Masco Corp

NYSE:MAS

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to Masco Third Quarter Earnings Call. My name is Umaria, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin.

[David Chaika, Vice President, Treasurer and Investor Relations]

Thank you, operator, and good morning. Welcome to Masco Corporation's 2021 third 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 third quarter earnings release and the presentation slides that we will refer to today 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 [phone].

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.

[Keith Allman, President and Chief Executive Officer]

Thank you, Dave. Good morning, everyone. And thank you for joining us today. I’m proud of the way our team continues to execute in these dynamic times. In the third quarter sales increased 11%, our fifth consecutive quarter of double-digit, top-line growth. This was against a strong 16% comp from last year. This growth came as we continued to face significant supply chain challenges. Certain raw materials were hard to come by such as resins, microchips, and even pallets. Freight congestion in ports and lack of trucking capacity, contributed to increase delays in shipping and receiving goods. And labor shortages continue to be a challenge.

I would like to thank both our employees and our tremendous supplier partners, who together, have worked tirelessly to address the challenges. They have kept our plants running and our customers supplied, resulting in outstanding topline performance.

Operating margin for the quarter was 17.5%. As we executed our plan transition to a more normalized level of SG&A expense to support our brands, innovation and new products.

Moving to our segment performance beginning with Plumbing, sales increased 15%, excluding currency, led by exceptional growth in North America and international faucets and showers and our spa business. These results highlight the strength of our Plumbing platform diversity across geographies and channels.

To support our continued international growth, Hansgrohe recently announced plans to invest in a new manufacturing facility in Serbia. This additional capacity will enable further growth and further strengthen Hansgrohe’s capabilities to serve as customers. We plan to invest approximately a $100 million in this project over the next three years.

In our Decorative Architectural segment sales grew 4% against a robust 19% comp from the third quarter of 2020. PRO paint had an exceptional growth of over 45% in the quarter, helping to offset and moderating demand in DIY paint. DIY paint declined mid-single digits against a tremendous comp of over 25% in the third quarter of 2020. We continue to see indications of DUI paint, demand stabilization as demand was fairly consistent throughout the quarter. When compared to our third quarter 2019 sales, our DIY paint sales were up over 20%, a clear indication of a re-engaged homeowner and strong home improvement fundamentals.

Lastly, Behr paint was recently recognized as The Home Depot Partner of the Year in the paint department. This recognition was a result of successfully keeping The Home Depot in stock during the DIY surge last year, our continued investment and our joint effort to grow the PRO paint category and our commitment to bring in new and innovative products such as our recently launched Behr Dynasty to the Home Depot. Each of these has contributed to tremendous growth for both Behr paint and the Home Depot. And this recognition is a testament to the strength of our partnership.

Moving on to capital allocation, we continued our share buyback activity during the quarter by repurchasing 2.2 million shares for a $128 million. In addition, we anticipate deploying approximately $150 million in the fourth quarter, bringing our total share repurchases to over a $1 billion for the year.

Now, let me give you an update on what we're experiencing with inflation. The second half of 2021 is largely unfolding as anticipated. We experience low double-digit inflation in the third quarter, and we expect mid-teens inflation in the fourth quarter. We have taken pricing actions across both segments and expect to achieve price cost neutrality by year end. It has been an extremely dynamic year and our supply chain and commercial teams have done an exceptional job managing through the many challenges. Because of this outstanding execution and continued strong demand for our products, we are maintaining the midpoint of our previous guide and expect to achieve full year earnings per share in the range of $3.67 to $3.73.

Lastly, before I turn the call over to John, we are pleased to share with you that our comprehensive, 2020, corporate sustainability report is now available on our website. This report demonstrates our commitment to environmental, social and governance responsibility. During a year of unparalleled change, our team members remained committed to maintaining our strong reputation for ethical business practices, reducing our environmental impact and enhancing our DE&I efforts. I'm proud of the hard work we are doing every day to ensure that our employees feel a sense of inclusion, belonging, and support.

Our progress in ESG is a priority for our Board and our executive leadership team. I hope you will take the time to read more about how our long-term sustainability influences the way we run our business, operate our facilities and contribute to the community.

With that, I'll turn the call over to John for additional details on our third quarter results. John?

[John Sznewajs, Vice President and Chief Financial Officer]

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 the Slide 7, demand for our industry-leading brands remain strong and our teams executed exceptionally well in a dynamic environment. This resulted in another strong quarter of double-digit top line growth. Sales increased 11% against an impressive 16% comp in the third quarter of last year. Net acquisitions contributed 2% to growth and currency had a minimal impact. In local currency North American sales increased 9% or 6% excluding acquisitions. The strong performance is driven by outstanding execution to achieve volume growth in propane faucets, showers and spas, and by increased selling prices. In local currency international sales increase a robust 15% or 18% excluding acquisitions and divestitures against the healthy 9% comp.

Gross margin of 34.2% is impacted by a higher commodity and logistics costs in the quarter. We expect this inflation will have peak impact on our P&L in the fourth quarter. We will offset these costs with additional pricing actions and productivity initiatives; expect the exit this year price cost neutral. SG&A as a percentage of sales with 16.7%. As planned during the quarter, we increased certain expenses, such as headcount, advertising and marketing to a more normalized level to support our brands. We expect this increase to continue into the fourth quarter as these costs continue to normalize. Operating profits in the third quarter was $385 million and an operating margin of 17.5%, our EPS was $0.99.

