28 -Oct -2020 Masco Corp....This is an annual award across all of Home Depot suppli ers and speaks to our commitment to partner with our customers to drive growth through innovation,

Corrected Transcript

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28-Oct-2020

Masco Corp. (MAS)

Q3 2020 Earnings Call

Masco Corp. (MAS) Q3 2020 Earnings Call

Corrected Transcript 28-Oct-2020


2 Copyright © 2001-2020 FactSet CallStreet, LLC

CORPORATE PARTICIPANTS

David A. Chaika Vice President, Treasurer & Investor Relations, Masco Corp.

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp.

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp.

......................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Matthew Bouley Analyst, Barclays Capital, Inc.

John Lovallo Analyst, Bank of America Merrill Lynch

Mike Dahl Analyst, RBC Capital Markets LLC

Adam Baumgarten Analyst, Credit Suisse

Susan Maklari Analyst, Goldman Sachs & Co. LLC

Truman Patterson Analyst, Wells Fargo Securities

Keith Hughes Analyst, Truist Securities, Inc.

Michael Rehaut Analyst, JPMorgan Securities LLC

Stephen Kim Analyst, Evercore ISI

Garik Shmois Analyst, Loop Capital Markets LLC

Timothy Ronald Wojs Analyst, Robert W. Baird & Co., Inc.

Philip Ng Analyst, Jefferies LLC





MANAGEMENT DISCUSSION SECTION

Operator: Good morning, ladies and gentlemen. Welcome to the Masco Third Quarter 2020 Earnings Call. My

name is Maria, 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 A. Chaika Vice President, Treasurer & Investor Relations, Masco Corp.

Thank you, Maria, and good morning. Welcome to Masco Corporation's 2020 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 313-792-5500.

Our statements today will include our views about our future performance, which constitute forward-looking

statements. These statements are subject to risks and uncertainties that could cause our actual results to differ

materially from the forward-looking statements. We describe these risks and uncertainties in our risk factors and

other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange

Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and

earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in

our earnings release and presentation slides, which are available on our website under Investor Relations.

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


Thank you, Dave. Good morning, everyone, and thank you for joining us today. I hope you and your families are

staying healthy and safe in these difficult times. Please turn to slide 4. During the third quarter, demand for our

products was extremely strong as consumers continued to reevaluate how they use their homes in the face of

ever-changing responses to the pandemic. With more time at home and more disposable income due to reduced

discretionary spending on leisure travel, entertainment, and gas for commuting, to name a few, consumers are

investing in their homes.

I'm very proud of our strong execution as we met this increased demand and served our customers, while

maintaining our top priority of employee safety. This resulted in tremendous performance on both our top and

bottom lines. Sales for the quarter increased 15%, excluding the impact of currency. Operating profit increased

$127 million or 43%, and operating margins expanded 400 basis points to 21.4%. We delivered strong

incremental margins of 48% as a result of our ability to profitably leverage the robust volume growth, and to pull

the right cost reduction levers. Earnings per share grew 73% to $1.04 per share.

Turning to our segments, excluding currency, Plumbing sales increased 12%. North American Plumbing sales

grew 14%, led by extremely strong performance at Delta, which drove greater than 20% growth across each of its





retail, e-commerce and trade channels. Trade sales in North America were particularly strong in the second half

of the quarter, with Delta achieving record trade sales in both August and September. Delta was recently

recognized as The Home Depot Marketing Partner of the Year. This is an annual award across all of Home Depot

suppliers and speaks to our commitment to partner with our customers to drive growth through innovation,

omnichannel expertise and strategic thought partnership.

Our spa business also rebounded nicely in the third quarter and achieved growth, despite still dealing with

government limitations on the number of employees in its factories. Record levels of demand and backlog for our

spas continued, as consumers look for ways to enhance their at-home living and backyard experience. Our

international Plumbing business also posted strong growth of 9%, excluding currency, led by growth in Germany

and China. While Europe as a whole rebounded in the third quarter, certain markets remain challenged, such as

the UK and Spain.

