Masco Corporation

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Masco Corporation's first quarter 2022 conference call. My name is Mary, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. To ask a question, please press star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. I will now turn the call over to David Chayka, Vice President, Cheshire, and Investor Relations. You may begin.

Thank you, Mary, and good morning. Welcome to Masco Corporation's 2022 first quarter conference call. With me today are Keith Allman, President and CEO of Masco, and John Snubice, Masco's Vice President and Chief Financial Officer. Our first quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at 313-792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risk and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We describe these risk and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP, earnings release, and presentation slides, which are available on our website under Investor Relations. With that, I'll turn the call over to Keith.

Thank you, Dave. Good morning, everyone, and thank you for joining us today. Please turn to slide five. Masco was off to a great start this year with our first quarter results. Our top line increased 12% with growth driven by volume and pricing in both segments. Our operating profit declined slightly due to higher commodity and freight costs as inflation reached mid-teens for the quarter. Despite these higher costs, we achieved sequential margin improvement through pricing actions and expense controls, as SG&A as a percentage of sales improved 110 basis points to 15.9% of sales, even with higher marketing and growth initiative investment. Our earnings per share for the quarter was 95 cents, a 7% increase compared to the very strong first quarter of 2021. Turning to our segments, plumbing grew 11% in local currency with 10% growth in North American plumbing and 12% growth in international plumbing. This impressive performance was against a 27% comp. Our plumbing business remains well positioned for growth with our market leading brands, new product introductions, and healthy backlogs. Furthermore, international markets including Europe, remain strong and customers report continued pent-up demand and a strong backlog of projects. In regards to Russia and Ukraine, Moscow has very little exposure as we sold approximately 40 million euro of product into those countries in 2021 and have since ceased operations. In our decorative architectural segment, sales grew 17 percent as Bayer continued its tremendous performance with low double-digit growth in DIY paint and another quarter of over 50% growth in propane. Our paint business is performing extremely well, as evidenced by our strong results. We continue to work very closely with our partner, the Home Depot, on our paint strategy, and we are jointly investing with them to drive continued share gains in both our DIY and propane businesses. We also continue to launch new products, achieve industry-leading quality ratings, and are pleased with the performance of our recently launched Bayer aerosols, caulks, and interior stain programs. Turning to capital allocation, we repurchased $364 million of our stock during the quarter and an additional $50 million in April. Based on our positive outlook for our business and current market conditions, we now expect to repurchase approximately $900 million of our stock this year, an increase from our previous expectation of at least $600 million. To assist with this, we have secured an additional $500 million in short-term funding that we will likely deploy in an accelerated share repurchase transaction. Lastly, inflation has remained persistent. and we now expect double-digit cost inflation for the full year, up from our original view of high single digits as freight, metals, and paint input costs continue to face upward pressure. This increase in our inflation expectation will pressure margins, even though we fully expect to recover the cost and maintain operating profit dollars. Therefore, as a result of our strong first quarter performance higher sales expectations and likely lower share count, we are raising our earnings per share expectation for the year to be between $4.15 to $4.35 per share, an increase from our previous expectations of $4.10 to $4.30. Finally, let's turn to our longer-term view on our markets and our outlook. We are clearly in a period of rising interest rates and inflation. As we discussed last quarter and as indicated in our guidance last quarter and this quarter, we expect our sales growth to moderate from the rapid growth we have experienced over the past 18 months. However, times like these are the very reason we transformed Damasco over the past several years to be a focused business model of low-ticket repair and remodel products with product, end-user, and geographic diversification. We believe this model will outperform even through rising interest rates and inflationary cycles. We have a healthy mix of both pro and do-it-yourself oriented end users and estimate our end user mix to be approximately 50% professional and 50% DIY. Our low ticket products are used in both normal weekend repair projects as well as full home remodels. Our low ticket branded nature of products affords us the ability to raise prices to offset cost inflation. And our shift away from new construction means that our business is much less sensitive to changes in interest rates and more aligned with the health of the consumer and home values. We also believe, in addition to the changes we have made to our portfolio, there are numerous structural factors to housing, such as demographics, age of housing stock, and how consumers view their homes that will be supportive of increased repair and remodel activity, even in a rising interest rate environment. We're on the leading edge of a large 75 million millennial cohort forming households and entering the housing market. 2.7 million more homes will reach the prime remodeling ages of between 20 and 39 years old over the next three years. The COVID-19 pandemic has clearly increased the desire for more enjoyable living spaces, which has led to increased home demand and remodel expenditures. And the consumer and homeowners have strong balance sheets with more than $2 trillion in savings and home equity values at all-time highs. All of these structural forces provide tailwinds for our business. The changes we have made to our business and the structural factors supporting our markets give us the confidence to increase our earnings per share outlook and our share repurchases for the year, positioning us well to continue to drive long-term shareholder value. I'll now turn the call over to John for additional detail on our first quarter results and full year outlook. John?