Turning the Slide 8, plumbing growth continued to be strong with sales up 16% against the 13% comp in the third quarter of last year. Net acquisitions contributed 2% growth and currency contributed another 1%. North American sales increased 16% or 10% excluding acquisitions. Delta led this outstanding performance delivering another quarter of robust double-digit growth driven by strength in their e-commerce and trade channels. With strong brand recognition and general relationships Delta continues to drive consumer demand for its products. Watkins Wellness also contributed to grow up in the quarter in both demand and our backlog remains strong. International plumbing sales increased 15% in local currency or 18% excluding net acquisitions.

Hansgrohe delivered strong growth as demand continued to improve across Europe and numerous other countries. Hansgrohe key markets of Germany, China, in the U.K. all grew double-digits in the quarter. Segment operating profits in the third quarter was $248 million and operating margin was 18.7%. Operating profit was impacted by the planned increases in SG&A that I mentioned earlier, as well as an unfavorable price cost relationship. This was partially offset by strong incremental volume. We anticipate additional SG&A increases in commodity and inflation will most significantly impact this segment's operating margins in the fourth quarter. We will mitigate the commodity inflation with additional pricing and productivity actions expect to be priced cost neutral as we enter 2022. For a full year 2021, we continue to expect Plumbing segment sales growth to be 22% to 24% of operating margins of approximately 18.5%.

Turning to Slide 9, decorative architectural sales increased 4% for the third quarter or 3% excluding acquisitions. Our DIY paint business declined mid-single digits in the quarter against more than 25% comp in the third quarter of last year. Despite this decline, DIY paint demand appears to be stabilizing as we have seen relatively consistent demand since July. When comparing to Q3 2019 our third quarter DIY sales are up over 20%. Our propane business delivered exceptional growth of more than 45% in the quarter as paint contractors are applying top rated Behr paint to more commercial and residential projects.

We expect demand in this channel to remain strong as propane contractors report growing demand for their services. When comparing to Q3 2019, a third quarter of pro-sales are up over 35%. Segment operating margin in the third quarter was 19% and operating profit was $166 million. Operating profit was impacted by lower volume, increased commodity costs and higher marketing expense to support the new BEHR DYNASTY product launch partially offset by higher net selling prices. For full year 2021 we continue to expect Decorative Architectural sales growth will be in the range of 2% to 5% and operating margin to be approximately 19%.

Turning to Slide 10, our balance sheet is strong with net debt-to-EBITDA at 1.3 times. We ended the quarter with approximately $1.9 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Working capital as a percent of sales including our recent acquisition was 17%. Finally, we repurchased more than 15.2 million shares in 2021 for $878 million. This is approximately 6% of our standing share count at the beginning of the year. We expected to play approximately $150 million for share repurchases or acquisitions in the fourth quarter as we continue to aggressively return capital to shareholders.

And turning to our full year guidance; if summarized our expectations for 2021 on Slide 11, we continue to anticipate overall sales growth of 14% to 16% and an operating of approximately 17.5%. Lastly, we are maintaining our 2021 EPS estimate midpoint, but narrowing the range to $3.67 to $3.73 representing approximately 19% EPS growth at the midpoint of the range. This assumes a $252 million average diluted share count for the year.

Additional modeling assumptions for 2021 can be found on Slide 14 of our earnings deck.

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

[Keith Allman, President and Chief Executive Officer]

Thank you, John.

Demand for our products and home renovation remains strong at a much higher levels than experienced in 2019. When you compare our third quarter performance to Q3 2019 revenue is 28% higher, operating profit is 29% higher, operating margin is 10 basis points higher and adjusted earnings per share is an outstanding 62% higher. With our demonstrated supply chain excellence and our ability to offset inflation with price we believe we are well positioned to carry this momentum into 2022 and deliver margin expansion and double-digit EPS growth consistent with our long-term outlook. We look forward to sharing our detailed 2022 outlook on our fourth quarter call in February.

With that I'll now open the call up for questions. Operator?

[Operator]

[Operator Instructions] Your first question will come from the line of Matthew Bouley with Barclays. Please proceed with your question.

[Matthew Bouley, Barclays]

Good morning, everyone. Thanks for taking the questions and congrats on the results in a pretty tough environment here.

First question on the propane strength, recognizing some of the drivers of broader sort of do it for me strength here and the project demand. John, you just mentioned; just given how strong it was. Was there – is there anything else for you where you think you may have had some sort of structural success in boosting awareness or market share of BEHR PRO or conversely should we be aware of any more transitory benefits perhaps as customers are sort of hustling to find paints where they can and you guys have done a great job of keeping BEHR PRO in stock. How should we think about that balance? Thank you.

[Keith Allman, President and Chief Executive Officer]

Hey Matt, this is Keith, I'll take this and John, you can add-in if you have other comments. I think there are a few things that, that really contributed to that 45% growth that we saw in the quarter in PRO. First and foremost, we had – we had really outstanding supply chain execution. I can't say enough about our supply chain teams, our research and development teams that we're able to move formulations and our suppliers. We've been working with the supply base and have been pretty consistent in our supply register for like 20 years.

So those relationships really paid off and our hard work on supply chain and R&D, so really good availability of product and supply chain execution in general. We continue to invest in our brands. We've talked about that, and we've talked about that last quarter and we continue to invest in our brands and having that leading brand, having the leading quality, having a leading service levels all contributes to this, especially in tough and dicey times, like we've just gone through. And we continue to execute in terms of new product introductions and our innovation pipeline such as BEHR DYNASTY, a new line of aerosol paint, interior stains, Cox and other adjacencies.