In our Decorative Architectural segment, sales grew an exceptional 19% as we drove growth in all product

categories, including paint, bath and cabinet hardware, and lighting. Our DIY paint sales remained very strong in

the quarter with growth in the upper 20% range. PRO paint declined mid-single digits, a significant improvement

from last quarter. Paint demand has remained robust as it is a simple, economical project that homeowners can

do themselves to improve the appearance of their home.

Across all of our business units, it was an exceptional quarter. I would like to again thank all of our employees for

their tremendous efforts in serving our customers and keeping each other safe.

Now, moving into our fourth quarter outlook. We anticipate demand to remain strong and expect fourth quarter

sales growth, excluding currency, to be approximately 8% to 10% in both segments. Additionally, we expect fourth

quarter operating margins for our Plumbing segment to be approximately 19% and operating margins for our

Decorative segment to be approximately 17%. Together, this would put Masco's operating margin at over 17% for

the quarter, a year-over-year expansion of approximately 150 basis points.

As it relates to SG&A as a percent of sales, we anticipate further investment in our brands, innovation, and

service to ensure we continue to deliver long-term sustainable value creation. This outlook assumes no further

shutdowns in facilities or points of distribution, which is obviously a concern as COVID cases spike in many parts

of the United States and the world.

Lastly, I'd like to update you on our capital allocation. While there remains uncertainty in the current environment,

based on our strong balance sheet and liquidity, we do plan on resuming our share repurchase program in the

fourth quarter. While the amount of repurchases will be subject to many variables, our initial plan is to deploy

approximately $100 million towards repurchases in the quarter.

And finally, there is no change to our thoughts on M&A. We remain active in the M&A market and have the

balance sheet and liquidity to execute transactions with the right strategic fit and return during these uncertain

times.

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

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp.

Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted

performance, excluding the impact of rationalization and other one-time items.





Turning to slide 6, we had an outstanding quarter, as sales increased a robust 15%, excluding currency. Foreign

currency translation favorably impacted our third quarter revenue by approximately $13 million. In local currency,

North American sales in the third quarter increased 16%. This exceptional performance was mainly driven by

strong volume growth in our DIY paint and North American Plumbing businesses. In local currency, international

sales rebounded nicely from last quarter and increased 9% over prior year, driven by increased volume.

Gross margin was 38% in the quarter, up 210 basis points, driven by increased volume and cost leverage. Our

SG&A as a percent of sales decreased 200 basis points to 16.5% as a result of fixed cost leverage and our

continued focus on cost containment. Operating income was $425 million, up $127 million or 43% from last year,

with operating margins expanding 400 basis points to 21.4%. Our EPS was $1.04, an increase of 73% compared

to the third quarter of 2019. Company-wide incremental margins for the quarter were a strong 48% due to

operating leverage on the exceptional volume, our continued focus on cost control and a relatively benign

commodity environment.

While this tremendous performance is a testament to Masco's operating leverage and commitment to cost control,

we also recognize the need to invest in our brands, service and innovation to fuel our growth and plan to fund

such investments in future quarters. While uncertainty remains and precise forecasting is a challenge, we do

anticipate continued solid consumer demand in the fourth quarter. We expect sales growth, excluding currency, of

8% to 10%, with approximately 150 basis points of margin expansion from Q4 of 2019. Uncertainties such as the

effect of government stimulus programs and the impact of the virus on the overall health of the economy and

consumer could impact demand in the market and our expected results. Additionally, it is important to note that

our Q4 expectations assume no further closures of our manufacturing plants or points of distribution related to

COVID-19.