Thank you, Keith, and good morning, everyone. As Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to slide seven, we capitalized on the continued healthy demand for our industry-leading brands and delivered a solid start to the year, with sales increasing 12% in the quarter against the robust 25% comp in the first quarter of last year. Net selling prices increased sales by 9%, The higher volumes increased sales by 5%. This was partially offset by 1% each related to currency and divestitures. Sales grew 14%, excluding the net impacts of acquisitions, divestitures, and currency. In local currency, North American sales increased 14%. This outstanding performance was driven by strong growth in both DIY and propane, as well as faucets, showers, and spas. The main drivers of this growth were increased net selling prices, which increased sales by 9%, and higher sales volumes, which increased sales by 3%. In local currency, international sales increased 12%, or 18%, excluding divestitures. Higher volumes increased sales by 9%, net selling prices increased sales by 7%, The favorable mix added 1%. A gross margin of 32.1% was impacted by higher commodity and logistics costs in the quarter. As we discussed in our previous earnings call, price costs had a peak impact on our P&L in the fourth quarter of 2021, and we experienced 140 basis points sequential improvement in the first quarter of 2022. Our SG&As and percentage of sales improved 110 basis points to 15.9% due to operating leverage and continued cost containment activities across our businesses. Operating profit in the first quarter was $356 million, an operating margin of 16.2%. Our EPS was 95 cents in the quarter, an increase of 7% compared to the first quarter of 2021. Turning to slide eight, plumbing growth was 9 percent, or 12 percent, excluding the net impacts of currency, acquisitions, and divestitures. This strong performance was achieved against a healthy 22 percent count in the first quarter of last year. Pricing and volume contributed approximately equally to segment growth. North American sales increased 10 percent in local currency. This performance was led by Delta, they drove strong growth across their wholesale, retail, and e-commerce channels. Watkins Wellness was also a contributor to growth as they continued to capitalize on increasing demand and the increasing trend toward outdoor living. International plumbing sales increased 12% in local currency, or 18% excluding divestitures. Hounds grew across their markets with particular strength in their key markets of Germany, China, France, and the UK. Segment operating profit in the first quarter was $228 million, and operating margin was 16.8%, a 410 basis point sequential improvement in margin. Operating profit was impacted by inflation and higher variable costs, on items such as personnel and marketing expenses, which was partially offset by higher net selling prices and incremental volume. Turning to slide nine, decorative architectural sales increased 17% for the first quarter. Our pro paint business delivered another quarter of more than 50% growth, driven by ongoing momentum with pro customers as we continue to deliver value to these customers through our service capabilities and our innovative high-quality products. This, coupled with our strong operational execution, resulted in further share gains in our pro business. We expect propane demand to remain strong, and we continue to invest in the pro, along with our partner, the Home Depot, in new services to retain and grow our penetration with the pro customer. Our DIY business also performed well in the corner. Sales grew low double digits against a strong comp in the first quarter of last year. Operating profit was $158 million in the quarter, up $16 million, or 11%, and operating margin was 18.8%. This performance was driven by higher net selling prices and incremental volume, partially offset by higher commodity costs and variable expenses, along with investments to drive future growth. Turning to slide 10, our balance sheet is strong, with net debt to EBITDA at 1.7 times. We ended the quarter with approximately $1.2 billion of balance sheet liquidity. Working capital at the percent of sales was 20.1%. This percentage was elevated in the first quarter, largely due to higher inventory levels to meet the demand of our customers, cost inflation, and delays in receipts and delivery of materials. Despite these challenges, through focused execution, we continue to refine our inventory levels, expect working capital as a percent of sales to be approximately 16.5% at year end. We also continued our focus on shareholder value creation by deploying $414 million to share repurchases during the first four months of the year. With our aggressive repurchase of stock in Q1 and our current outlook, we now anticipate repurchasing approximately $900 million for the full year, an increase from our previous guidance of approximately $600 million. To facilitate this, yesterday we executed a $500 million one-year term loan from a group of banks to provide additional liquidity for share repurchases. We anticipate employing this $500 million shortly in the form of an accelerated share repurchase transaction.