So our ability to not only have that supply chain execution, but continue with the basics of the business of investing in the brands and executing new product introductions all paid off. And I think all those – all those things are helping to drive demand. And we saw that in our performance, in the 45% growth that we saw in PRO and we think that enabled us to get new customers. And now it's up to us to develop the loyalty, which we've demonstrated an ability to do so. It was a very challenging quarter for us in across paint, both PRO and DIY, but I'm very happy with the execution.

[John Sznewajs, Vice President and Chief Financial Officer]

Yes. May the only thing that I would add to Keith's comments is that, I think it's also a reflection of investment that we've made over many years in this program that feed on the street both calling on outsiders on paying contractors, as well as the investment on people inside Home Depot Stores, and also Home Depot's investment in this program. So it's been, the joint partnership that we developed to go after the PRO, and I think really helped drive the success that we experienced here in that third quarter.

[Matthew Bouley, Barclays]

That's great color there. Thank you both to that. Second one, just on the Asian supply chain, where you guys have a relatively robust footprint. So just, I guess, a two-parter at any quantification you can give maybe on sort of the near-term cost impacts of everything going on with ocean shipping and transportation from Asia? And then just longer term thoughts on any sort of supply chain repositioning that that's sort of come about as a result of all these recent challenges? Thank you.

[John Sznewajs, Vice President and Chief Financial Officer]

Sure. Sure, Matthew. I am Matt Bouley, like everyone else that's reported so far, this earning season. We've faced supply chain challenges coming across the Pacific. You may have seen elevated costs to get the containers across to the United States. And we’ve seen it’s also resulting delays in getting products through the port systems here in United States, whether it's on the west coast or any of the other ports that we bring product in. So the good news is, even though we've experienced some of that, we have also as a result pass through some of the price increases down because of the raw material inflation that because of some of the logistics inflation that we've experienced. And so that that is – we feel good about our ability to get that price and then that's a portion of which allows us to feel good about being price cost neutral as we exited here in 2021.

[Keith Allman, President and Chief Executive Officer]

Yeah. I – just to add a little bit to John's comments, I think not strictly in the Asian supply chain, but overall, when you look at inflation, we're experiencing or we experienced low double digit inflation in the third quarter, and we're expecting in that mid-teens region in the fourth quarter. And as John mentioned a good work on our commercial teams and we will exit the year in price cost neutral.

[Matthew Bouley, Barclays]

All right. Well, thank you both and congrats on that hard work.

[Keith Allman, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question will come from the line of Susan Maklari from Goldman Sachs. Please proceed with your question.

[Susan Maklari, Goldman Sachs]

Thank you. Good morning, everyone.

My first question is just following up on some of the exposure in terms of inflation and inputs there. Can you talk a bit to what you're seeing in terms of some of the core commodity exposure, things like maybe copper, brass any of the sort of chemical inputs on the paint side? And I know you talked about, seeing that mid-teens inflation in the fourth quarter, but just any more detail on how to think about where – what those trends are?

[Keith Allman, President and Chief Executive Officer]

Sure. As I think we've all read and seen broadly across the industry, there's been a broad-based inflation and we're experiencing that, that same thing. We're seeing it in metals, zinc and copper, as you mentioned. And that's across both, both our category – both our segments particularly in the hardware and objective piece of architectural as well as obviously in brass and plumbing.

We’ve seen in polymers, and again that's across both our segments. Resins and paint, plastics in our plumbing valve train, for example, with our cross-linked polyethylene and our cartridges for the valves, we're saying it there, and then again same sort of story across both segments and logistics. Container costs continued to escalate even things like pallets and of course over the road trucking costs associated with some labor constraints that are broadly there in the trucking industry. So its broad based inflation and we expect to continue to see that in the fourth quarter. And as we mentioned we have done some good work and we'll continue to do work in the fourth quarter as it relates to achieving price cost neutrality by the end of the year.

[John Sznewajs, Vice President and Chief Financial Officer]

Yes. Susan, maybe to put a finer point on Keith's comments. I think but for the fourth quarter and probably be the peak of inflation for the year, I suspect we'll feel mid-teens inflation in total across the company. They'll probably be low teens in the plumbing segment and probably high teens in our paint business. So pretty significant inflation, but as Keith mentioned the team has done a terrific job of working to offset those costs here as we exit 2021.

[Susan Maklari, Goldman Sachs]

Okay. That's very helpful color. And then as a follow-up, can you talk a little bit about what you're seeing across the various channels within plumbing? I know that you kind of highlighted some strength within the e-commerce as well as the trade channels there. Can you just give us some commentary on how the various channels are moving? And any implications as we think about the margin trajectory there as some of those maybe continue to strengthen?

[Keith Allman, President and Chief Executive Officer]

Yes. We're really seeing, again, a strong broad based growth in plumbing. So if you look at geographically as we spoke in the prepared remarks, international is strong. We were very, very good growth in China, in the UK and in Germany, which are core markets for Hansgrohe and then good growth here in North America. With regards to channel and slicing it up by channel very strong performance in e-commerce; we've invested our best and brightest talent there. We've invested in our capital in terms of acquisitions to build and we've been working for a number of years in terms of our internal capabilities from logistics to pick and pack quantities of one to handling returns, marketing and generating a more efficient search, a better purchase journey for the consumers, et cetera. So a lot of work has gone into that, but we saw a real strong growth particularly in plumbing and e-commerce and also in the trade channel.

