about price, but mentions that overall price was around 1% for Masco.

The speaker discusses the growth of their propane business and their focus on a specific segment of the market. They credit their success to their value proposition for contractors who are already shopping at Home Depot and their quality products and cost competitiveness. They believe this segment makes up about half of their propane business.

The company is just starting to tap into the potential market for propane sales, and their success is driven by their focus on service and making the process easy for contractors. They plan to continue investing in areas such as online ordering, delivery options, and loyalty programs to expand their share. They believe there is still a lot of potential for growth in this market. They also mention that their propane customers have backlogs and project sizes may be smaller, but pros are still busy.

During a conference call, David Chaika and Keith Allman discuss the backlog and project size for propaners. They mention that the backlog has normalized in the past few years and that it is difficult to determine the project size at this point. They also mention that there has not been a significant change in ticket size. The next question is about international markets and Allman states that it is difficult to predict if they have reached a bottom or if they will continue to weaken. They mention softening in central Europe and China and expect it to continue in the fourth quarter. However, they note that their company, hansgrohe, is gaining market share in Europe.

The company has been able to combat difficult market conditions by expanding in Europe and China. They are seeing signs of stabilization in the international markets. The retail channel has been weaker in plumbing and DIY, but there has not been a significant change in the promotional environment. The company works closely with their customers on promotions.

The promotional environment has not seen much change and the speakers thank the caller and move on to the next question. The next question is about plumbing mix and pricing, with the company expecting further tapering in the fourth quarter. There has been some impact on mix due to geographic factors in the international market, but it is not significant. Paint and coatings revenue was down high single digits and total segment sales were down 10%.

The hardware and lighting businesses were down double digits in the third quarter due to a pullback in DIY-oriented products. The fourth quarter margin guidance shows a bigger step down than usual, which could be due to a mix of international sales and increased expenses from new factories. However, the company is focused on driving strong incremental growth in the future.

David Chaika and Adam Baumgarten discuss the current state of the market, noting caution due to uncertain conditions. They anticipate continued pressure on margins from lower volumes and negative mix. They also mention upcoming plant startup costs. When asked about point-of-sale trends, Keith Allman declines to provide specific information for the quarter but notes positive trends overall. Susan Maklari asks about the current state of the consumer and its potential impact on next year's business, to which Keith Allman responds that it's a mixed bag.

In Europe, there has been a recent pullback in consumer spending due to concerns about pending legislation regarding non-fossil fuel heating systems. However, this legislation has now been pushed back to 2028, so consumer spending is expected to pick up again. In the US, consumer spending has remained steady, driven by the perceived value of home improvement projects such as painting and replacing fixtures. Despite some uncertainty and volatility, consumers have been resilient and continue to feel positive about their homes.

The company believes that there will be a strong demand for home remodeling once the economy stabilizes. They plan to take advantage of this pent-up demand. They also plan to allocate their cash towards share repurchases and acquisitions. The DIY paint segment has seen a decline in sales due to low levels of existing home sales.

In the third quarter, the market for DIY paint is softer than expected, but the fundamentals are still supportive due to millennials entering the housing market. The company is positioned well for this trend. Commodity costs are starting to see relief, with container costs and certain metals coming down. This will be a tailwind for the company in 2024. Overall, the company is expecting low single-digit deflation in plumbing and flat commodity costs for the full year. The reduced commodity costs in the fourth quarter will benefit the company in 2024.

The speaker, Keith Allman, responds to a question about the company's targeted operating margins. He explains that not all segments have the same margins and that hardware is lower than paint. However, the company is looking to improve and has room to drive margins even higher. In plumbing, there is a range of margins depending on the product, but the company has shown the ability to execute and drive margins through their focus and operating system.

The company will be addressing variability in their segments, but they will not break it down by country or price point. They have a system in place to drive improvements in margins, but they will not be breaking it down specifically. They have made improvements in productivity and have addressed inefficiencies in the back half of 2022.

In the paragraph, Keith Allman discusses the biggest drivers for the company's performance, including price cost recovery and productivity. He also mentions that brass deflation is expected to be in the low single-digit percentage for the year, with a potential benefit in the fourth quarter. The company's investments in both segments were in line with expectations, with plans to continue investing in the business.

The speaker says that the fourth quarter will be impacted slightly, but in line with the third quarter. They attribute margin improvement to productivity improvements and price-cost relationships. The speaker is asked about pricing actions for 2024 and mentions taking targeted price increases in plumbing this year. They have strong pricing power and may take price in plumbing next year if needed, but it is too early to tell.

Keith Allman clarifies that the 3Q price increase in plumbing was last year, and the company has also implemented targeted price increases earlier this year. When asked about DIY paint volumes, Allman explains that DIY has been a roller coaster during COVID, with an initial increase followed by a decrease when people became comfortable with having professionals in their homes. DIY volumes are currently lower than pre-pandemic levels, and the company will provide more detail on DIY trends in the next call. Allman also mentions that the millennial cohort may not be enough to drive significant growth in the DIY segment. The operator thanks everyone for joining the call and concludes the discussion.

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