Masco Corp (MAS) — Q1 2023 Earnings Call Transcript

Thank you, Michelle, and good morning. Welcome to Masco Corporation's 2023 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 have described 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. Please turn to Slide 5. I'm pleased with the start of our year and want to thank our employees and supplier partners for executing well in an environment that remains challenging. We are focused on winning in the recovery by continuing to engage with our customers, launch new products, and expand the breadth of our brands, while at the same time, managing our costs in these uncertain economic times. In this period of volatile macroeconomics and slowing demand, our top line decreased 10% in the first quarter against a strong 12% comparison. Volume was down 14%, partially offset by pricing actions of 6%. While operating profit declined in the quarter, it was primarily due to lower volume, higher input costs, and continued investments for future growth. Our strong execution delivered a decremental margin of approximately 20%. Our earnings per share for the quarter was $0.87. Turning to our segments, Plumbing sales declined 8% in local currency, with North American and International Plumbing declining 10% and 3% respectively. Both our North American and International Plumbing businesses continue to further strengthen their industry-leading brands, customer service, and new product development. In North American Plumbing, Delta Faucet launched new products at the Kitchen and Bath industry show, such as the Delta Shower Sense Digital Shower, and the Delta Steam Shower, each offering consumers a more customizable shower experience. In our Spa business, Watkins Wellness launched a complete redesign of its top selling HotSpring's Highrise offering. These spas have exciting new features to enhance the consumer experience that we believe will help Watkins outperform the competition even in the challenging market. In our International Plumbing business, Hansgrohe launched new products at ISH, the world's leading plumbing trade show, including a new product portfolio of sanitary ceramics and bathroom furniture, paired with their premium faucets and showers. Additionally, they introduced the next generation of their in-wall iBox valve, which allows installers to connect any type of plumbing fixture without the need for major construction work. Hansgrohe also displayed their focus on the environment with a concept study of a bathroom that consumes 90% less water and energy, highlighting their commitment to the development of innovative and sustainable products. With our strong brands, geographic diversity, and innovative products, our Plumbing segment is well positioned to continue to gain global market share. Turning to our Decorative Architectural segment, sales declined 10% in the quarter against a strong 17% comparison. PRO paint declined mid-single digits against a tremendous comparison of over 50% in the quarter of 2022, and DIY paint sales declined high single digits. In the quarter, Behr continued to launch new products and services and received recognition for their industry-leading customer satisfaction. We gained shelf space with our adjacent paint categories such as aerosols, interior stains, caulks and sealants, and applicators as these programs expanded into additional stores. We launched Behr Dynasty Exterior for the summer painting season, expanding the lineup of our number one rated Dynasty paint line, and we continued to invest in people and capabilities to better serve the PRO painter by adding additional sales representatives, increasing job site delivery capabilities, and expanding our loyalty programs. Lastly, in a recent third-party paint satisfaction study, Behr earned the number one rating in the exterior paint category and the number two rating in interior paint, demonstrating the strength of the Behr brand, the quality of our products, and our exceptional service performance. Turning to capital allocation, with our strong free cash flow and balance sheet, we returned $121 million to the shareholders through dividends and share repurchases as we bought back 1.1 million shares for $56 million in the quarter. Now turning to our outlook for the remainder of 2023, while we delivered solid first quarter results, we remain cautious and continue to expect softening demand trends in 2023 as our markets adjust to increasing interest rates, persistent inflation, and tighter consumer spending. In this uncertain environment, we are focused on adjusting our costs and minimizing the impact on margins from lower volumes. We have enacted select hiring freezes and have reduced staffing with headcount down approximately 5% year-over-year. We announced the closure of one of our plumbing manufacturing facilities, and we have delayed the opening of our new Spa plant as we continue to balance investing to win in the recovery with cost reductions. With the actions we are taking to address this dynamic environment, our continued strong capital deployment, and the uncertain macroeconomics, we anticipate