And then strong, as we mentioned strong – strong PRO growth in pain. So a really good performance across multiple channels and multiple geographies, and I think Susan, that, that speaks to the work we've done in terms of the portfolio of driving affordable smaller ticket items that are involved in quicker remodels if you will, and smaller jobs as well as obviously being part of that bigger ticket job what executed. So that diversity across geographies, channels, price points, et cetera, has really delivered for us a nice robust portfolio, and I think that's a big part of it.

[John Sznewajs, Vice President and Chief Financial Officer]

Susan, maybe I'll give you a little bit more color on one specific channel. I mean, let me talk a little bit about the e-commerce channel and the acquisition of Kraus, and how that's aided our e-commerce growth. So Kraus – the Kraus we bought in the beginning, really the tail end of last year, and the integration is going well and they continue to perform above our expectations. And we've made some good investments along with Kraus's complimentary products and online presence.

And they helped to actually strengthen some of Delta's market-leading offerings to drive future growth. One of the things we specifically have done is with the help of Kraus, we've launched Delta branded sinks online, utilizing their offering and this is really a good contributor to our growth here in the back half of 2021. So e-commerce Delta was strong in e-commerce before we required Kraus in the Kraus acquisition. We really complimented Delta's strength in the online channel to accelerate its growth.

[Susan Maklari, Goldman Sachs]

Great. That's very helpful color. Thank you. And good luck with everything.

[John Sznewajs, Vice President and Chief Financial Officer]

Thank you.

[Operator]

Your next question will come from the line of Mike Dahl from RBC Capital Markets. Please proceed with your question.

[Mike Dahl, RBC Capital Markets]

Good morning. Thanks for taking my questions. Really exceptional results across the segments, particularly in paint, in light of what some of your peers are saying. So I have a couple of follow-ups. Keith, I know you mentioned a couple things around your supply chain partners and how you've kind of successfully managed there. But it is striking in terms of your ability to not just get product, but keep the inflation lower than what I think most of your public peers have talked about in that segment. So I'd love to hear just a little more detail or color on exactly kind of how you've managed this? Or what you think you've done differently than, than some of your peers over the last few months?

[Keith Allman, President and Chief Executive Officer]

Well, at the risk of maybe being redundant to what – what I've already talked about, I can't overstate what our supply chain teams have been able to do. And it's a product of a great partnership with Home Depot and the simplification and the focus that we have. We work hard to understand the Home Depot consumer, and we work hard to understand the Home Depot supply chain. And fundamentally everything that we do is geared towards and focused on that customer and those consumers. And because of that, I think that makes us fleet of foot, it makes us – it helps us be able to do the sorts of things that we need to do and react quickly when times get tough.

It's mind boggling when you think about the types formulations that we had to go through in our R&D department in terms of changes and revalidation's to be able to move from one supplier to next to be it on colorant or resins, and really that's across our entire business, but specifically in pain. I think when you look at our formulations and how – what goes into our formulations and what was particularly tight in terms of capacity, I think that gave us a little bit of advantage and it has not been easy.

We have changes the challenges and we continue to have challenges, but fundamentally, I do think it has to do with the extreme focus and dedication we have on a specific customer and the consumers and the ability to manage that versus say having a more complex lineup where we have different types of coatings and different types of customers and those sorts of things. So it's an attribute to simplification 80/20, a focus on our teams, and absolutely the highest quality workforce particularly in supply chain and R&D.

[Mike Dahl, RBC Capital Markets]

That's great. Thank you. And then just as a follow-up, BEHR DYNASTY specifically, can you help us kind of size what the – what the contribution was from a top line perspective in the quarter? And you talked about some increased marketing costs around that just, how should we be thinking about that program in the fourth quarter and on a go-forward basis? And how's the adoption been or the sell-through?

[John Sznewajs, Vice President and Chief Financial Officer]

Yes. Mike its John. So I think the impact on the quarter was relatively light. There was a small load in of about $20 million in the quarter. It's obviously helped the top line growth number, but it wasn't a huge driver of the overall growth.

[Keith Allman, President and Chief Executive Officer]

Yes. We're excited about DYNASTY. I'll tell you, it's going very well. It's our best paint ever. Best scuff resistant, most one color high colors, fast drying, lead certified green guard. It's just extremely good paint. It's our highest price point yet, but when you match it with those attributes it's a good value. I mean my father bought some of it. Let me tell you he's as excited as they get, while that's only one point, it's indicative of what kind of value this can bring. And it's an example of how our deep and extended relationship with the Depot can really help. We consistently bring that innovative new products and market leading attributes. And we do that, I like to think of our teams fighting above their weight class. We are focused and to your earlier question on supply chain, it kind of shows itself here with DYNASTY, very happy with DYNASTY and the launch.

[Mike Dahl, RBC Capital Markets]

Yes. Great. Okay. Thank you.

[Operator]

Your next question comes from the line of Phil Ng from Jefferies. Please proceed with your question.

[Phil Ng, Jefferies]

Hey guys congrats on a really impressive quarter in a challenging backdrop, and great to see demand being really strong here. Any color on how you're thinking about organic growth as we look out the 2022, since your comps to get a little tougher in the first half and how much line of sight do you have?

[John Sznewajs, Vice President and Chief Financial Officer]

Yes. Phil its John. You're right, the comp as we go into the first part of 2022 will be tough, obviously when we post 31% growth in the Q1 and 53% growth in Q2 in plumbing I should say, 25% overall, 24% Q1, 24% in Q2, those are tough comps to go up against. That said, as I mentioned on my prepared remarks, we've got continued good backlogs in a number of our businesses that we have visibility into.