Turning to slide 7, Plumbing grew 12% excluding the impact of currency. Foreign currency translation favorably

impacted this segment's sales by approximately $13 million in the quarter. North American sales increased 14%

in local currency, led by Delta. The strong growth we experienced at the end of the second quarter in our trade,

retail and e-commerce channels, continued in the third quarter, driven by robust consumer demand and some

inventory restocking. While manufacturing in our spa business improved compared to the second quarter,

Watkins continues to operate at less than 100% capacity due to ongoing government-mandated employee

limitations in our Mexican facilities. Despite these challenges, Watkins grew in the third quarter, and they

continued to experience very strong demand for their products, resulting in a record backlog.

International Plumbing sales increased 9% in local currency. Hansgrohe drove low double-digit growth in both

Germany and China, with lower growth in other European countries. This growth was partially offset by continued

declines in other countries, including the UK and Spain, where the economies have been slower to recover.

Operating profit was $271 million, up $83 million or 44% from prior year, with margins expanding 510 basis points

to 23.8%. The strong incremental margin of 61% was driven by higher volume, cost productivity initiatives and a

favorable price cost relationship. Turning to the fourth quarter, we anticipate sales, excluding currency, to be up

8% to 10%, with margins of approximately 19%, up 150 basis points from prior year.

Turning to slide 8, Decorative Architectural grew 19% for the third quarter. This outstanding performance was

driven by high-teens growth in our paint business with strong high 20% growth in our DIY paint, partially offset by

a mid-single digit decline in PRO paint. The continued resurgence in DIY paint and some inventory restocking

drove this performance. We remain well positioned with Behr's compelling quality and value proposition to

capitalize on this shift in consumer behavior. While PRO paint demand declined in the third quarter, we saw a

nice improvement from Q2 and sequential improvement through the quarter.





Our builders' hardware business also contributed to the segment's results as they delivered exceptional growth

across product categories and benefited from strong consumer demand and new program wins. Additionally, our

lighting business continued to improve, achieving growth over prior year. Operating profit increased in the quarter

by 34%, driven by incremental volume and continued cost control, partially offset by an unfavorable price cost

relationship. Turning to the fourth quarter, we expect the strong demand for paint to continue and anticipate

segment sales growth of 8% to 10%, with operating margins of approximately 17%, up approximately 70 basis

points from prior year. At the same time, we anticipate a price cost headwind and a more normalized level of

investment in the fourth quarter.

And turning to slide 9, we continued to strengthen our balance sheet with net debt-to-EBITDA at 1.1 times as we

ended the quarter, with approximately $2.3 billion of balance sheet liquidity which includes full availability of our

$1 billion revolver. Working capital as a percent of sales improved 70 basis points versus prior year to 16.4% due

to lower inventory levels and an improvement in accounts payable, largely resulting from working capital

improvements at Kichler.

It is important to note that our GAAP reported net cash from operations of $573 million for the nine months ended

September 30th reflects the cash taxes paid on the sale of our Cabinetry business. Excluding the impact of

approximately $192 million of cash taxes paid on the gain on the sale of our Cabinetry business, our year-to-date

adjusted net cash from operations is approximately $765 million, with free cash flow of approximately $690

million. This is consistent with our expectation of 100% free cash flow conversion this year. A reconciliation can

be found in the appendix of this deck.

During the third quarter, we also successfully refinanced our 2021 debt maturity at historically low rates, which will

result in approximately $4 million of annualized interest expense savings. Lastly, as Keith mentioned, we plan to

reinstate our share buyback activity in the fourth quarter. We currently intend to deploy approximately $100 million

to share repurchases in the fourth quarter, subject to market conditions.

And with that, I'll now turn the call back over to Keith. ......................................................................................................................................................................................................................................................


Thank you, John. The COVID-19 pandemic continues to impact our business as consumers reevaluate their living

environments. The house is no longer just a place for shelter. It has become the office, the restaurant, the

classroom, the gym and the entertainment center. And we are capitalizing on these changing needs with our

leading products by providing an affordable way for homeowners to discover better living possibilities and to

enhance how they interact with their homes.