earnings per share for 2023 to be in the range of $3.10 to $3.40 per share. While near-term market conditions remain challenging, we believe the long-term fundamentals of our repair and remodel markets are strong. Those cyclical factors, such as home price appreciation and existing home turnover, will likely remain a headwind for 2023. We believe structural factors, such as consumers staying in their homes longer, the age of housing stock, and high home equity levels will drive increased repair and remodel activity in the years to follow. Our products are found everywhere consumers want to shop. We are able to leverage consumer and customer insights across all channels. This drives powerful innovation as evidenced by our 25% vitality index and leading customer satisfaction as demonstrated by numerous customer satisfaction and service awards. Through the execution of our Masco operating system, we look to drive operating margin expansion through cross productivity and volume leverage. As demonstrated in the first quarter, we will continue to invest in our brands, capabilities, and people to outperform the competition in both the near and long-term. With favorable fundamentals for our portfolio of low ticket repair- and remodel-oriented products, and our continued focus on executing our growth strategy, together with our strong free cash flow and capital deployment, we are positioned to drive shareholder value creation for the long-term. Before I turn the call over to John, I wanted to take a moment to thank him for his over 27 years of service to Masco. He has been an invaluable partner, not only to me, but to the entire organization, our Board, and the investment community during his tenure with the company. He will be missed, and we wish John all the best in his future endeavors. John will be leaving us at the end of May, and we are in the process of selecting his successor. We have strong internal candidates and have engaged a search firm to assist in conducting a thorough external search as well. While we complete this process, Dave Chaika, Masco's Vice President, Treasurer and Investor Relations, has been appointed as our Interim CFO. Dave has over 20 years of experience with the company, starting in our M&A department, and progressively adding additional responsibilities including treasury, risk management, financial planning, analysis, and investor relations. Additionally, prior to Masco, Dave was a Vice President in the commercial banking industry and an officer in the U.S. Navy. Now for the final time, I'll turn the call over to John to go over our first quarter results and 2023 outlook in more detail. 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 7, sales in the quarter decreased 10% and, excluding currency, decreased 9%. Lower volumes decreased sales by 14%, partially offset by net selling prices of 6%. North American sales decreased 10% in local currency. International sales decreased 3%. Despite lower volume, our strong execution in the quarter resulted in our gross margins expanding 150 basis points to 33.6%. This is the first time in seven quarters that we've expanded gross margins as we are now recovering the significant cost inflation we have absorbed over the past two years. Our SG&A as a percentage of sales was 17.8% due to higher brand and marketing investments such as trade shows and sales meetings to support our growth strategy of investing in our brands, service, and innovation. Operating profit in the first quarter was $312 million and operating margin was 15.8%. Operating profit was impacted by lower volumes, higher input costs, and growth investments, partially offset by higher net selling prices. Lastly, our EPS in the quarter was $0.87. Turning to Slide 8, Plumbing sales in the quarter decreased 10% against the 9% comparison, and excluding currency, decreased 8%. Lower volume decreased sales by 12%, partially offset by net selling prices, which increased sales by 5%. North American Plumbing sales decreased 10% in local currency. This was driven by continued lower demand that we started to experience in the third quarter of last year. The slower demand was fairly broad-based across product categories and channels. Our Spa business, which is approximately 15% of the segment, declined over 20%. That has now worked through the significant backlog generated from the spike in demand for its products. International Plumbing sales decreased 3% in local currency against an 18% comparison as demand softened in many European markets and China. For plumbing overall, changes in channel inventory positions during the quarter did not significantly impact our results. Segment operating profit in the first quarter was $202 million with an operating margin of 16.5%. Operating profit was impacted by lower volumes, and higher brand and marketing investments, partially offset by higher net selling prices. This resulted in a decremental margin of 19%. While input costs have declined from their peak levels, particularly container costs, overall input costs remain elevated. Turning to Slide 9, Decorative Architectural sales decreased 