Concurrently,

We extended the maturity of our $1 billion revolving credit facility by three years to April of 2027. Finally, let's turn to slide 11 and review our outlook for 2022. With our strong first quarter performance, additional pricing actions, and favorable outlook for our markets, we now expect four-year sales growth for Masco in the range of 7% to 11%, excluding foreign currency, up from our previous guidance of 4% to 8%. We anticipate full-year operating margins to be in the range of 17% to 17.5%. In our plumbing segment, we now expect 2022 sales growth to be in the range of 5% to 9%, excluding foreign currency, up from our previous guidance of 3% to 7%. Given current exchange rates, foreign currency is expected to unfavorably impact plumbing revenue by approximately 2%, 90 million dollars we anticipate the full year plumbing margins will be in the range of 18 and a half to 19 percent in our decorative architectural segment we expect 2022 sales to grow in the range of 10 to 14 percent up from our previous guidance of six to ten percent looking specifically at paint growth for 2022 we currently anticipate our diy business to increase low double digits up from our previous guidance of high single digits, and our pro-business to increase high-teens up from our previous guidance of mid-teens. We anticipate the full-year decorative architectural margin to be approximately 17.5 to 18 percent. As we have previously discussed, in this segment, pricing actions typically only recover the dollar amount of inflation. As a result, all else equal, Operating dollars remain neutral from cost recovery pricing action for results in margin compression. Finally, as Keith mentioned earlier, our updated 2022 EPS estimate is $4.15 to $4.35, which represents 15% EPS growth at the midpoint of the range. This assumes a $236 million average diluted share count for the full year. Additional modeling assumptions for 2022 can be found on slide 14 in our earnings deck. With that, I would like to open the call for Q&A. Operator?

Mary, we'd like to open up the call for Q&A.

Thank you. In order to ensure that everyone has a chance to participate, We would like to request that you limit yourself to asking one question and one follow-up question during the Q&A session. To ask a question, please press star, then the number 1 on your telephone keypad. To withdraw your question, please press the pound key. Our first question comes from the line of Sisa and Kim from Evercore ISI. Your line is now open.

Great. Thanks very much, guys. Yeah, good results and exciting times out there. So we appreciate the guidance here. I wanted to see if we could get a little bit more in the way of specifics around what you're doing with the pro business. You said you're up 50%. Again, raising your guide for the year in terms of the pro side of the business. You alluded to programs and services to retain those new customers. I was wondering if you could give us a little bit more granularity around that so that we can frame how this business is going to come so strongly later this year.

Thanks for the question, Steve and Keith. Good morning. Our business, our pro business, is doing very well, and I think it's important to highlight that it begins with the strength of the brand, with the achievements we've made with regards to the quality in the can and how the consumer perceives it, as well as overall customer satisfaction on the consumer side so there continues to be real strong uh consumer pull through through the channel uh based on the investments that we've made for a long long time and the strength of those investments so it begins with uh what we have to sell and we're selling a very good paint and the consumers and the pros appreciate that i think with the strong execution that we've had in our supply chain and kudos not only to the Bayer team and R&D and the folks in the factory, but our supply base has been with us for decades and we're very loyal and they're very loyal to us and they've done an outstanding job through very difficult circumstances. So that is really the core of what's driven our success is strong execution and strong brand service and innovation. In terms of our programs that we're developing and are launching to continue to drive the growth and to give us confidence in the raise that we've made in our guidance. I'm not going to get into the details for obvious reasons, but they're focused on rewarding customers who continue to give us more share of their wallet. And that's really what we're targeting. We've had the opportunity to get bare paint into a lot more pros hands. And frankly, they like that. And we're developing programs to continue to do that, to get our paint in more pros hands, and then to add to stickiness and to help us maintain as much share of all of those new customers as we can.

And just in terms of timing on that, Keith, can you give us a sense for, are those programs which you are currently rolling out now, or are these When should we expect these to really be at full force this year, like second quarter or third quarter?

You know, as we've talked about frequently, I think the best indication of our future performance is what we've done in the past. Look at what we've been able to do, and this steady growth in pro has been an evolution where we continually launch new programs, be it on the execution side of delivery and job site delivery and high-speed tinting and those types of advantages to programs that we develop jointly with the Home Depot to make the in-story experience better to how we service with regards to our technical representation and our in-field reps to what we do for loyalty programs and the like. So it will be a combination of of things that are happening now and will continue to roll out. There will be new things that happen, and we plan on continuing that as we have really since the start of the program.

Okay, great. Thanks very much. Best of luck. Thank you.

Our next question comes from the line of Matthew Bully from Barclays. Your line is open.

Hey, good morning, everyone. Thank you for taking the questions. So it sounded like your direct exposure to Russia and Ukraine is relatively small, but I think the investor concern is probably more related to the knock-on effects to sort of the rest of European demand. Just how are you guys thinking about sort of the rest of the impacts to the Hans Grohe business in Europe just as a result of everything that's going on there? Thank you.

Well, you know, as we said in the prepared remarks, relatively low level of exposure as it relates to demand in both those countries, call it 40 million euro, and we've ceased operations there. Our supply chain and our supply base, if you will, does not have anything inbound or interrelated with those two countries. So really, I would say there's no direct impact. Certainly, we're watching very carefully with regards to the indirect impact. We have seen, we believe, some fuel oil increases in price that were indirectly related, obviously, to the conflict. As it stands now in Europe, as John highlighted in the detailed remarks, we continue to see strong demand really across our main countries of Germany, France, UK, where we do a significant amount of our volume. And that's continued to be robust. And the consumer traffic, the health of the consumer, and our demand patterns continue to be strong. So at this point, we have not seen any indirect knock-on effect of the conflict, but obviously we're watching that very carefully and we'll continue to do so.