At our Investor Day, a little more than a year ago, we committed to between $2.80 and $3 earnings per share in

2021. I'm very proud of the entire Masco team. I'm pleased to say that we will achieve and likely exceed this

range a full year earlier than planned. And while it is a bit early to provide a definitive outlook for 2021, we believe

that the strong consumer trend of increased investment in their homes will continue in 2021 and support growth

for our products. The changes we have made to Masco over the past few years, our culture of execution and our

commitment to continue to invest in brand, innovation and service to support our customers positions us well to

drive long-term growth and value creation in this ever changing market.

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





QUESTION AND ANSWER SECTION

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Matthew Bouley of

Barclays. ......................................................................................................................................................................................................................................................

Matthew Bouley Analyst, Barclays Capital, Inc. Q Good morning. Congrats on the results and thank you for taking the questions. I wanted to start out with a

question around the, I guess, longer-term margin. Keith, you just mentioned the Investor Day and thinking about

how to guide this year is kind of setting up. On the margin side, to come in above the ranges you had given in

both segments, and I also hear you around some intentions around investing for growth, so as we think about

2021, is the idea that you're going to sort of intentionally bring those margins back into the long-term range, or is

there a potential that you can kind of remain above those long-term ranges for an extended period here? Thank

you. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Matthew, when you think about our margin targets for 2021 that we setup at the Investor Day, we need to

remember that, that was based on a significantly lower volume expectations for 2021. I think we had Plumbing, in

that 18% to 18.5% range, Deco was 17.5% to 18% and overall Masco, just shy of 17%. And as I said, this

guidance was based on a low volume outlook. And as we've talked along in this call and in other calls, we

leverage volume very nicely. So, there's lots of variables. And we'll continue to invest in our brands, innovation

and service, like we talked about. And that will certainly be somewhat of a headwind, if you would, to margin

expansion. But with strong R&R fundamentals and increased volume, I would think that we would be able to

exceed those targets and margins that we talk about, at our Investor Day in 2021. ......................................................................................................................................................................................................................................................

Matthew Bouley Analyst, Barclays Capital, Inc. Q Okay, understood. Secondly, maybe zeroing in on the 4Q margin guide in Plumbing, just given where you kind of

ended Q3, implying a bit of a step down sequentially that's larger than typical for Q4. So, is there anything in that

Q3 Plumbing margin that is, I don't know, I guess, unsustainable or one-time in nature that might drive that type of

step down? Thank you. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A There's a couple of things that are interacting, as we think about Plumbing in the fourth quarter. Recall that, once

the pandemic hit, we very swiftly enacted significant cost-cutting measures, as we were in the throes of assessing

what exactly the impact was going to be on liquidity, on cash flow, et cetera, and on demand. And we

demonstrated, I believe, with our third quarter results, that our demand has remained robust. So, now as we move

into the fourth quarter, we do expect to see some increased production costs.

Certainly, over time, higher bonuses, higher volume rebates, probably, we'll have some additional – a little bit of

additional air freight, as we continue to balance out inventories in our supply chain. And keep up with strong

demand. Commodities will be a little bit less favorable, as we look forward. And we do anticipate, as I talked

about, bringing back some additional investment spend, to make sure that we are going to win in the recovery.





We talked about investment in brands, in advertising and marketing, continued and increased investment in

innovation. So, that's the dynamic that we're looking at as we think about margins, Q4, really pretty similar for the

other segment as well, but definitely for Plumbing. ......................................................................................................................................................................................................................................................

Matthew Bouley Analyst, Barclays Capital, Inc. Q Okay. Thanks, Keith. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of John Lovallo of Bank of America. ......................................................................................................................................................................................................................................................

John Lovallo Analyst, Bank of America Merrill Lynch Q Hey, guys. Thank you for taking my questions as well. Maybe starting off, just with Kichler, just wondering if you

can give us an update on how the performance was in the quarter [indiscernible] (22:45) very strong segment

performance. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A They did a great job, really impressed with the team down there. Continue to execute, I would say, better than

plan – at or better than plan. So, we achieved growth. That was very solid. And the team is doing a good job;

we're on plan. ......................................................................................................................................................................................................................................................