10% for the first quarter against the strong 17% comparison. Paint sales declined high single digits with PRO paint sales decreasing mid-single digits against the robust comparison of over 50% in the first quarter of 2022. DIY paint sales declined high single digits. Keith mentioned we gained shelf space with our adjacent product offerings such as aerosols, interior stains, caulks and sealants, and applicators. For PRO paint, we are investing along with our partner in our joint capabilities to continue to grow share in this large and growing market. Lastly, our operating profit was $133 million and operating margin was 17.6%. Turning to Slide 10, our balance sheet remains strong with net debt EBITDA at 2.2 times at the end of the quarter. We ended the quarter with approximately $1.3 billion of balance sheet liquidity. Working capital as a percent of sales has declined 100 basis points and 19.1% in a net 13-day reduction. With an improvement in working capital, net cash from operating activities was $33 million and an improvement of $260 million compared to the prior year. With expected lower volumes and less supply chain disruptions this year, we anticipate working capital as a percent of sales to continue to improve and be approximately 16.5% at year-end. During the first quarter, we repurchased 1.1 million shares for $56 million, returning $65 million to shareholders through dividends. As we discussed on our fourth quarter call, we anticipate deploying approximately $500 million towards share purchases or acquisitions for the full year, with activity likely more weighted to the second half of the year. Lastly, we have retired the $200 million remaining on our term loan that matures today by borrowing on our revolver. We will likely repay outstanding borrowings on our revolver during the third quarter. Now let's turn to Slide 11 and review our outlook for the year. We had a better-than-planned start to the year; however, we believe the delayed impact of rising rates, tighter credit, and lower consumer spending in the face of persistent inflation have yet to fully play out in the economy. With these uncertain times as the backdrop, we are maintaining our full year outlook at this time. For Masco overall, we are planning for volumes to be down in the low double-digit range, partially offset by low single-digit pricing. Based on this assumption, we expect 2023 sales to decline approximately 10% with operating margins of approximately 15%. At this time, currency is projected to have a minimal impact on our 2023 results. Our SG&A as a percentage of sales trended below normal levels during the pandemic; however, as we continue to invest in our business for future growth while maintaining cost discipline, we expect this percentage to increase back to a more normalized pre-pandemic level to be around 17.5% for 2023. As always, we will take appropriate actions to address our costs as the year develops based on market conditions. In our Plumbing segment, we expect 2023 sales to decline in the range of 10% to 14%. We anticipate the full year plumbing margins will be roughly flat with 2022 segment margins at approximately 16%. Lower volumes and plant set up costs will impact margins, while favorable selling pricing increases will partially offset these headwinds. In our Decorative Architectural segment, we expect 2023 sales to decline in the range of 5% to 10%. Looking specifically at paint for 2023, we currently anticipate our DIY paint to decrease high single digits and our PRO paint business to decrease mid-single digits as we recycle over 25% paint growth from last year. We anticipate full year Decorative Architectural margins to be approximately 16%. This is largely due to our significant pricing actions in this segment and typically will recover the dollar amount of inflation. As a result, all else being equal, operating profit dollars remain neutral from cost recovery pricing actions resulting in margin compression. We are also planning on increased investment in people and capabilities in 2023 to drive future growth in our PRO paint business, which will have a greater impact in the coming quarters. Finally, as Keith mentioned earlier, our 2023 EPS estimate remains $3.10 to $3.40. This assumes a $226 million average diluted share count for the year and a 24% effective tax rate. Additional modeling assumptions for 2023 can be found on Slide 14 in our earnings deck. Before I conclude, I want to take a moment to thank Keith for his 10 years of partnership, our board, and the entire Masco team for everything over the last 27 years. Leaving Masco is bittersweet for me. I look forward to keeping in touch with my friends and colleagues here and watching the company's continued growth and success. Dave is a very capable executive. We have worked together for more than 20 years, and I know the finance team won't miss a beat under steady leadership in his new role as Interim CFO. I'm proud of everything that we have accomplished together at Masco, and I wish the team the best of luck in the future. With that, I'd like to open the call for Q&A. Operator?