Got it. Thank you for that, Keith. And then second one, just to press on the pro-paint business in another way. Obviously, competitors have spoken to gaining access to raw material supply again. The specific question is just if we should think about any sort of competitive dynamics emerging as you've got multiple industry participants talking about market share, and specifically, is there anything on the pricing side that we should be aware of on that front? Thank you.

Yeah, I don't have anything particularly to add more color to with regards to pricing other than what we've made in our comments. When we look at our competition, I respect them a lot. We have great competition. There's no question about it. And I think to a large degree, we're as good as we are because of the pressure that they put on us. So I welcome the competition, and they're strong, and I respect them. With regards to how this market share shakes out as capacity becomes more realigned, I think you see our confidence in the guide that we've changed. And we certainly wouldn't do that if we didn't have that kind of confidence. And fundamentally, that confidence is based on the fact that we have an incredibly strong brand. We've got outstanding quality. We have a reputation for outstanding customer service. And this is reports from third parties. This isn't just Masco's view on our own paint business. So we have strong paint to begin with. We've demonstrated the strength of our supply chain and our team at Bayer and our team and our suppliers. So we've got a strong team with a great product and great recognition. And when we have the opportunity to get that paint into more pros' hands, we continue to see that kind of feedback. It's very positive. And thanks to our supply chain for being able to put us in that position. And our intent is to continue to work hard to keep as much of the share of wallet of those new painters that have tried us. And so far, it's working pretty good. So very much respect the competition, but also extremely confident in our paint business as reflected in our guide.

Great, great. Well, thank you for that, Keith, and good luck.

Our next question comes from the line of John Lavaglio from UBS. Your line is open.

Good morning, guys. Thank you for taking my questions as well. The first one on the ASR, which I think is very positive, and I think it sends a very strong message. I just wanted to be clear. It sounds like that's fairly definitive that you're going to go forward with that. The timing could be near term. But I guess the question is, what was sort of the factors that led you to that decision to go forward with that?

You know, John, hey, good morning. It's John. You know, you're right. We are looking at this ASR, and obviously, you know, by the fact that we entered into the one-year term loan yesterday is a pretty good indication of that. The way we're looking at this is, you know, we've seen, you know, it comes down to value creation, right? We've seen the share price retreat a little bit this year, and As we look forward, the way we're looking at this is we're simply pulling forward our future cash flows with the term loan to buy back these shares. Because we've repurchased $400 million to date, and we've got this heavy working capital this time of year, that was the reason we took out the additional loan, just for the liquidity we needed for the transaction. So because of where we see the share price rise, you know, the strength we're continuing to see in our business, we think is, you know, a pretty realistic view as to how we see the repair market developing, even in this rising rate environment. You know, we feel it's the appropriate time and the right time to put our balance sheet to use to be a little bit more aggressive on share repurchases and further enhance shareholder value. You know, we've always said that, you know, our share repurchase program would be programmatic But we also said that we would be opportunistic if we saw a little bit of a dislocation. And we think this is one of those times. And so that's why we've really pursued this transaction at this time.

Yeah, that makes a lot of sense. We would agree. Okay. And then on the plumbing supply chain with a lot of the componentry coming out of China, I'm curious what the Shanghai shutdowns have done and what you see going forward in relation to the supply chain.

It's an important thing that we're watching for sure. As we, both in terms of demand in China, you know, we do roughly about $300 million of demand in China, as well as the source of products coming out of China. We've, first and foremost, concerned with our employees and ensuring their safety. And really, we feel good about that aspect of it. I'm happy to say that. But we're, currently our supply chain, while It continues in general to be tough and to require extra special effort to manage the challenges that have been going on for some time. We're going to do okay, and we expect as Shanghai and Beijing come out of the lockouts that with the underlying growth in the market in China that we'll be able to do okay there. And to date, we haven't had, while it's still a challenge, We haven't had significant issues coming out due to the shutdown of those two cities, and we expect it to stay that way.

Great. Thank you, guys.

Our next question comes from the line of Mike Dow from RBC Capital Markets. Your line is open.

Morning. Thanks for taking my questions. The first question, I mean, you know, obviously alluded to some of the potential puts and takes with with housing and how home improvement evolves. So I'm wondering if you're seeing anything, whether in, you know, something more discretionary like your, your spa business or anything in sellout trends, you know, could you talk about how you're, how you're looking at some of your kind of leading edge positions in terms of evaluating whether or not you're seeing consumer softening come through and maybe what else you're, you're watching most closely in this environment?