We mentioned the fact that Watkins our wellness business continues to have a very strong backlog of probably several hundred million dollars. Our plumbing businesses, both Hansgrohe and Delta to the extent that we look at their backlogs, they are bigger than they would historically be at this time of the year, given the seasonality of things generally slowing down. So we do think that the first part of – growth going into the first part of 2022 will be good, but obviously we're up against some pretty tough comps.

Beyond that, Keith, I don't know, pain is, got a little bit less visibility into the – the backlog of pain other than on the probe business we see some of the commercial projects coming through.

[Keith Allman, President and Chief Executive Officer]

Yes. I'd add our international markets were also recovering nicely. And we'll have more detail on 2022 in our fourth quarter call.

[John Sznewajs, Vice President and Chief Financial Officer]

Phil, but I would say that, if you think about the macro trends where we stand right now, the macro trends really set up for a good 2022. The two big ones that we watch, because it really does impact our low ticket repair model portfolio of products that we have. Our existing home turnover and home price appreciation and as you know; those two have been very good. And why are those two on the fact that consumer's balance sheet is very good.

All statistics say that $2 trillion of more savings as a result of the pandemic that the consumers are sitting on now. And the fact that the home is – for a vast majority of consumers, it's their largest investment. We think this environment bodes well for continued investment in homes. We're hearing about backlogs of big ticket projects with contractors. So we think that the supply chain tightness that the consumers have experienced have contributed to that backlog of big ticket projects. And so going into 2022, we think the environment set for good growth.

[Phil Ng, Jefferies]

Now, that's really helpful. Any color on how you're thinking about when supply chain kind of normalizes and appreciate some of these challenges? I think there was an expectation for maybe restocking inventory channel in the fourth quarter. Any color on how that has kind of progressed that more of an opportunity when we think about 2022 as well? Thanks a lot, guys.

[John Sznewajs, Vice President and Chief Financial Officer]

It's very difficult to predict the supply chain in this environment. I think some things will have a little bit more lasting impact. I think logistic will probably remain tight. Well into 2022, our – if you will, the blood pressure metric that we look at is our fill rates coming from our supply base and our timeliness and accuracy of delivery dates versus promise. And those are starting to improve. Now, we have a long way to go. We're not back to where we need to be, but I would say in terms of our supply and incoming, we are starting to see some improvement and a little bit of stabilization as we look at those two key metrics.

Umaria, I think we can go to the next question.

[Operator]

Your next question will come from the line Adam Baumgarten from Zelman. Please proceed with your question.

[Adam Baumgarten, Zelman]

Hey guys, thanks for taking the questions. Good morning. Just looking at decorative on the implied 4Q guidance, somewhat similar to revenue growth compared to 3Q; do you expect the similar PRO out performance to continue through the end of the year?

[John Sznewajs, Vice President and Chief Financial Officer]

Yes. We would and yes, and we expect PRO to remain strong as we go through the ounce of the year. Whether it's going to be the same 45 plus percent growth we realized in Q3 is yet to be determined, but based on what we're hearing from PRO contractors based on the projects that, that we're hearing in terms of contract or backlogs, we do think the PRO demand will continue to be quite good.

[Adam Baumgarten, Zelman]

Okay. Got it. Thanks. And then just on the SG&A spend kind of normalizing, when do you expect to reach that full normalized run rate? Is it by the end of this year, or will it drag into next year?

[John Sznewajs, Vice President and Chief Financial Officer]

It'll probably drag into next year, Adam. If you think about our SG&A spend, we've talked since the beginning of the year about $40 million of spend that we pulled out of the system last year during the height of the pandemic. And we'll slowly later that, that back in over the course of the self recorders. Keith mentioned earlier, we're investing in our brands, we're investing in innovation, we're investing in headcount, and it's all reflecting in itself in some of the top line growth that you've witnessed today – that we reported today. So some of that investment, we'll be mindful of it. We are not going to just let it all flow back in. So sufficed to say that our businesses have their fingers on the dials and are actively managing that cost as it comes back in.

[Adam Baumgarten, Zelman]

Thank you.

[Operator]

Your next question will come from the line Garik Shmois from Loop Capital. Please proceed with your question.

[Garik Shmois, Loop Capital]

Hi, thanks. Good morning. Just given the rising price points and inflation, just wondering if you could speak to any change in mix that you might be seeing in plumbing and paint, and if that's being impacted at all?

[Keith Allman, President and Chief Executive Officer]

Garik mix really wasn't that big of an issue in the quarter. There may have been a little bit of slightly favorable mix in plumbing as we've seen a little bit greater strength in Europe, which can tend to be I mean we get more projects, which means our AXOR brand does a little bit better. And maybe some of our spa business is trended to a little bit more of a favorable mix. But beyond that it wasn't all that impactful in the quarter.

[Garik Shmois, Loop Capital]

Okay, thanks. And then to the extent you can provide a little bit more color on your expectations for margin expansion in 2022, recognizing you provide more guidance after next quarter, but given you are going to be likely exiting this year a price cost neutrality, would you anticipate margin expansion across your businesses to begin early in the year?

[John Sznewajs, Vice President and Chief Financial Officer]

We've talked about this and we haven't changed our outlook. And that is that we have nice dropdown and incremental volume we'll exit the year at price cost neutrality. There still is questions about where commodities will move if at all in 2022, and can I remember that if they do, we will handle that as we have in the past with productivity and further price if needed. So, we throw all that all together, as we've talked in the past, we're looking at margin expansion, not in the hundreds of basis points, more in the tens of basis points, but our commitment and how we drive our leadership teams and how we structure our variable compensation for those teams is growth above market and margin expansion. That's fundamentally part of our culture and how we drive our businesses. And that's what we will achieve in 2022.