Good morning everyone. Thanks for taking the questions and I just want to pass along my best wishes to John. So just on the overall margin outlook, given your first quarter margins came in ahead of the full year guide, previously you guys had spoken to sequential margin improvement across the business, and so now the guide mathematically implies lower margins for the balance of the year. So my question is, is that just conservatism? Is there still a path to sequential margin improvement in either segments or is there something out there that could still take margins lower? Thank you.

Hey, Matthew, this is Keith. I'll start off, and John, maybe you could add some detail. I think when we, when you think about margin and our performance vis-à-vis the outlook, it's really driven by volume. As we've talked in the past, incremental and decremental volumes are in around that 30% to 35% range. That is a fundamental driver of what's happening to our margins. Additionally, as I talked in my prepared remarks, we endeavor to strike a balance here of managing our costs in these uncertain times, and we've demonstrated our ability to do that thus far. But it's also important that we continue to invest in our business. You'll see continued investments in marketing and advertising. For example, this quarter, we had two significant trade shows, which added up to material investments for us that haven't happened in many years. We're getting together more as an organization in terms of sales meetings to continue to drive. So there's additional investments on top of the headwinds that we plan on experiencing from lower volumes. And then there are pricing actions that counter that and we have taken pricing and we'll see those anniversary here mainly in the second quarter, then a little bit into the third quarter. So hopefully that gives you a little bit of an idea of what's driving our thoughts on the margins as we look to the year.

And Matt, maybe to just add a little bit of color, further color to Keith's comments. Our prior statement was really that we would see sequential year-over-year improvement every quarter as we go through the year. What we intended to convey was that Q2, Q1 of this year would be better than Q1 of last year, et cetera, as the year rolled out. As we look at our margins going forward, the back half of the year margins will get a little easier because the comparisons are lower, particularly in the fourth quarter. We think we can get there for each of the subsequent quarters from here, but yes, it will be lower than where we're at here in Q1.

Gotcha. Okay, yes thanks. Thanks John for that clarification and thanks Keith. So second question, you mentioned in Decorative that there were some shelf space wins in your adjacent categories. I'm just curious if you can kind of put a little finer detail on that. Any color around kind of load in or was there a margin impact from that in the Decorative business?

We're not going to get into the specifics on the load and the margin on these is very good. I think it's good business for us. We've been working with our partner, Home Depot, on caulks and sealants, applicators, stains, and other products that we've talked about. As evidenced by the fact that we're rolling it out to additional stores, it's working, and it's really a tribute to the Behr brand and the team out at Behr and their execution, so good business for us. It's building. Clearly the main portion of our business is in the liquids, but this is good and it's been a strategic effort for the team, and it's successful.

Alright, thanks Keith. Good luck, guys.

Good morning, guys, and thank you for taking my questions. Maybe just dovetailing off of Matt's question there, I mean, a 15.8% margin in the first quarter, Q2 and Q3 are generally well above the first quarter and the full year outlook is 15%. I mean, I know we're only through the first quarter, but maybe if you could help us frame the sort of the upside and downside case there. I mean, let's say that demand stays relatively flat from where it is today, I mean, where could those margins actually shake out?

Yes, John, maybe I'll start and Keith feel free to chime in. So John, as you know, kind of Keith alluded to in answering Matt's question, we did deliver some strong performance in Q1, and obviously the 6% price helped, and as Keith also just referenced. A lot of that pricing benefit starts to subside as you go through the year. There will still be some benefit in Q2 because that's when a lot of the pricing got initiated, but that benefit will really subside significantly as you go into the back half of the year. So with that benefit going away, that will have some impact on margins. And Keith also mentioned that we do expect volumes to be pressured this year. If you consider the strong comparisons we're up against in the first half of the year, volumes were softer in the back half of last year. So we expect that down. Our 10% guide to the top line being down will weigh on it. We also have some additional investments that we're making. Keith mentioned the fact that we're continuing to invest in programs and initiatives across the entire portfolio, but specifically in the PRO paint initiative. Lastly, we have a couple of facilities that are starting up in the back half of the year that will create some expense headwind for us. All those things are pressuring margins. Now to your question, if volumes remain flat, could there be some upside? Yes, there could be and I expect there to be if volumes remain flat, but that's not the model that we're forecasting at this point.

