Masco [MAS] Conference call transcript for 2022 q1
2022-04-27 11:52:07
Fiscal: 2022 q1
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.:
Operator: 00:04 Good morning, ladies and gentlemen. Welcome to 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. [Operator Instructions] 00:34 I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin.
David Chaika: 00:41 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 Sznewajs, 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. 01:17 Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We describe these risks 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. 01:40 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 in our earnings release and presentation slides, which are available on our website under Investor Relations. 01:58 With that, I'll now turn the call over to Keith.
Keith Allman: 02:03 Thank you, Dave. Good morning, everyone and thank you for joining us today. Please turn to Slide 5. 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. 02:30 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 $0.95, a 7% increase compared to the very strong first quarter of 2021. 03:02 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. 03:30 Furthermore, international markets, including Europe remains strong and customers report continued pent-up demand and a strong backlog of projects. In regards to Russia and Ukraine, Masco has very little exposure as we sold approximately EUR40 million of product into those countries in 2021, and had since ceased operations. 03:55 And our Decorative Architectural segment sales grew 17%, as Behr continued its tremendous performance with low-double digit growth in DIY paint and then another quarter of over 50% growth in pro-paint. Our paint business is performing extremely well, as evidenced by our strong results. 03:20 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 PRO paint businesses. We also continue to launch new products, achieve industry leading quality ratings and are pleased with the performance of our recently launched Behr aerosols, caulks and interior stain programs. 04:44 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. 05:23 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. 06:19 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 the Masco 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. 07:06 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. 07:47 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. 08:25 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. 09:09 I'll now turn the call over to John for additional detail on our first quarter results and full-year outlook. John?
John Sznewajs: 09:19 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. 09:31 Turning to Slide 7. We capitalized on the continued healthy demand for our industry-leading brands, delivered in 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. 10:04 Sales grew 14% excluding the net impact 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 pro-paint, as well as faucets, showers and spas. The main drivers of this growth were increased net selling prices, which increased sales by 9%, the higher sales volumes, which increased sales by 3%. 10:38 In local currency, international sales increased 12% or 18% excluding divestitures. Higher volumes increased sales by 9%. Net selling prices increased sales by 7% favorable mix added 1%. Gross margin of 32.1% was impacted by higher commodity and logistics cost in the quarter. As we discussed in our previous earnings call, price cost had a peak impact on our P&L in the fourth quarter of 2021. We experienced a 140 basis point sequential improvement in the first quarter of 2022. 11:21 Our SG&A as a percentage of sales improved to 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 and operating margin of 16.2%. Our EPS was $0.95 in the quarter, an increase of 7% compared to the first quarter of 2021. 11:48 Turning to Slide 8. Plumbing growth was 9% or 12%, excluding the net impacts of currency, acquisitions and divestitures. This strong performance was achieved against the healthy 22% comp in the first quarter of last year. Pricing and volume contributed approximately equally to segment growth. North American sales increased 10% in local currency. This performance was led by Delta, it drove strong growth across their wholesale, retail and e-commerce channels. 12:25 Watkins Wellness was also a contributor to growth as it continue to capitalize on increasing demand and the increasing trend towards outdoor living. International Plumbing sales increased 12% in local currency or 18% excluding divestitures. Hansgrohe grew across their markets with particular strength in a key markets of Germany, China, France and the UK. 12:57 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 partially offset by higher net selling prices and incremental volume. 13:20 Turning to Slide 9. 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 continued 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. 13:53 We expect pro-paint demand to remain strong and we continue to invest in the PRO along with our partner, The Home Depot, a new services to retain and grow our penetration with the PRO customer. Our DIY business also performed well in the quarter. 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. 14:37 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 as a 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 in delays in receipts in 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. 15:21 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 deploying 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. 16:17 Finally, let's turn to Slide 11 and review our outlook for 2022. Our strong first quarter performance, additional pricing actions and favorable outlook for our markets, we now expect full 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%. 16:51 In our Plumbing segment, we now expect 2020 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% or $90 million. We anticipate the full year plumbing margins will be in the range of 18.5% to 19%. 17:19 In our Decorative Architectural segment, we expect 2022 sales to grow in the range of 10% to 14%, up from our previous guidance of 6% to 10%. 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%. 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, but results in margin compression. 18:14 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 the $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. 18:42 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.
Operator: 19:00 Thank you. [Operator Instructions] Our first question comes from the line of Stephen Kim from Evercore ISI. Your line is now open.
Operator: 23:33 Our next question comes from the line of Matthew Bouley from Barclays. Your line is now open.
Operator: 27:54 Our next question comes from the line of John Lovallo from UBS. Your line is open.
Operator: 31:22 Our next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open.
Operator: 36:44 Our next question comes from the line of Michael Rehaut from JP Morgan. Your line is open.
Operator: 42:12 Our next question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.
Operator: 45:28 Our next question comes from the line of Deepa Raghavan from Wells Fargo Securities. Your line is open.
Operator: 47:52 Our next question comes from the line of Keith Hughes from Truist Securities. Your line is open.
Operator: 49:34 Our next question comes from the line of Garik Shmois from Loop Capital. Your line is open.
Operator: 51:05 Our next question comes from the line of Adam Baumgarten from Zelman & Associates. Your line is open.
Operator: 53:02 Our next question comes from the line of Phil Ng from Jefferies. Your line is open.
Operator: 57:22 Our last question comes from the line of Truman Patterson from Wolfe Research. Your line is open.
Operator: 62:05 This concludes today's conference call. Thank you for participating. You may now disconnect.