[Garik Shmois, Loop Capital]

Great. Thank you.

[Operator]

Your next question will come from the line of Deepa Raghavan from Wells Fargo Securities. Please proceed with their questions.

[Deepa Raghavan, Wells Fargo Securities]

Hi, good morning, all. Thanks for taking the question. Let me start with some October trends. Just curious how that has trended so far? Are you seeing any seasonality, rebounding anything that you are able to talk to on October so far, please?

[Keith Allman, President and Chief Executive Officer]

Yes, I think we've really moved to talking about our quarter and how we've exited the quarter, and we're not going to get into slice and a dice in that, up on a monthly basis. And the reason because there is ebbs and flows, different parts of our businesses launch products, have fill and different things happen. So, it's more productive and a better indicator for how we're doing for our business if we stick to the core.

[Deepa Raghavan, Wells Fargo Securities]

Okay, understood. How about the quarter then? Any surprises, either positive or negative during Q3 three? And anything that you would point us out as we look into 2022, to be aware of that we shouldn't probably carry forward?

[Keith Allman, President and Chief Executive Officer]

In terms of surprises, it's playing out as we expected. As I said in our opening comments, I will say that while I have a high expectation of our supply chain team, I was pleasantly surprised and happy to see how well we really performed. We talked about it in paint. The same could be said in Plumbing and that had a real impact on our business and how we fared competitively. So, that was well, maybe not a surprise, it certainly was nice to see, and I'm proud of the teams.

[Deepa Raghavan, Wells Fargo Securities]

Great. It was a nice quarter though. Thanks so much.

[Keith Allman, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question will come from the line of Keith Hughes. Please proceed with your question.

[Keith Hughes, Truist Securities, Inc.]

Thank you. Questions in Plumbing I guess looking at the growth both in North America and Europe, can you give us some sort of a feel how much of that growth in units and how much of that growth is price mix?

[John Sznewajs, Vice President and Chief Financial Officer]

Keith as we look at it, we did see good volume growth in Plumbing both domestically and internationally. And don't get acquisitions contributed the growth as well. But if you factor out the acquisitions, I'd say, if you had to weigh the two of volume mix versus price, I'd say in plumbing you much more heavily weighted on volume than you would on price in the quarter.

[Keith Hughes, Truist Securities, Inc.]

Okay. Looking the difference in growth rates, excluding acquisition between North America and international, international to get that higher, was there certain regions internationally that really it out that pushed it higher than the U.S.?

[John Sznewajs, Vice President and Chief Financial Officer]

So internationally, yes, the three that we mentioned that grew double digits were Germany, China, and the UK. And as you might expect Germany and China had a relatively easy comps compared to given the third quarter of last year. China was actually growing nicely in the third quarter of last year and continued to. So that was a bit of a positive surprise for us, just the strength of the Chinese market over there. But other than that, if you factor out those three large markets, but if you look broadly across the 140 markets that Hansgrohe sells into, nearly all experience some form of growth. I mean, there were a couple very small marks that we sell into that didn't grow. But boy, I'd say 135 of the 140 countries we sell into, grew in the third quarter.

[Keith Hughes, Truist Securities, Inc.]

Okay. Thank you.

[Operator]

Your next question will come from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

[Stephen Kim, Evercore ISI]

Yes, thanks a lot guys. Couple of questions on [indiscernible] specifically, paint, Keith I'm reminded about how Behr has this long-standing history of just excellent fulfillment. And it was good to see that, I guess that really was a standout again, this quarter. Into DIY segment of the business if we look at things, kind of in terms of a kind of a two-year stack in your commentary, it kind of suggests that there might have been a modest volume acceleration in 3Q, but I'm assuming that I'm just wondering, was that all just price? Did you actually see any kind of volume acceleration in 3Q?

And then on the PRO side of the business, builders scrambling around sending guys to Home Depot to go get paint, to get homes closed. I'm wondering how much of a benefit do you think that was to the up 45%? And do you think that business can be sticky?

[Keith Allman, President and Chief Executive Officer]

So, couple of parts to your question. Firstly, yes, we did see some in terms of gallonage, when you look at DIY Q3 2021 versus Q3 2019. So, we did see some slight positive gallonage there in terms of overall volume. And obviously with the price, we saw some very nice revenue volume when you do that comparison stack over 2019.

In terms of was our supply chain performance versus competition, a factor in getting a look for some pros? I would say yes. And it's incumbent on us to make that as sticky as we can. And we'll see, I'll tell you I feel good about it. This new Dynasty brand is being applied and installed by some professionals, we're obviously seeing our PRO line of paint that continues to be installed by professionals and it's working well and the brand has pull with consumers. And so, you think about the PRO and the resi repaint, as well as some of the commercial and more multifamily looks that we're getting, I think, we fare well. But it's incumbent on us to start to develop that kind of loyalty in those pros like we have in other pros. So, I think it was certainly a factor and we'll work as hard as we can to make it sticky.

[Stephen Kim, Evercore ISI]

Yes, certainly you have the opportunity, so that's good. If you look at – I just wanted to clarify one thing about your many comments on cost inflation, were there any sub segments worth calling out let's say lighting or hardware or Hansgrohe, whatever, where you actually were price cost neutral already in 3Q or where you expect to be price cost neutral in 4Q? I don't just mean by year end, but I mean actually in 4Q. And could you comment specifically on labor inflation in your outlook?

