Masco Corp (MAS) — Q2 2025 Earnings Call Transcript

Thank you, operator, and good morning, everyone. Welcome to Masco Corporation's 2025 Second Quarter Conference Call. With me today are Jon Nudi, President and CEO of Masco; and Rick Westenberg, Masco's Vice President and Chief Financial Officer. Our second 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. 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. With that, I will now turn the call over to Jon.

Thank you, Robin. Good morning, everyone, and thank you for joining us. I want to start today by expressing my gratitude to all of our employees, customers, suppliers, and investors who have been so welcoming and supportive as I officially started my role as President and CEO of Masco as of the beginning of this month. I am humbled by the opportunity to lead such an outstanding company, and I intend to build on Masco's successful history of creating exceptional value for all of our stakeholders. During my two years serving on our Board of Directors, I came to deeply respect and admire this company. I strongly believe in the power of our brands, the strength of our people, and the opportunities ahead. I plan to use my first 100 days to actively engage with internal and external stakeholders to hear their views on Masco, our industry, and further opportunities for our business. I already have the opportunity to kick off my listening tour at the headquarters of Delta Faucet and one of their manufacturing facilities, a return from that trip energized by the team's passion, shared sense of ownership, and desire for growth. As I visit our other businesses over the next several weeks, I'm excited to work closely with our entire Masco team to continue to strengthen our portfolio of brands, enhance consumers' lives, drive profitable growth, and deliver meaningful shareholder value. Now let's turn to our second quarter performance. As I mentioned, I believe in the power of Masco's brands. During the quarter, our innovative products received several recognitions. Beginning with North America plumbing, we are very pleased with Delta Faucet's performance and their newest product category of water filtration and a $1.2 billion market for undercounter water filtration products. Delta and Brizo's award-winning reverse osmosis systems are the most certified tankless systems based on leading competitors, National Sanitation Foundation certifications. These products are also the first reverse osmosis systems in the industry to earn the WaterSense certification label from the U.S. Environmental Protection Agency. In our international Plumbing business, Hansgrohe continues to demonstrate their leadership in branding and design. This quarter, Hansgrohe won four Red Dot Design awards, including the Best of the Best Award for their RainDance Alive showerhead products. In our Decorative Architectural segment, Behr received the number one rating for interior paint from a leading independent third-party rating agency for the 12th year in a row. This year, we swept the top three spots with our Dynasty, MARQUEE, and ULTRA products. Two of Behr's wood stain products were also rated number one in their respective categories. These top ratings across multiple product categories show the depth and strength of products across our Behr brand. Finally, Behr introduced ChatHUE, an innovative AI tool designed to make choosing the perfect paint color even easier. I'm incredibly proud of the team at Behr for evolving the way we approach color selection, providing our consumers with a more personalized and enhanced experience. I'll now shift to discuss our second quarter results and outlook for 2025. We are very pleased with our operating performance in the second quarter, particularly as we navigated a dynamic geopolitical and macroeconomic environment. We have worked diligently to address the impacts from additional tariffs through various mitigating actions, including cost savings initiatives, ongoing changes to our sourcing footprint, and pricing where necessary. For the quarter, our net sales decreased 2%. However, in local currency and excluding the Kichler divestiture, sales were in line with the year prior. Gross margins increased 10 basis points to 37.7%. Operating profit grew $14 million to $413 million, and operating profit margin increased 100 basis points to 20.1%. Lastly, we delivered earnings per share growth of 8% in the quarter to $1.30 per share. Turning to our segments. Plumbing sales increased 4% in local currency. North American plumbing sales increased 5% in local currency driven by favorable pricing and volume. Delta Faucet continues to deliver strong performance through consumer-driven demand for their innovative products and industry-leading brands. International plumbing sales increased 1% in local currency as we continue to see stability in many European markets while other markets such as China remained challenged. Operating profit for the segment was $276 million, and operating margin increased 110 basis points to 21%. Turning to our Decorative Architectural segment, sales decreased 12% in the quarter or 4% excluding our divestiture of Kichler. Overall, paint sales decreased mid-single digits. DIY Paint sales decreased high single digits. Demand for DIY Paint remains soft across the industry driven by low existing home turnover and the dampened macroeconomic environment, and we expect this pressure to continue throughout the remainder of this year. In PRO Paint, sales increased mid-single digits. Our strategic investments in this category and our close partnership with the Home Depot continue to result in growth with PRO customers. The strength of our Behr brand and the quality of our products resonates with PRO customers and allows us to capitalize on the sizable growth opportunity in the PRO Paint market. Operating profit for the segment was $157 million, and operating margin was 21.3%. We are proud of the work of our teams across our business during the first half of the year as they mobilized quickly to implement various mitigation actions in response to increased tariffs, higher commodity costs, and the macroeconomic uncertainty. Our teams are able to deliver strong financial results through focused execution and responding rapidly to the changing environment. Now turning to our expectations for the full year. While some uncertainty surrounding near-term market conditions persists, we are restoring financial guidance for 2025. Rick will provide more detail into the components of our guidance. However, given the overall macroeconomic environment, we now anticipate the global repair and remodel market to be down low single digits. We expect to continue to outperform the market. We anticipate our sales to be roughly flat, excluding the impacts of divestitures and currency, with lower volumes largely offset by pricing. Based on our expected operating performance and capital deployment actions, we anticipate adjusted earnings per share for 2025 to be in the range of $3.90 to $4.10 per share. It is important to note that the 2025 estimates we are providing today include the impact from inactive tariffs that are currently in effect, net of our various mitigation actions. These estimates do not include impacts from any potential future tariffs or changes in existing tariffs. While some market uncertainty remains for the near term, the structural factors for repair and remodel activity over the mid to long term are strong, namely the growing age of the housing stock and home equity levels. Nearly 1.7 million more homes will reach the prime remodeling ages of 20 to 39 years old by 2027. Homeowners are staying in their homes longer, and home equity levels are near record highs. We continue to be focused on achieving additional growth, and we are structured to achieve favorable incremental benefits from volume growth due to our available capacity, high levels of productivity, and disciplined cost structures. We believe we are well positioned to grow faster than our competition to evolve and lead while remaining true to the values that have been foundational throughout our nearly 100-year history. It is an absolute privilege for me to join such a high-performing company built on iconic brands that are part of people's daily lives, and I'm honored to help write the next chapter. With that, I'll turn the call over to Rick to go over our second quarter results and our 2025 outlook in more detail.