I'd point to a couple things, Mike. We, as expected, are seeing some tempering of the white-hot demand we've seen in the last 18 months. We talked about that last quarter, and while demand this quarter was a little bit better than we expected, there is a little bit of tempering from what we've seen in the past 18 months. However, it's still strong. We are not seeing really any sort of evidence. There's a little bit of a mixed shift, but nothing material. The consumer continues to be willing to spend as driven by the overall change in the view of the housing, the home in our view, driven by COVID. And we're seeing strong sales in our spas. That backlog of our spas, you know, a very expensive discretionary. item, but in the right spot as it relates to the whole wellness trend. And that backlog continues to be in that 30-week range. So that's strong. Hansgrohe and our higher-end shower systems continue to sell well. We're seeing our shower doors, which are relatively expensive, continue to sell well. So no real mixdown, strong traffic, good backlogs. And, again, this all feeds into why we've decided to change our guide in the first quarter, which typically we don't do, because we like what we're seeing and the strength of the consumer.

Mike, what I would just add to Keith's comment is, you know, in terms of, you know, sell-in, sell-through, I think it was pretty balanced during the quarter across all product categories. We didn't see any significant change in that whatsoever through the quarter.

Okay, that's very helpful. Thank you for those comments. My second question, just wanted to ask for clarification on price cost, because I certainly understand your comments around DEC-ARC, and that's always been dollar recovery, not margin percentage recovery. But when we look at the new full-year guide for margin, both on a consolidated and segment basis, Is there an expectation for price-cost neutrality, price-cost favorability, and how should we be thinking about that in terms of cadence, i.e., are there incremental headwinds in the second quarter because of what you've seen, but then you catch back up in the second half? Just a little more color on that would be great.

We exit the quarter price-cost neutral, and we expect that to continue in the second quarter. Now, we don't have a crystal ball for where commodities are going to go, but our intention and our strategy hasn't changed. We think we have the right to drive price increases as needed. Obviously, our first choice is to work with productivity and with our supply base and our customers to minimize the impact. to take price where we need to as we see inflation. And we don't know where that's going to go, but we continue to monitor it. And maybe, John, you can give a little bit of color on it.

Yeah, Mike, maybe give you a little bit more color just on what we're seeing in terms of inflation across the portfolio. You know, we continue to see some inflation across our cost assets, particularly in persistent freight inflation. You know, in terms of the raw materials, you know, copper has been pretty stable over the course of the last quarter or so, but zinc has increased since the start of the year. And paint input costs, including resins and anti-IO2, continue to escalate. And I'd say that inflation is kind of in the range of 20% plus. And like I mentioned, freight, packaging pallets, and fuel continue to remain high. So that inflation continues. And so that impacts a little bit of of our margin guide that we gave for the year. So, you know, we think we've got cost recovery, you know, coming, but then we'll have, you know, mainly in the back half, and we'll see, particularly in the plumbing segment, we'll see margin expansion in the back half of the year. But, you know, that will, you know, the incremental inflation will weigh a little bit on, because of cost recovery in the paint, will weigh a little bit on our margins.

Got it. Got it. All right. Thanks Keith. Thanks John.

Our next question comes from the line of Michael Rehot from JP Morgan. Your line is open.

Thanks. Good morning everyone. Thanks for taking my questions. You know, first I just wanted to dial back to the demand backdrop and I believe you said earlier that sell through is kind of consistent with sell in, which is always a good sign. I was curious about during the quarter, I mean, we've heard different noise at parts, at points over the past couple of months around, you know, either demand remaining robust or maybe slowing a little bit, you know, different chatter out there or anecdotal. You know, wanted to kind of get your take on your experience around demand trends, you know, January, February, March. and if there's been any differences in April across, you know, plumbing and deck arc.

Well, you know, we're not keen on talking about in-the-month changes, you know, in April. I'll tell you that, you know, we exited the corridor strong, and that remains. In terms of different channel breakdowns, of where we saw our demand, broad-based and strong demand in North America and international. In international, we saw growth across really most of our geographies, but particularly in China and Germany. And we've talked about our pro-demand being very strong, and that continues. Continued strength in propane in the quarter and feel that that's, while we consistently say it's difficult to pin down the size of a market in any one quarter, we think that's indicative with those high growth rates of share gain. And our outdoor spas and fitness systems remaining historically strong. So the demand was pretty steady through the quarter that we just finished. We've exited strong, and that continues.

Yeah, Mike, the one additional color point that I'd give you on the quarter is if you think about how the quarter evolved just from a COVID perspective, January was you know, a little bit more impacted by COVID is people are coming out of the year and holidays. And so perhaps a little bit less activity in January, but things got stronger as the, as the quarter developed. So, you know, into February and into March. So, um, that might be help you out a little bit in terms of color.