[Keith Allman, President and Chief Executive Officer]

Yes, well, I'm not going to get into slicing and dicing it by individual commodities, or products, or segments, and that sort of thing as it relates to price cost, but in terms of labor, that continues to be a challenge, as we talked about. And that's one of the things that we're working very hard to do as it relates to programs, whether white collar or blue collar. As it relates to safety in our factories and programs for different work engagements if you will, or different work methodologies as it relates to work from home or hybrid or come into the office, sort of thing to appeal to as much of the labor as we can. And that includes in some cases some wage increases and wage inflation. So, yes, labor is an issue, and I think that's globally across industry. But we're also seeing that.

[Stephen Kim, Evercore ISI]

Okay. Makes sense. Thanks guys.

[Keith Allman, President and Chief Executive Officer]

Thanks, Steve.

[Operator]

Your next will come from the line of David MacGregor from Longbow Research. Please proceed with your question.

[David MacGregor, Longbow Research]

Yes, good morning, everyone. And Keith, congratulations on a great quarter. A lot of great execution. I wanted to just – you talked about trying to achieve price or you will achieve price cost neutrality by the end of the year. And I guess I'm just wondering thinking about the extent to which would that push on pricing here in the second half, how much carryover pricing you would have into 2022? And also, if I could just get some clarification around that price cost comment you noted that you'd be price cost neutral in plumbing, but if you mentioned it for decorative architecture, I may have missed that. Are you expecting with the higher inflation in decorative architecture to be price cost neutral by year end there as well?

[Keith Allman, President and Chief Executive Officer]

Yes, we are across, across Masco.

[David MacGregor, Longbow Research]

Okay. And carry over pricing for 2022, what are your thoughts there?

[John Sznewajs, Vice President and Chief Financial Officer]

Yes, David, there will be some carryover pricing into 2022. We'll get into more color on that on our fourth quarter call in February.

[David MacGregor, Longbow Research]

Okay. All right. I guess second question, just obviously a very strong market share performance in PRO paint, but could you just talk about where else within your product makes you may have gained, share in the quarter?

[John Sznewajs, Vice President and Chief Financial Officer]

Well, we had a very solid performance in plumbing, plumbing trade in particular, e-commerce continues to be – we believe we're a leader in e-commerce and we continue to – we believe gain share. I'll tell you that at it's very difficult to accurately pin down overall market volume in a particular quarter. So that we'll see as we in the year and we go through our models that we use to estimate total market size, but I believe we're gaining share in trade plumbing and e-commerce certainly would think we're gaining share in our spa business, and our wellness business and Watkins that continues to perform quite well.

And when I look at our growth in Europe versus what our competition is doing, I believe we're gaining share at Hansgrohe as well. But again, it's difficult. I like to speak with absolute numbers and run it through our market model. And it's very difficult to see the actual market size quarter-to-quarter, but we're doing well in Watkins, doing well in Europe with Hansgrohe, certainly in plumbing and the propane you talked about.

[David MacGregor, Longbow Research]

Great, thanks very much.

[Operator]

Your next question will come from the line of Ken Zener from Key. Please proceed with your question.

[Ken Zener, Key]

Good morning, everybody

[Keith Allman, President and Chief Executive Officer]

Good morning.

[John Sznewajs, Vice President and Chief Financial Officer]

Hi, Ken.

[Ken Zener, Key]

Paint up 4% headline as noted the volumes were down, which contributed to that operating margin. Could you maybe discriminate if you look at the paint PPI index, it says PPI was up about 10% in the third quarter. Could you maybe give us a sense of that pricing magnitude and then for those three buckets that hit operating margins, the volume commodity costs, marketing expenses, could you maybe give us a sense of magnitude of those buckets? That's it. Thank you.

[John Sznewajs, Vice President and Chief Financial Officer]

Yes, Ken. So, in terms of our paint inflation that we felt in the quarter, we were up mid-teens inflation in paint. So, and that was the inflation that we felt and that obviously had an impact on the margin that we developed. In terms of I'm not familiar with the PPI index, but I think, that addressed as your question.

[Ken Zener, Key]

Right. And then the impact for the volume versus the other the commodity cost for the margin impact.

[John Sznewajs, Vice President and Chief Financial Officer]

So, if you think about – yes, so obviously with volumes being down that had a pretty negative impact on the margins, as well as some of the investment that we put back into the business during the quarter, I think, those are the two probably bigger impacts with pricing being a small offset to those.

[Ken Zener, Key]

Thank you very much.

[Operator]

Your next question will come from the line of Steven Ramsey from Thompson Research Group. Please proceed with your question.

[Steven Ramsey, Thompson Research Group]

Good morning. Some of our recent channel checks point to some companies reducing skews to focus on better margin, better volume products, given the supply chain issues. Are you doing this in any product categories? And if so, would it be on a near-term or long-term basis?

[Keith Allman, President and Chief Executive Officer]

Part of our ability to perform as well as we did with respect to supply chain. And this was in Plumbing was simplifying our assortment for a limited period of time. It was for a couple months, I believe, in that range to allow our suppliers to do less changeovers have longer and ultimately do a better job of supplying our customers. So, there was a little bit of that, but it was short-lived, it helped out as I said, our supply base with longer run. But that was basically simplification and 80-20 thinking as part of the Masco Operating System. And we applied that in this case during this tough issue around supply chain, but that's over for the most part, those skews are back in line and that's, again, part of what gives me confidence that we're starting to get some relief on some of these issues as it relates to supply chain, particularly from our great supplier partners.