Yes, I got it. Just to create a little bit. I think the declining volume is the pressure on margins where we could see some potential upside if we didn't see that volume decline. We had nice execution in the quarter. Our dropdown or decremental should typically be in that 30% range, and we've done a pretty good job of that in Q1. If we can continue to do that, that would provide potential upside. There's always an opportunity for commodity costs to come down. When we look at where they were in this first quarter, we haven't seen that deflation. They remain elevated. So we think we have our guide in the right place giving the uncertainty in macroeconomics. We will continue to invest in our brands while driving productivity and watching our costs.

Okay. That's helpful, guys. And then maybe more of a high-level strategy question here. If we think about the PRO paint effort at Home Depot, what do you see as sort of the biggest challenges to growth there? Is it, is there a sufficient dedicated sales force? Are there enough specialty products needed to complete bigger jobs? How do we get to the point where it's very competitive with shareowner PPG? What are sort of the missing elements in your view?

I would tell you, I think we are competitive, as evidenced by the 45% two-year stack of growth in PRO. You don't get that without being competitive. I like where our product offering is. Now there are certainly tweaks we can continue to make, but we have the right price points and a very strong brand. It's really about execution. When we look at what's happened to the customer base over the last couple of years when we've had this extraordinary growth, we've been able to, because of our supply chain prowess, get our paint in the hands of more painters. What we're seeing and have significant data regarding net promoter scores and customer satisfaction shows how they view our product and the total service offering with our partner, Home Depot, is very strong. The challenge is continuing to execute and deliver on our brand promise while having the right price and service proposition. I think we're competitive and we have tough competitors, but I think our team has shown that we're looking forward to the challenge.

Yes, and John, what I also can point out to you, maybe just add to, sorry to cut you off there. You can take a look at the business. We've grown this to a $900 million business in a market that's sized around $9 billion to $10 billion. What I like about how we're positioned, and everything that Keith just said, is that we believe we have a great runway in front of us for future growth because of our relatively small presence in the overall market. Even though it's a $900 million business, we have a lot of opportunity to continue to grow this over the coming years with the combination of Behr and the strength of our channel partners, Home Depot.

Yes, I probably should have said even more competitive as opposed to just being competitive, so I appreciate that color. Thank you guys.

Good morning. Thanks for taking my questions. Keith, I think in part of your opening remarks about kind of the caution that you're trying to express in the guide and recognizing there's some uncertainty in how the economic environment plays out and the lag effect of what we're seeing out there. More specifically, you're a month into the quarter, your comments seem maybe a little more hedging around the second half. Can you give us a little bit more color on what you're seeing at the start of Q2 and whether you've seen, notwithstanding the comparisons, any evidence of a significant change in customer behavior across your businesses?

Mike, yes sure. As you know, I'm a little bit reticent to talk about in quarter and where that looked month-to-month as there's a lot of variability there if the prior period had fewer days or if there was a load in for a new product launch or those sorts of things. So we tend to stick to the quarter. I will tell you we did see a little bit of softening through the quarter, and coming out in April, it's fairly consistent with how we exited the quarter. It's not that we're trying to signal what we're seeing in terms of something different than what came out of the quarter. It's more of an understanding that we're in volatile times, and that we're one quarter in. We'll learn a lot in the second quarter and will have a more informed opinion. It's just an extremely volatile period right now.

Okay, that's fair and makes sense. And then the second question, just back on price costs, I think it's clear enough in terms of some of the price commentary where you get the carryover that then fades. I would think that costs should follow a somewhat similar trajectory in terms of highest in the first half of the year on inflation and then maybe lower in the back half, but could you just give us a little more sense of from a pure price cost standpoint, how you expect the year to progress as we go from Q2 through Q4?