No, that, that is very helpful. I appreciate that. Um, I guess just secondly, um, You know, with the different moving pieces, I'm kind of shifting to the margin front here and, you know, kind of appreciate that, you know, obviously you're offsetting the incremental inflation with more pricing dollars, keeping the price-cost neutral on the dollar basis, broadly speaking. But sequentially, you know, any type of thoughts when you think about plumbing and deck arc 2Q versus 1Q, should we think about perhaps, you know, I would think all else equal given, you know, there's typically that lag in price against cost inflation. Should we be thinking perhaps of 2Q margins across both segments being slightly lower than 1Q sequentially and then obviously the catch up in the back half I know you don't like to get too much into the weeds on the quarters, but I think given the environment, it would be helpful.

Let me give you a little bit of color on plumbing. I think that would be most helpful. As expected, we saw significant sequential improvement in our plumbing margin in the first quarter. In the first quarter, we did see higher commodity and supply chain costs flow through the P&L. call it a more normalized spending level of investment in such things as marketing, headcount, growth initiatives, et cetera. And this was partially offset by our pricing action. So as a result, as we expected, our price-cost relationship improved nicely in the first quarter, talking plumbing here, and that will continue to improve for the rest of the year. In terms of how we see the year playing out going forward in plumbing, The relationship year over year in plumbing will improve each quarter going forward, and we do expect to see margin expansion in the back half of the year in plumbing, and hence the guy for 18.5 to 19. I think when you look at decorative architecture, the main story there is the relationship between pricing for dollar increases and the margin impact on that.

Mike, the other thing to think about, If you think about sequential Q1 to Q2, it's generally Q2 is our strongest volume quarter. So while we may be facing some headwinds in terms of margin from the price-cost, we do generate a lot more volume in Q2, which should help on the margin side as well.

Great. Thanks, guys. Appreciate it.

Our next question comes from the line of Susan McClary from Goldman Sachs. Your line is open. Thank you.

Good morning, everyone. My first question is, you know, just kind of building off of your last comment, when you think about the year and the sequence of the upcoming quarters across both the segments, do you expect that we will see normal seasonality, even though it sounds like we came into this year with quite a bit of strength across your business

I would expect that there would be the traditional seasonality, Susan, with Q1 probably being our softest quarter, and then Q2 and Q3 being the stronger seasonal selling. That said, obviously we're up against the comp issue, and so we faced a pretty tough comp in the first quarter this year, a pretty strong comp in the second quarter of last year, and then You know, obviously, in the back half of the year, we were up against the tough comps of the second half of 2020, which reduced our, you know, our sales growth in the back half of 2021. But, you know, factoring out kind of the anomalies of how the pandemic played through the financials over the course of the last couple years, you know, we would expect the traditional seasonality to apply.

Okay. Okay. That's helpful. And then my second question is on the DIY paint side. You know, you also increased your guide there to, I think, low double digits from high single digit growth for the year. As you sort of look out and you think, you know, because that's coming off of a much more established, mature kind of a business there. But as we think about the underlying housing trends that are coming through, people, especially younger people, continuing to enter homeownership, does that suggest that that is a business that can sustainably operate at just a much higher volume level? And what does that mean then in terms of the pricing and the margin trajectory across paint?

We definitely believe that, in particular with the point you mentioned as it relates to the millennial cohort coming in and being first-time homebuyers and entering that market and knowing and seeing with our research that they are DIYers, and that's an extremely helpful component to this DIY business. We think that it's stabilized, and we think it's stabilized at a very – a good number for us as it relates to the overall size of the market and the demand. With regards to your question looking forward at margin, really that hasn't changed with regards to our approach to margin. In an escalating commodity cost environment, that puts pressure on our margins, and we've discussed that thoroughly. Conversely, as those commodities begin to abate, that would help our margins. So I think if you look at our guide for margin, that really is right in the range of how this business is expected to perform with those dynamics of the pricing.

OK, great. Thank you very much. Good luck with everything.

Thank you.

Our next question comes from the line of Deepa Raghavan from Wells Fargo Securities. Your line is open.

Hi, good morning, everyone. Thanks for taking the question. Nice increase to the volume guide. Just curious what's driving the foliar volume higher? Is it mostly price or is there some, I'm sorry, not volume, the foliar organic growth higher? Is it, you know, is most of it price at this point in time? Is there also some volume inbuilt in there? And, you know, if you can provide us with a split of volume versus price in the foliar guide, that would be helpful.

Yeah, Deepa, it's John. In terms of your question, absolutely, it's both a combination of price and volume that's driving our organic growth for the year. In terms of the breakdown of price and volume, as you might expect in this inflationary environment, this year it's going to be more price than volume, but we do expect volume growth across both our segments for the year. At this point, we're not going to get into the specifics of the breakdown of the two components of price and value.