[Steven Ramsey, Thompson Research Group]

Great. And then maybe taking that topic and thinking broader the supply chain and labor issues, are they forcing you to make changes to fill demand and support margins in the near term that will have to be kind of reversed or changed in a major way as the supply chain environment normalizes over the next one year plus?

[Keith Allman, President and Chief Executive Officer]

Could restate that question for me? I wasn't tracking with you. I apologize.

[Steven Ramsey, Thompson Research Group]

I guess what I'm getting at is the near-term changes to manage this environment that you are having to make, will those have to be reversed in a major way as the supply chain and labor market normalizes over the next three to six quarters?

[Keith Allman, President and Chief Executive Officer]

No. No reversing of any kind of things. I was just indicating that we did take some of our lower volume complexity offline for a couple months to give our suppliers a breather to lengthen their runs. That's all.

[Steven Ramsey, Thompson Research Group]

Great. Thank you.

[Operator]

We do you have a question in queue from a participant that did not record their name or their firm name, but they are calling from a 216 area code. Caller, please state your name and firm and provide for your question.

[Eric Bosshard, Cleveland Research]

Sounds like me. It's Eric Bosshard, Cleveland Research. Two things. First of all, the incremental pricing, you have to take incremental pricing now, or in 4Q to offset the incremental installation?

[John Sznewajs, Vice President and Chief Financial Officer]

Yes, we will be implementing price in the fourth quarter, Eric, to help offset inflation, yes.

[Eric Bosshard, Cleveland Research]

Is that in both businesses?

[John Sznewajs, Vice President and Chief Financial Officer]

Across the company.

[Eric Bosshard, Cleveland Research]

Okay. And then secondly, in terms of faucets or plumbing, I'm curious if you're seeing within the business any change in mix in terms of what consumers are buying as you've raised price or as you're managing the product offering if you've seen any notable change in behavior from consumers?

[Keith Allman, President and Chief Executive Officer]

Not really, no. The mix change as John talked about was relatively small and more associated with different regions growing that tend to be higher mix like Europe growing quite well. And that tended to be higher mix and our spas, continue to grow, which is a higher price point. But we're not seeing any mix shift as it relates to pricing changes.

[Eric Bosshard, Cleveland Research]

Okay. Thank you.

[Keith Allman, President and Chief Executive Officer]

Thank you.

[Operator]

And we do have time for one final question, which will come from the line of Truman Patterson with Wolfe Research; please proceed with your question.

[Truman Patterson, Wolfe Research]

Hey, good morning everyone just wanted to hop on for a couple items that I don't think have been touched on yet. Clearly very strong growth in the PRO paint business. Just wanted to understand in order to make this stickier have you all started targeting, I don't know, local or regional builders for exclusive contracts or any other kind of sales strategies to make sure that this momentum continues moving forward?

[Keith Allman, President and Chief Executive Officer]

We're not going to get into the competitive nature in terms of our salesforce execution and what we're going after. But fundamentally it's about understanding the value that we bring and then targeting the customers that would appreciate that value the most. So, we're not going after all of our every pro that's out there, we definitely are segmenting. And that's part again, of our 80-20 simplification where we believe we have the best chance that's where we'll put our sales efforts. So, we are targeting our sales and we are looking at different attributes for those specific customers. I won't go and say specific long-term contracts or anything of that sort. I won't get into specifics, but along those lines of targeting our offer to what the customer values the most is exactly what our culture is about.

[Truman Patterson, Wolfe Research]

Okay. And then on the M&A strategy, you're generating strong, free cash flow, $850 million of cash on the balance sheet. Could you just give an update of your overall strategy there, the pipeline of deals and valuations we've been hearing that they are fairly elevated?

[John Sznewajs, Vice President and Chief Financial Officer]

Yes, Truman it's John. I think a good way to think about our M&A strategy is take a look at the four recent acquisitions we've done in the last year. So, we did four, of the four, each of them are very aligned with the strategy of one of our business units. So, in the case of Kraus, Delta is looking to grow their e-commerce strategy and Kraus is a great compliment to Delta's already strong presence in the e-commerce channel. And it's going enhance that.

Similarly, we bought Steamist, one of the leading steam shower businesses. That focuses on Delta's strength with their trade business, with the steam shower businesses is of demand and if it's hand in glove there. Obviously, the applicator business that we bought earlier in the year, compliments Behr’s paint offering, and then the high-style drain business we bought in Europe compliments Hansgrohe's high style showers and process.

And so, as you think about where we're focusing our efforts, it's on these smaller bolt-on, tuck-in type businesses that have an alignment with the strategy of one of our business units. And yes, that's really focusing on both paint and plumbing. So, our team that we've got in place is doing a great job of the cultivation of new, smaller businesses. And I would anticipate there will be future acquisitions obviously we can't foreshadow the timing of those. But the team is working hard.

Part of the reason that we're focusing on these Truman also is to your point the valuations as you move up in terms of the size are quite high and so we see better value in the lower middle market. And so that's where we're focusing our efforts at this time. And then I think we'll continue to focus our efforts in that lower middle market over the coming months and quarters.

[Truman Patterson, Wolfe Research]

All right. Thank you all

[Keith Allman, President and Chief Executive Officer]

Thank you.

[Operator]

I would like to thank everyone for joining us today and for your interest in Masco. That concludes today's call.