I think we've done a pretty good job of recovering. We'll anniversary some significant pricing that we gave in the little, mostly in the second quarter. We've taken some pockets of further price increases in our Plumbing business where we need it, and we'll continue to evaluate it. The fundamental message is there's an anniversary of the significant price increases that we implemented last year that will come into the second half. The dependency as it relates to margin is on the volume.

Yes, and Mike, what I would add to Keith's comments is that while inflation may have moderated from the peak, it has moderated at higher levels than we expected. That should weigh into how you think about higher price costs, cadence for the year. While it will be better than this time last year, inputs like copper are still hovering around $4 a pound. Some of our paint costs have moderated, but remain elevated. We're still seeing some pressure in some inputs, especially materials like TiO2. Overall, we're calling for flat inflation in 2023, which is likely higher than we anticipated at the beginning of the year. Therefore, because of the inputs remaining high, other costs like labor, transportation, etc., will still be high. As Keith said, while we implemented price selectively here in the first part, it will be continuously sticky inflation.

Very helpful and thanks John. Thanks, Keith.

Great, thanks. Good morning everyone. And John, it's been a pleasure working with you, and best of luck in the future. First question, I wanted to zero in a little bit on the paint segment. Both of my questions are kind of centered on that. First, if you could talk a bit about the competitive backdrop. We've heard a lot about Sherwin Williams potentially getting more aggressive. I'm wondering specifically when you talk about investments in the segment over the coming quarters, where those investments would be concentrated in terms of either personnel, marketing, or even promotions or brand spend?

Thanks Mike. Certainly, we have very solid competition in paint, and that makes us better. We'll continue to drive our investments, particularly in the PRO, but also in the aisle and in DIY where we're extremely strong. We've fared quite well. The last two-year stack, as I mentioned is 45% growth in PRO, and we're going to continue to invest in that. We're not going to get into the specifics of our plans going forward, but we will continue to invest in it to develop our service capabilities and to maintain strong net promoter scores and grow those. What we've done is things like buy online, pickup in store, ordering, expanding our delivery options where we do more job site delivery, and expanding and developing our outside PRO sales force both at Behr and Home Depot. Enhancing our loyalty programs for PRO painters is part of our strategy too. It's a competitive business. But we're faring well, and we're going to continue to invest in it and expect to continue to gain share.

Yes, Mike, one maybe to address specifically one component of your question related to promotions, promotional activity. Overall, the level of promotion in the industry has been fairly moderate and perhaps similar to last year. We continue to think we offer our price competitive marketing, and we believe that there will be selective promotions, but we don't see it elevating or escalating over the coming weeks. If our channel partner decides to pursue promotions, that's their decision, but we will support them in that if they choose to go that route.

Right. Fair enough. That's very helpful and I appreciate the color on the promotions as well. I guess secondly, maybe just kind of taking a longer-term view on the segment from a margin standpoint, your guidance for margins this year would be lower than what you've seen in quite several years. I'm trying to triangulate how much of that decline might be due to cost inflation that drives some margin contraction versus anything that you might consider structural. In other words, are there changes in the paint business margin profile due to a lower margin profile given that it's smaller than DIY and has higher investments or in the near term?

Yes, Mike, I'll take a start at this and Keith, feel free to chime in. If you take a look at the differential that you cited and consider the price-cost relationship we have, as we've said before, this results in margin compression. If you consider the amount of price we've put in, we had double-digit pricing over the last couple of years. A 10% price increase would lead to about 180 to 200 basis points margin contraction that accounts for the vast majority of the margin compression you cited. There will be some investments that will be a headwind because as we bring on new sales force, there's always a cost ahead of sales generation and this will create a headwind. So those would be the significant factors. There's minor margin differentials in PRO due to our investments in areas like job site delivery and our loyalty program.

Great. Thanks so much.

Hey, good morning everyone. Just on the decremental margin piece, I believe last quarter you mentioned overall decremental margins might be in that low 20% range and you're around 20 for the first quarter. Is that still kind of how you're thinking about the balance of the year or has that changed at all?