Okay, that's fine. In terms of margin guide, just to clarify, you're baking in only the inflation you're seeing so far, correct? Or is there any future inflation also that you're assuming? Just trying to square that lowered margin guidance and see if

know if inflation continues is there further risk to that margin or are you baking in some cushion within yeah i i would say um deeper to that question in terms of the inflation you know i see the guiding contemplates the inflation we've seen here in the first quarter uh and and you know what the foreseeable uh inflation is that we are experiencing if there's something that materially changes beyond where kind of current market conditions change, that is not contemplated in our guide.

Thanks very much for the color. Good luck.

Our next question comes from the line of Keith Hughes from Truist Securities. Your line is open.

Questions on inventory. The inventory count is up a good bit year over year. If you could talk about how much of that's inflation, what units look like year over year, and Is this changing any kind of view of production schedules for the remainder of the year?

Yeah, Keith, in terms of inventory, there were a number of things that touched upon inventory. You're right. You hit on one of them. Inflation is clearly a component of what drove the inventory levels higher. Two, we're carrying higher levels of safety stocks at this point. Because of some of the tightness we've seen in raw materials, particularly on the input side, like paint, for instance, If we could procure or secure more of that product, we took advantage of the opportunity to buy more inventory. And there has still been a little bit of supply chain that caused our inventory, so more time on the water for our products. So we feel like we're in a good position from an inventory level. In terms of how we're producing or does the chain cause any changes in our production, No, not really. Not at all. As I mentioned on our prepared remarks, while inventory is high at this stage of the year, we do anticipate driving that inventory down further as the year progresses, and we do think we can get to a much more normal level as we exit 2022. Thank you.

Our next question comes from the line of from Loop Capital. He lies open.

Oh, hi. Thanks. Just to follow up on the inventory question, do you think there is any opportunity for you to participate in any channel fill with your customers as material supply improves?

As we talked earlier, we see the sell-in roughly matching the sell-out, the POS. we think the inventories have been relatively stable in the channel. Now in spots we've been able to catch up and others, frankly, I think we'd like to have a little bit more inventory in the channel. So it's getting slightly better. And I would say that that represents maybe a little bit of upside for channel fill going forward as we're not quite where we would like to be.

Got it. And then just clarification on the, Is that separate from the $900 million that you have for BIDOX and M&A in the guidance? Or is that included in the guidance?

No, that's included in the guidance, Garrick. So, you know, if you think about the $400 million or so that we've purchased year-to-date, you know, and then you contemplate the $500 million ASR, that comprises the $900 million total that we're talking about. Got it. Thank you.

Our next question comes from the line of Adam Baumgarten from Zellman and Associates. Your line is open.

Hey, good morning, everyone. Just a question. You mentioned a little bit of mixed impact earlier in the call. I think it may have been a comment around potential trade-down. Can you just elaborate on that?

Adam, perhaps we misspoke, but, you know, if anything, we've seen a little bit of mix-up in the quarter. And I think the mix was perhaps most favorable within our plumbing segment. We've seen pretty good growth. Some of Hans grows higher in lines over in Europe. And some of that has to do with the fact that, as you may recall, they do a fair amount of international projects, and some of those projects spec in higher-priced products. And so that's one area. We did see some favorable mix also, I think, in the decorative architectural segment in Some of our other businesses, outside of paint, Liberty Hardware, I saw some improved mix. They were selling some more shower doors and things like that, which shows some favorable mix.

Adam, just to add on and to be clear, we really don't expect a significant impact either way with regards to mixes. We look forward to 2022. Got it.

Good to hear. And then just So, to gears to plumbing on the margin side, you know, just curious how much of a margin headwind some of that variable spend was in the quarter and what, you know, that should look like for the full year?

It wasn't much of a headwind, Adam, you know, in terms of that incremental spend. Some of that's just, you know, with the growth that we've been experiencing, we're just putting some investment in to sustain current levels and actually, you know, invest for future growth. And so, you know, I don't think that would be a significant impact either in the quarter or for the full year.

Got it. Thanks.

Our next question comes from the line of Phil Ying from Jefferies. Your line is open.

Hey, guys. Congrats on a really strong quarter. Appreciate the update on the guidance. I mean, your business is certainly a smaller ticket in nature. It should be far more resilient. But just given all the inflation we're seeing and potentially lower housing turnover, are How do you kind of see the demand profile shaping up in the year? Pretty steady? I know there's some comp nuances, but at least we're hearing maybe some softness with some of the consumers out there.

As we've consistently said through this call in the last quarter, demand remains solid and strong, and that is broad-based across our geographies, across our channels, and across, as we talked about with regards to mix, our price points. So continued steady confidence. As it relates to your comment on existing home sales, it's still a strong number. And that's a number that's very productive for us. And when we look through this year, our backlogs remain strong. International markets are performing well. Spa backlogs at 30 weeks. Propane is doing extremely well. And we've been able to do that while getting price to offset inflation and driving productivity and managing a complicated supply chain set of issues. The home price appreciation, the consumer's balance sheet, all those things really are what we would call cyclical factors that are tailwinds to us. And then you add on to that the structural factors around age of the housing stock,

and the millennials coming into the market we think this is set up for a very strong several years of demand for us so we're looking good through 22 and we like the backdrop that's great color keith and then from a raw material standpoint um just curious um perhaps sean uh how that kind of ripples through your p l just appreciating that you know some of this uh the movement in commodity there might be a lot because you're buying components so help us understand perhaps that ripple effect through your P&L. And then when we think longer term, your ability, you know, call it in 2020, 2024, getting your margins back to where it's been the last few years, appreciating there's some noise right now with inflation.

