Masco Corp (MAS) — Q1 2022 Earnings Call Transcript

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. 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. 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. With that, I'll now turn the call over to Keith.

Thank you, Dave. Good morning, everyone and thank you for joining us today. 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 $0.95, a 7% increase compared to the 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, Masco has very little exposure as we sold approximately EUR 40 million of product into those countries in 2021 and had since ceased operations. Our Decorative Architectural segment sales grew 17%, as Behr continued its tremendous performance with low-double-digit growth in DIY paint and another quarter of over 50% growth in pro-paint. Our paint business is performing extremely well, as evidenced by our strong results. We continue to work very closely with our partner 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. 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 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. 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 are 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 consumers 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.

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 7. We capitalized on the continued healthy demand for our industry-leading brands, delivering 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%, higher volumes increased sales by 5%. This was partially offset by 1% each related to currency and divestitures. 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%, 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%, favorable mix added 1%. 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 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. Our SG&A as a percentage of sales improved by 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. 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, which drove strong growth across their wholesale, retail, and e-commerce channels. Watkins Wellness was also a contributor to growth as it continued to capitalize on increasing demand and the growing 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 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 were partially offset by higher net selling prices and incremental volume. 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 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 pro-paint demand to remain strong and we continue to invest in the PRO along with our partner 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, which were 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 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, and delivery of materials. Despite these challenges, through focused execution, we continue to refine our inventory levels and 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, 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. 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%. 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% or $90 million. We anticipate the full-year plumbing margins will be in the range of 18.5% to 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. Our PRO business is expected to increase high-teens, up from our previous guidance of mid-teens. We anticipate that the full-year Decorative Architectural margin will 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 actions, but 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 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. With that, I would like to open the call for Q&A.

Great. Thanks very much, guys. Yeah. Good results and exciting times out there. So we appreciate the guidance. 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 that 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 comp so strongly later this year.

Thanks for the question, Stephen. It’s Keith. Good morning. Our PRO business is doing very well and I think it's important to highlight that it begins with the strength of the brand. We've achieved regarding the quality in the can and how the consumer perceives it as well as the overall customer satisfaction on the consumer side. So there continues to be real strong consumer pull-through the channel, based on the investments that we've made for a long time and the strength of those investments. So it begins with what we have to sell and we're selling 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 Behr team and R&D and the folks in the factory but our supply base has been with us for decades. They are loyal, and they've done an outstanding job through very difficult circumstances. 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 launching to continue to drive growth and give us confidence in the raise we've made in our guidance, I'm not going to get into the details for obvious reasons, but they are 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 Behr 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 into more PROs' hands and then to add to stickiness to help us maintain as much share of wallet of those new customers as we can.

Can you provide an update on the timing of those programs? Are they currently being rolled out, and when can we expect them to be fully operational? Will that be in the second or third quarter of this year?

As I've talked about frequently, I think the best indication of our future performance is what we've done in the past. If you look at our steady growth in PRO, it has been an evolution where we continually launch new programs on the execution side of delivery and job site delivery and high-speed tinting, and those types of advantages to programs that we developed jointly with Home Depot to make the in-store experience better to how we service with regards to our technical representation and our in-the-field reps to what we do for loyalty programs and the like. So it will be a combination of things that are happening now and we 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.

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 impacts to the Hansgrohe business in Europe, just as a result of everything that's going on there? Thank you.

As we said in the prepared remarks, relatively low level of exposure as it relates to demand in both those countries, call it EUR 40 million, and we ceased operations there. Our supply chain and our supply base, if you will, do not have anything inbound or interrelated with those two countries. So really, I would say there is no direct impact. Certainly, we're watching very carefully with regards to the indirect impact we have seen. We believe some fuel and oil prices have increased, which were indirectly related to the conflict. As it stands now in Europe, as John highlighted in our detailed remarks, we continue to see strong demand really across our main countries of Germany, France, and the UK, where we do a significant amount of our volume. That demand continues 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 will 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.

I don't have anything particularly to add more color to regarding 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 is no question about it. 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 their strength. With regards to how this market share shakes out as capacity becomes more realigned, you see our confidence in the guide that we've changed. 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 and outstanding quality. We have a reputation for outstanding customer service; this is reported by third parties. We have strong paint to begin with. We've demonstrated the strength of our supply chain and our team at Behr and our team and our suppliers are strong. When we have the opportunity to get that paint into more PROs' hands, we continue to see that kind of positive feedback. Thanks to our supply chain for putting us in that position. Our intent is to continue to work hard to keep as much of the share of wallet from those new painters who have tried us, and thus far, it’s working pretty well. I'm very much respecting the competition but also extremely confident in our paint business, as reflected in our guidance.