Thank you, Jon, and good morning, everyone. Thank you for joining. As Robin mentioned, my comments today will focus on adjusted performance excluding the impact of rationalization charges and other onetime items. Sales in the second quarter decreased 2%, but were in line with the prior year excluding the impact of our divestiture of Kichler and favorable currency. Our divestiture of Kichler in the third quarter of 2024 decreased sales by 3% year-over-year in the second quarter of 2025, while currency represented a 1% increase in sales. In local currency, North American sales decreased 3%, but were in line with the prior year excluding the divestiture impact. International sales increased 1% in local currency. Gross margin increased 10 basis points in the quarter to 37.7%. SG&A decreased $27 million driven by our divestiture and lower employee-related expenses. SG&A as a percent of sales improved 90 basis points to 17.6% in the quarter. Operating profit increased 4% to $413 million in the quarter, and our margin expanded 100 basis points to 20.1%. Operating profit was driven by cost productivity initiatives, favorable SG&A, and a positive price/cost relationship, partially offset by lower volume. Lastly, our EPS increased 8% to $1.30 per share. Turning to our segments. Plumbing sales increased 5% in the second quarter, or 4% excluding the favorable impact of currency, largely driven by pricing, which increased sales by 3%. In local currency, North American plumbing sales increased 5% in the quarter. This performance was primarily driven by Delta Faucet, which delivered strong growth in both the trade and e-commerce channels. In local currency, international plumbing sales increased 1%, driven by pricing actions. Hansgrohe achieved growth in many of its European markets, including its key market of Germany. This was largely offset by softness in other markets, particularly China. Segment operating profit in the second quarter increased 11% to $276 million, and operating margin expanded 110 basis points to 21%. Operating performance was driven by cost savings initiatives and a favorable price/cost relationship. Turning to Decorative Architectural segment, sales decreased 12% in the second quarter. The divestiture of Kichler reduced sales by 8%. In the quarter, total paint sales decreased mid-single digits due to lower volume. PRO Paint sales were up mid-single digits, and DIY Paint sales decreased high single digits. Given the continued softness in the overall DIY market and the unfavorable impact of inventory timing this year versus 2024, as discussed on prior earnings calls, we anticipate our total paint sales for the full year to decrease mid-single digits. We anticipate our full year DIY Paint business to decrease high single digits. In our PRO Paint business, we expect sales to increase mid-single digits for the full year. Operating profit in the second quarter was $157 million, impacted by lower volume and an unfavorable price/cost relationship, partially offset by cost savings initiatives. Operating profit margin was 21.3% and was favorably impacted by the divestiture of Kichler. Our balance sheet remains strong with gross debt-to-EBITDA at 2x at quarter end. We ended the quarter with $1.3 billion of liquidity including cash and availability under our revolving credit facility. Working capital was 20.1% of sales at quarter end. Working capital was impacted by tariff-related dynamics including higher material costs and pricing, increasing our working capital balances. As a result of these tariff-related impacts, we anticipate that our working capital as a percent of sales will be approximately 17.5% at year-end. Given our strong cash generation, we returned $167 million to shareholders in the second quarter through dividends and share repurchases, including the repurchase of $101 million in stock. As it relates to capital allocation, we expect to invest approximately $175 million through capital expenditures to pay a dividend of $1.24 per share and currently anticipate deploying at least $450 million towards share repurchases or acquisitions in 2025. Now let's turn to the outlook for the full year. The market environment remains volatile and uncertain, particularly related to tariffs. That said, there has been some improved visibility since our Q1 earnings. Based on this visibility, we are reinstating our 2025 guidance. Please note that the guidance being provided today includes the impact of currently enacted tariffs in effect in July. We estimate the total annualized cost impact of these incremental tariffs to be approximately $210 million before mitigation, down from $675 million as of our Q1 earnings call. Of the $210 million annualized cost impact, approximately $140 million relates to the incremental 30% China tariffs, while the remaining $70 million is driven by the 10% global reciprocal tariffs and 50% tariff on steel and aluminum. We will continue to take appropriate actions to address our costs as the year develops based on market conditions. We anticipate total company operating margin to be approximately 17% in 2025.