Here, Phil, yeah, maybe give you a just refresher, everyone's memory in terms of how commodities flow through and hit our P&L. It's a little bit of difference between the two segments. So Given the length of our supply chains in the plumbing segment, it takes about two quarters for any inflation to kind of ripple through and directly impact our P&L. And you kind of saw that, you know, in 2021 as particularly copper and zinc inflated last year. We saw a little bit more of a margin headwind in the back half of the year. In terms of the decorative architectural segment, because supply chains are a little bit shorter, the timing for that to flow through and hit our P&L is a little bit shorter as well. And so I'd say that's kind of in the order of magnitude of 90 to 120 days or so. So, you know, we feel good about that. You know, as we look forward and get beyond this inflationary period, you know, as Keith alluded to earlier, there's a dynamic in our paint business that's a bit unique as we see commodities roll over. We could potentially see some margin expansion in that segment because of just the way the math works on that. In the plumbing segment, I would say longer term, there has been the ability to recoup margin on inflation. This inflation is perhaps a little bit different only because of the amount of the inflation that we're seeing right now, and in particular, some of our bigger businesses over in Europe you know, put through pricing on a regular basis, and then you contemplate, you know, maintaining margin on that. So we might be able to see some of that take place as we get out of this inflationary environment.

Okay. Thanks a lot. Appreciate the call.

Our last question comes from the line of Truman Patterson from Wolf Research. Your line is open.

Keith, John, morning, and thanks for taking my questions. Um, first, uh, John, I was hoping you could just give, uh, an update, uh, or, you know, a state of the union on the supply chain in the United States specifically. I realize, you know, there's some moving parts in with the China shutdowns, but hoping you can give an update of the supply chain versus, you know, either late 21, early 2022 in the U S regarding labor, raw material, availability, transportation, et cetera.

In terms of those various aspects of the supply chain, I would say this. Things on the margin in terms of supply of material, we're seeing improvement. Again, it's on the margin and it's not anywhere near back to where it was pre some of these supply chain issues taking place. Labor is, depending on location, we're seeing either tightness or good supply of labor. So depending on where our plans happen to be, it's a little bit variable. But it's something that we're continuing, and our ops teams are continuing to drive very closely, or look at very closely. But we think we're in pretty good shape from a labor position. You know, I would still say that shipping and freight is tight in North America. We've seen very modest changes, but overall, that's the one area that we're probably watching most closely is both inbound and outbound freight.

Okay, thanks for that. And then final one, you know, you all, I imagine you have a pretty long history of delta plumbing operating margins. I'm just hoping you can maybe compare and contrast 2021 or your expectations of 2022 compared to prior periods of elevated inflation and how margin has performed. Have there been any notable structural shifts that maybe make the current period relatively outperform prior periods?

You know, in terms of, you know, historical periods, obviously, you know, Truman, we haven't seen an inflationary environment like this in base metals in a long, long time.

Right.

So, you know, I'm not certain yet that there's a true apples-to-apples comparison. That said, what I would tell you is the team that we've got down at Delta is a terrific team. They are on top of this. They are driving their business both from a volume perspective as well as they're taking the necessary – pricing actions, all while balancing the supply chain issues that we talked about on your prior question. At the same time, driving innovation and driving the brand. And so, you know, Ken and the team down there are just doing an absolutely terrific job of felt this tradition of, you know, of leading the company in terms of, you know, driving both sales profits and future growth. So, Keith, I don't know if there's anything else you wanted to add. I think it's

This is a unique situation for sure, both in terms of the magnitude of the cost increase and the speed at which the cost increase hit us. And our strategy to deal with this remains consistent, which is to first and foremost focus on our safety of our employees and then work together with our customers and our suppliers to make sure we're delivering the best products we can at the best price. And sometimes, and particularly in situations like this, it requires obviously significant price increases. And we're going to continue to operate in that method as we have in the past and continue to drive above market growth. And the team, as John said, set up to do that.

You know, I would tell you that once we get outside of this, you know, inflationary environment, you know, I would expect that, you know, the team – we drive margin expansion through volume growth and our typical productivity initiatives that we drive across our businesses. So this might be a little bit of an anomalous period, but once we get outside of it, I think we'll return to our normal cadence of activity.

All right. Thank you, too, and good luck on the upcoming year.

Thanks.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.