Adam, as Keith mentioned on the call or in his prepared remarks, we're working hard to keep our costs in control and are working to keep our decremental margins around that 20% level. Obviously, things could change if volumes were to deteriorate more significantly than we are forecasting, which could impact it. But we're working hard to maintain our decremental margins around 20% this year.

Okay, got it, thanks. And then just on the price increases in Plumbing, I think it was 10 days or so ago, maybe a week in Delta, Brizo and Peerless. Just wondering how that's being accepted by the market, given that we're not hearing a lot of price increases broadly speaking out there in building products?

I think it's understandable when you look at the massive inflation we've experienced. We were a little bit behind in getting that pricing in place. No one is ever happy to hear about price increases, but the channel understands what we've all been through, and also what the competition has done. So I think it's going quite well.

Hey great. Thanks a lot. Best of luck.

Thank you. Good morning. And let me add my best wishes to John. My first question is about the cost environment. You've obviously set a fairly cautious tone as you look at the next couple of quarters. But what are you watching specifically within the business to determine if you need to take additional actions, or what would make you more confident to add incremental investments?

Susan, I think there's an external and an internal view that we look at. The usual suspects in terms of external data include home prices, home equity increasing, existing home sales, better-than-expected GDP in the U.S., Europe, and China, and consumer confidence. However, our actions would be more fundamentally triggered by what we see in terms of point of sale and incoming order rates. That's what we would key on to signal if it’s time to look at a different investment rhythm based on what the market is seeing. There's flexibility in having activation points and we certainly have those plans ready.

Okay. And then when we think about the quarter, there were obviously some events that came through late in March, especially in the banking environment and consumer lending. Have you seen any change in the tone from both retailers and dealers on the Plumbing and Paint side in terms of their willingness to take inventories into the season or any change in how they're thinking about the outlook and the approach to demand?

No, really not at all. In terms of inventory position, we actually had a small restocking in our Plumbing segment where some of our bigger wholesalers put in a little bit more inventory. We want to be ready for the spring selling season. Our business leaders think we're in pretty good position for the level of demand we're seeing at this point, so there's no real hesitation in anticipation of any sort of event or downturn related to inventory.

What I would also say, Susan, is that event probably did cause us to add a little more caution to our stance and outlook going forward because there could be some ripple effect through the economy that is unanticipated or unforeseen. That's how we digested that event.

Thank you. Questions on Plumbing. You called out the Spa business in size, and it declined in the quarter. Are there any other subproduct categories or channels that are outsized and affecting the volume decline in the quarter?

But for Spas, it's been pretty consistent and broad-based, Keith. When we look at product categories from bathing to accessories to fixtures, taps, and showers, everything has been pretty consistent; retail to trade. I would say that maybe trade held up a little bit better earlier in the quarter as we worked through some of the backlogs and some of the bigger projects, but it's been consistent. You are right. We have experienced some decline in the quarter in Spas, after a three-year run of significant growth. The new launches in Spas and the complete refresh of our best-selling line of Spas are fabulous. I think they will help us compete in this challenging environment.

And second question on that, even if we exclude the Spa, it's still a pretty notable unit decline across the rest of Plumbing in an industry that's not really known for a lot of cyclicality. What are you hearing in the channel regarding the reasons for the significant unit decline in the quarter?

Yes, I mean, Keith, we've seen some degradation in volume. That said, I would point out that we were up against a significant comparison in the first quarter of last year – a 9% comparison is quite strong for this segment. That plays into some of the volume decline we saw this year, given the strong comparison from the first quarter of last year.

Thanks a lot, guys. And John, we're going to miss you. But best of luck. I wanted to follow up a little bit on your margin commentary. To be crystal clear, you talked about the margins on a year-over-year basis, which implies a Q2 operating margin better than 17.2%. I want to ensure that I'm understanding what you're saying. Will this year-over-year progression kind of hold true across both segments?