The market environment remains volatile and uncertain, particularly related to tariffs. That said, there has been some improved visibility since our Q1 earnings. We expect our sales in 2025 to decrease low single digits, impacted by the 2024 divestiture of Kichler, which will reduce sales by approximately 2% year-over-year. We anticipate currency will have a favorable impact of approximately 1%, similar to the favorable impact experienced in the second quarter. Excluding the impacts of divestiture and currency, we anticipate Masco's overall sales to be roughly flat year-over-year with lower volumes largely offset by pricing. We will continue to invest in our business for future growth while also maintaining cost discipline. As a result, we expect SG&A as a percent of sales to be in line with 2024. In our plumbing segment, we expect 2025 full year sales to be up low single digits. We anticipate the full year plumbing margin will be approximately 18.5%. In our Decorative Architectural segment, we expect 2025 sales to decrease low double digits or mid-single digits excluding the impacts of our divestiture. We anticipate the full year Decorative Architectural margin to be approximately 18%. Finally, as Jon mentioned earlier, our 2025 EPS estimate is $3.90 to $4.10 per share.

That concludes the Q&A portion of today's call. I would now like to turn it back over to Robin Zondervan. We'd like to thank all of you for joining us this morning and for your interest in Masco. That concludes today's call. Have a wonderful day.