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

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; they’re going to go forward with that, and the timing could be near term. What were the factors that led you to that decision?

Good morning, John. You're correct that we are considering the ASR. Our recent entry into a one-year term loan is a strong indication of our commitment to this. This year, we've noticed a slight decline in our share price, and looking ahead, we're planning to utilize the term loan to buy back shares by pulling forward future cash flows. To date, we've repurchased $400 million in shares, and our current heavy working capital is one reason we took out the additional loan to ensure we have the necessary liquidity for this transaction. Given our view on the share price and the ongoing strength of our business, we believe it's a suitable time to engage more actively in share repurchases, enhancing shareholder value. We have always stated that our share repurchase program would be systematic, but we also mentioned we would be opportunistic during any dislocations, and we believe this is one of those moments. That's why we decided to pursue this transaction now.

Yeah. That makes a lot of sense. We would agree. Okay. And then on the plumbing supply chain, we’ve seen a lot of the components are 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. Both in terms of demand in China, we do roughly about $300 million of demand in China, as well as the source of products coming out of China. First and foremost, we are concerned with our employees' safety and we feel good about that aspect of it. I'm happy to say that. Our supply chain continues to be tough and to require extra effort to manage the challenges that have been going on for some time. We're going to do okay. We expect as Shanghai and Beijing come out of the lockdowns that with the underlying growth in the market in China, we will be able to do okay there. To date, 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.

Good morning. Thank you for taking my questions. My first question pertains to the potential factors affecting housing and the evolution of home improvement. Are you observing any changes, particularly in your Spa business or in sellout trends? Could you discuss how you’re assessing your leading-edge positions in relation to any signs of consumer softening and what other aspects you are closely monitoring in the current environment?

I'd point to a couple of things, Mike. We, as expected, are seeing some tempering of the call it, 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 evidence. There's a mix shift, but nothing material where the consumer continues to be willing to spend as driven by the overall change in the view of the housing and our view driven by COVID. We're seeing strong sales in our spas; the backlog of our spas, a very expensive discretionary item, is in the right spot as it relates to the whole wellness trend, and that backlog continues to be in the 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 mix down, 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, in terms of sell-in and sell-through, I’d say it’s 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. Certainly, I 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 exited 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 but 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 and maybe John, if you could give a little bit of color on that.

Sure, Mike, I can provide more details about the inflation we're encountering across our portfolio. We're still experiencing some inflation related to our cost pass, especially with freight. As for raw materials, copper prices have remained fairly stable over the last quarter, while zinc has risen since the beginning of the year. Additionally, costs for paint inputs, including resins and titanium dioxide, are continuing to climb. I would estimate that inflation is around 20% or more. Freight, packaging, pallets, and fuel prices stay elevated, contributing to ongoing inflation. This has a slight effect on the margin guidance we provided for the year. We anticipate some cost recovery, primarily in the second half of the year, particularly in the plumbing segment, and we expect margin improvement during that period. However, the additional inflation will slightly impact our margins due to ongoing cost recovery in paint.

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

Thanks. Good morning, everyone. Thanks for taking my questions. 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, we've heard different noise at parts at points over the past couple of months around either demand remaining robust or maybe slowing a little bit, different chatter out there; anecdotal. Wanted to kind of get your take on your experience around demand trends January, February, March, and if there's been any differences in April across plumbing and Dec Arc?

Well, we're not keen on talking about the month changes in April. I'll tell you that we exited the quarter 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. We've talked about our PRO demand being very strong and that continues. Continued strength in pro-paint in the quarter and feel that while we consistently say it's difficult to pin down the size of the market in any one quarter, we think that's indicative with those high growth rates of share gain. Our outdoor spas and fitness systems remain historically strong. The demand was pretty steady through the quarter that we just finished. We've exited strong and that continued.

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 a little bit more impacted by COVID. As people were coming out of the year-end holidays and so perhaps a little bit less activity in January, but things got stronger as the quarter developed into February and into March, so that may help you out a little bit in terms of color.