We didn't give commentary specifically by segment, but I would say your commentary about the company in total is correct. What we said is, year-over-year, we should see sequential improvement. Q2 could be a bit of a challenge for us, having said that margins will improve significantly as we go further into the back-half of the year since the comparisons will be easier.

So you're saying that you may not have a better year-over-year comparison in Q2 versus Q1?

Yes, the quarter hasn't played out, but that could be the case.

Okay, perfect. Thanks so much.

Hey everybody, good morning, and John, good luck on everything. Maybe just on the Plumbing side, if you could give us an update on what you're seeing on the supply chain? I know Keith, you have talked about that getting better in Q2 and having pretty good visibility on that going through the back half of the year. Just an update on what's going on there?

Yes, Tim. I would say that we've executed better than expected in the first quarter as the supply chain has improved. There are still some tightness pockets with some of the supply base. But all in all, it's getting better as the volumes have eased a little bit. Our delivery rates are improving, productivity, etc. Overall, while it's not perfect, it's getting better.

Okay. Okay, good. And just maybe on the Plumbing business within the International business, any change to how you're thinking about that business over the course of the year? The reason I ask is, it performed better than I would have thought, and I think Q1 was actually the most difficult comparison. I’m curious how you're thinking about that business, both cyclically in Europe and competitively?

There really hasn't been a change in how we're thinking about the International business. What I will tell you is that we expect to have more volume pressure as we look to the end of the year, compared to what we've experienced so far. So while we think it has held up nicely and only declined 3% against a strong 18% comp, we're expecting a bit tougher top-line environment than what we've experienced thus far. But that’s not a change in our thinking.

Tim, you had asked in terms of the competition. We're doing very well relative to competition in Europe, and we are most definitely taking share. The Hansgrohe team is doing an outstanding job.

Hey, good morning everyone. John, it has been great working with you over the years, and good luck in the future. I'm hoping you all can discuss the sequential ramp in Plumbing operating margins quarter-over-quarter, as it was a nice ramp. Do you think that some of the operational inefficiencies over the past couple of years, related to labor and transportation, as well as supply chain issues, are largely behind you at this point? Is there any way you might be able to quantify some of the costs that could be embedded in the back half of the year? I think you mentioned some brand and marketing investments, plant investments, etc.

The team has done a great job of getting our efficiencies in order. In a period of declining volume, it is an ongoing effort to balance our variable costs and shifts. The significant amount of inefficiencies we've experienced associated with the last couple of years are mostly behind us now. In terms of specific spending, we have a new plant startup that will incur some costs, and there will also be some headwinds due to reduced volume and the drop down from that.

Okay, perfect. And then, John, I believe you said that the overall inflation bucket this year should be flattish, a little bit higher than what you expected three months ago. Can you break that out by segment? Last quarter, you were expecting Plumbing raw materials to be down low single digits and Decorative to be closer to flattish. Any ideas on how to think through that?

Hey guys. Thanks for squeezing me in, and John, congrats, and thanks for all the help and congrats to you, Dave. I guess my question for you, Keith, perhaps appreciating you're largely in R&R, there's been a fair amount of excitement around new construction this spring selling season. It sounds like your guidance is factoring a step down in demand in the back half of the year. I'm curious if your view and that of your channel partners on demand this year has changed much in the last few months. How do you see the year progressing on the demand side?

Yes. It really hasn't changed much. When you look at our full year guide compared to how Q1 fared, it's consistent across both segments. So I'd say not a lot of change really. And again, we're one quarter in.

Okay, helpful. And then from a mix standpoint, anything you want to call out? At least we're hearing that the high-end of the market is holding up a little better, but I'm curious if you're seeing any nuances on mix and what impact that could have on margins, especially in a mixed macro backdrop in the back half of the year potentially?

We haven't seen anything material, Phil. There’s been some slight trade down in Europe in Plumbing, but beyond that, we haven’t seen significant mix impact or trade down, and our guidance does not reflect either. Thank you.

Thank you all for joining us this morning and for your continued interest in Masco. This concludes today's call.