John Lovallo Analyst, Bank of America Merrill Lynch Q Okay. And then, maybe just going back to the Plumbing margins, the 23.8% in the quarter, it sounds like there's

going to be some increased investment coming forward, which makes a lot of sense. But how much of that was

constrained investment in the quarter? Was that a factor, or was it just the other factors that you talked about? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A When you say constrained investments, John, how much did we have a reduction of the divestment in Q2? Is that

what you're asking? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Yeah, John, maybe I'll take this one. In terms of – yeah, I mean, if you think about our performance in the third

quarter in Plumbing, yeah, as we exited Q2, one of the things, as Keith mentioned, we really clamped down on

expenses at the start of the pandemic and we kept them constrained going into the third quarter. And so, as you

think about typical expenses that we might be running, particularly in the SG&A area, like a lot less travel and

entertainment, right, because virtually, we're not having our teams travel very much, things like promotional

expense were down significantly in the quarter. Things like trade shows that we would typically attend were all

down in the quarter.

And so, that led probably to a little bit better margin expansion on top of the benefits we enjoyed with the

operating leverage in Q3. And so, as Keith mentioned, as we roll from Q3 into Q4, we're trying to contain our





expenses as best we can, but we have to appropriately reinvest to grow the business. And so, we are viewing the

fact that we may need to layer some of those costs back in as we go into Q4. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Mike Dahl of RBC Capital Markets. ......................................................................................................................................................................................................................................................

Mike Dahl Analyst, RBC Capital Markets LLC Q Hi. Thanks for taking my questions. Nice results. Keith, John, you mentioned in remarks and in response to one of

the questions, some of the input costs potentially creeping up and, also, freight. I think, as we think about global

recovery and also potential vaccine distribution next year, there's certainly some thought that we could see further

acceleration in some of the freight pressures and also some reacceleration in inputs. I guess, can you give us any

more color, when you're thinking about that 4Q margin, how much of an impact are you already seeing and what

are your thoughts as we head into 2021 around inputs and freight? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Yeah, sure, Mike. It's John. In terms of commodity costs, yeah – and certainly, in Q3, we did have some benefit.

Of the drivers of our margin expansion in Q3, I'd say volume and cost productivity were much bigger drivers of our

Q3 performance than, obviously, commodity inputs.

Looking forward, as you think our Plumbing and you think about the base metals, copper and zinc, they did help

us and provided us a little bit of tailwind in the third quarter. But recall that we've seen copper and zinc start to

increase, particularly in the second quarter. And as I think – as we've said before on other calls, it takes about two

quarters for raw material inflation to flow through, particularly in the base – the copper and zinc before it hits our

P&L. And so, that will be a little bit less of a tailwind, a little bit more of a headwind as we go into Q4.

As it relates to the input costs for paint, our price commodity relationship was a bit of a headwind in the quarter

and we expect that to increase a little bit as we go into the fourth quarter. Resin prices have started to rise up a

little bit because oil has risen over the course of the year. So, that's where we're looking. TiO2, I would say, has

remained relatively stable, not a lot of up or down movements there. So, as we go into the fourth quarter, we

expect that to continue to be stable.

As part of your question, I think, Mike, you also mentioned freight. We haven't seen a lot of freight cost pressure,

yet. And I would remind everyone that distribution and logistics costs as a percent of sales for us is relatively low.

So, even though if we saw significant spikes in distribution logistics, that wouldn't be much of an impact. Though,

what we are seeing a little bit of tightness is on just supply of freight in trucks. And so, that's something we're

keeping an eye on.

That said, I think we and our teams have always done a great job of handling inflation, whether it's our general

inflation that we experience or commodity-based inflation. And so, we'll handle those accordingly. We'll do it like

we've always done. We'll continue to drive our cost productivity initiatives. We'll continue to work with our

suppliers to push back on them, and we'll also enact pricing, if that's required. ......................................................................................................................................................................................................................................................