No, that is very helpful. I appreciate that. I guess just secondly, with the different moving pieces, I'm shifting to the margin front here and appreciate that you're offsetting the incremental inflation with more pricing dollars, keeping the price-cost neutral on a dollar basis broadly speaking. But sequentially, any thoughts regarding Plumbing and Dec Arc Q2 compared to Q1? Should we think about perhaps, all else equal, given the typical lag in price against cost inflation, that Q2 margins across both segments might be slightly lower than Q1 sequentially, with a catch-up in the back half? I know you don't want to go too much into those details for the quarters, but 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 a 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 and 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 actions. As a result, as we expected, our price-cost relationship improved nicely in the first quarter, I’m talking about 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. We do expect to see margin expansion in the back half of the year in plumbing and hence, the guide for 18.5 to 19. I think when you look at Decorative Architectural, 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, is generally, Q2 is our strongest volume quarter. So while we may be facing some headwinds in terms of margin from 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.

Thank you. Good morning, everyone. My first question is just kind of building off of your last comment. When you think about the year and the sequence of the upcoming quarters across both 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 anticipate that we will see the usual seasonality, with the first quarter likely being our weakest and the second and third quarters showing stronger sales. However, we are dealing with a challenging comparison from last year, particularly in the first quarter where we had a tough comparison to manage. In the second quarter of last year, we also faced strong comparisons. Additionally, in the latter half of the year, we will be up against difficult comparisons from the second half of 2020, which impacted our sales growth in the latter half of 2021. Considering how the pandemic affected our financials over the past couple of years, we would expect the traditional seasonality to hold true.

Okay. That's helpful. And then my second question is on the DIY paint side. 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, because that's coming off of a much more established mature kind of business there. But as we think about the underlying housing trends that are coming through, 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. Knowing and seeing with our research that they are DIYers is an extremely helpful component to this DIY business. We think it's stabilized, and we think it's stabilized at a very good number for us, as it relates to the overall size of the market and the demand. With regards to your question looking forward on 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. Conversely, as we as those commodities begin to abate, that would help our margin. 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.

Okay. Great. Thank you very much. Good luck with everything.

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

Yeah, Deepa. It's John. In terms of your question, you're absolutely right; 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 volume.

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? Is there any future inflation also that you're assuming? Just trying to square that lowered margin guidance and see if inflation continues, is there further risk to the margin or are you baking in some cushion within?

Yeah, I would say, Deepa, to that question in terms of the inflation, I'd say the guidance contemplates the inflation we've seen here in the first quarter and what the foreseeable inflation is that we are experiencing. If there is something that materially changes beyond the current market conditions, that is not contemplated in our guide.

Thanks very much for the color. Good luck.

Questions on inventory. The inventory count was up a good bit year-over-year. If you could talk about what's – much of that inflation; what units look like year-over-year? Just changing any kind of view of production schedules for the remainder of the year?

Yes, Keith. Regarding inventory, several factors have influenced our inventory levels, and you're correct in pointing out a major one. Inflation has certainly played a role in increasing our inventory levels. We are currently holding higher safety stock due to some constraints we've experienced in raw materials, specifically inputs like paint. If we could acquire more of those materials, we would, and we have seized opportunities to purchase additional inventory. Additionally, ongoing supply chain challenges have contributed to our elevated inventory levels. Overall, we believe our inventory position is solid relative to our production. There haven't been any significant changes in our production schedules. As I noted in our prepared remarks, while our inventory is higher at this point in the year, we expect to reduce it further as the year progresses, and we believe we can bring it down to a more normal level by the end of 2022.

Okay. Thank you.

Hi. Thanks. Just a 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 raw material supply improves?

As we talked earlier there, we see the sell-in roughly matching the sell-out and the point of sale. We think the inventories have been relatively stable in the channel. Now in spots, we've been able to catch up, but frankly, I think we'd like to have a little bit more inventory in the channel, so it's getting slightly better. 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 a clarification on the ASR, is that separate from the $900 million that you have for buybacks and M&A in the guidance or is that included in the guidance?

No, that's included in the guidance, Garik. When you consider the approximately $400 million we have repurchased year-to-date and the $500 million ASR, that totals the $900 million we are discussing.

Got it. Thank you.

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

Yeah, Adam, perhaps we misspoke. If anything, we've seen a little bit of mix up in the quarter. I think with the mix was perhaps most favorable in our Plumbing segment. We've seen pretty good growth in some of Hansgrohe's higher-end lines over in Europe and some of it has to do with the fact that, as you recall, we do a fair amount of international projects, and some of those projects spec in higher-priced products. That's one area where we did see some favorable mix. Also, I think in the Decorative Architectural segment, some of our other businesses, Liberty Hardware, I saw some improved mix there selling some more shower doors and things like that, which shows some favorable mix.

To be clear, we really don't expect a significant impact either way with regards to mix as we look forward through the 2022.

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

It wasn't much of a challenge, Adam. Regarding the additional spending, part of it is due to our growth, and we're investing to maintain current levels and prepare for future growth. I don't anticipate this will have a major effect either in this quarter or for the entire year.

Got it. Thanks.

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

As we've consistently said through this call and last quarter, demand remained solid and strong across our geographies, channels, and price points, so continued steady confidence. Existing home sales remain a strong number, and that's productive for us. When we look through this year, our backlogs remain strong, international markets are performing well, outdoor spas, and pro-paint are doing extremely well. We’ve been able to do that while getting prices to offset inflation and driving productivity and managing a complicated set of issues in our supply chain. The home price appreciation, the consumers' balance sheet, all those things really are tailwinds for us. When you add on structural factors like the age of the housing stock and millennials entering the market, we think this is set up for a very strong several years of demand for us. We're looking good through 2022, and we like the backdrop.

That's great color, Keith. And then from a raw material standpoint, just curious, perhaps John, how that kind of ripples through your P&L, just appreciating that some of this movement in commodity might be a lag because you're buying components. So help us understand perhaps that ripple effect through your P&L? And then when we think longer-term, call it, in 2020 to 2024, getting your margins back to where it's been the last few years appreciating there is some noise right now with inflation?

Yeah, Phil. I mean, I'll give you just a refresh. In terms of how commodities flow through and hit our P&L, it’s a little bit of difference between the two segments. 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. You saw that in 2021, particularly with copper and zinc inflating last year, and we saw a little bit more of a margin headwind in the back half of the year. For 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; I'd say it's in the range of 90 to 120 days. So we feel good about that. As we look forward beyond this inflationary period, as Keith alluded to earlier, there is a dynamic in our paint business that's a bit unique. As we see commodities rollover, we could potentially see some margin expansion in that segment because of the way the math works on that. For the Plumbing segment, I'm not sure if there's anything more to add long term.

Okay. Thanks a lot. Appreciate the color.

Keith, John, good morning and thanks for taking my questions. First, John, I was hoping you could just give an update or state of the union on the supply chain in the United States. Specifically, I realize there are some moving parts regarding the China shutdowns, but I'm hoping you can give an update on the supply chain versus either late ‘21 or early 2022 in the U.S. regarding labor, raw material availability, transportation, etc.

Sure, Truman. In terms of those aspects of the supply chain, I would say the things on the margin in terms of supply of material are we’re starting to see 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 either seeing tightness or good supply of labor, so it's a little variable depending on which plans happen to be. Overall, we think we're in pretty good shape from a labor position. I would still say that shipping and freight are tight in North America. Maybe we’re seeing 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 all imagine you have a pretty long history of Delta Plumbing operating margins. I'm just hoping you could maybe compare and contrast 2021 or your expectations of 2022 compared to prior periods of elevated inflation and how margins have performed. Have there been any notable structural shifts that may make the current period relatively outperform prior periods?

In terms of historical periods, obviously, I mean we haven't seen an inflationary environment like this in basic metals in a long, long time. That said, what I would tell you is the team we’ve got down at Delta is terrific. They are on top of this; they are driving their business both from a volume perspective and they are taking the necessary pricing actions while balancing the supply chain issues we talked about in your prior question. While at the same time, driving innovation and the brand. The team, as John said, is set up to do that. Keith, I don't know if there's anything else you want to add?

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. Our strategy to deal with this remains consistent, which is to first and foremost, focus on the 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. In situations like this, it requires significant price increases, but we're going to continue to operate in that way as we have in the past and continue to drive above-market growth. The team, as John said, is set up to do that.

Once we get outside of this inflationary environment, I would expect that the team would drive margin expansion through volume growth and our typical productivity initiatives that we're driving across our businesses. This might be a bit of an anomalous period, but once we get outside of that, I think we will return to our normal cadence of activity.

No. All right. Thank you, two, and good luck on the upcoming year.

Thank you.

Thank you.