Mike Dahl Analyst, RBC Capital Markets LLC Q Great. Thanks for that. That's really helpful. My second question is – clearly, a great recovery in Plumbing, both in

North America and in international. Just wondering, I think with Europe, some of the rising cases have probably





been at least a few weeks ahead of what we've seen in the US, and there have been some local restrictions that

have probably gotten a little bit tighter there. Can you talk about just whether you're seeing any of those impact

your European Plumbing business at this point in the fourth quarter relative to the recovery in the third quarter? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Well, I'll take this one, Mike. Germany, which as you know, is Hansgrohe's largest market, and China, which is

also a very large market for us, each drove low double-digit growth in third quarter. So, we did see good growth.

We also saw growth, but to a lesser extent, in other European countries, Italy, the Netherlands, for example. But

as I said in my remarks, there were also other countries, such as the UK and Spain, that have been slower to

recover. So, when we think about Europe in the third quarter, it was good. It was robust for us.

As it relates to the fourth quarter, we're watching very closely what happens. And yes, you're right, there has been

some tightening, and they're doing it in a little bit different way than we are here. They tend to be more

metropolitan area focused, meaning they're being more pinpointed in the types of restrictions that they're

employing, whether it's cutting the time in certain cities that restaurants can be open or closing certain types of

venues like cinemas, movie theaters, et cetera, on a city-by-city basis. So they're being more surgical. And I think,

just like around the world, there's more experience on how to work through this. So it remains to be seen what the

ultimate impact will be. But I think what we've demonstrated is that we have the ability to be agile, if you will, and

to very closely monitor the situations and pull the cost levers appropriately if needed. So right now, we're really

watching, particularly over in Europe. ......................................................................................................................................................................................................................................................

Mike Dahl Analyst, RBC Capital Markets LLC Q Thanks, Keith. Good luck in the quarter. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Thank you. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Adam Baumgarten of Credit Suisse. ......................................................................................................................................................................................................................................................

Adam Baumgarten Analyst, Credit Suisse Q Hey, guys. Good morning. Thanks for taking my questions. Can you give us a sense for how much customer

restocking added to growth across both businesses? You did mention that in both segments. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Yes, Adam, as you might expect, as we exited this second quarter because of the strong demand that we were

experiencing at the end of Q2, inventories were relatively low in the channels. And as you think about the growth

drivers for the third quarter being volume and inventory restocking, I would tell you that volume was, by far, the

much more significant driver of growth. Inventory restocking was a relatively light impact in the quarter. ......................................................................................................................................................................................................................................................

Adam Baumgarten Analyst, Credit Suisse Q





Okay. Got it. Thanks. And then, just looking to 4Q paint or Decorative guidance, what are you assuming for DIY

and PRO growth in that guidance? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A We think demand for paint will continue to be strong as we go into the fourth quarter. We indicated we're

forecasting 8% to 10% sales growth in Q4. And again, I think we are going to see continued strong demand on

the DIY side, and muted but more an improving demand on the PRO side of our business.

So I would remind everyone, though, we've got a bit of a tough comp in paint as we go into the fourth quarter. As

you may recall, in our fourth quarter last year, we experienced about $20 million of sales pulled forward in the

fourth quarter of last year. And so that will be a bit of a comp headwind for us as we go into Q4. ......................................................................................................................................................................................................................................................

Adam Baumgarten Analyst, Credit Suisse Q Great. Thanks, guys. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Susan Maklari of Goldman Sachs. ......................................................................................................................................................................................................................................................

David A. Chaika Vice President, Treasurer & Investor Relations, Masco Corp. A Susan, you may be on mute. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Susan, are you there? Operator we'll – there you go. Hi, Susan. ......................................................................................................................................................................................................................................................

Susan Maklari Analyst, Goldman Sachs & Co. LLC Q Yeah. I'm sorry about that. That was my fault, sorry. My first question is just talking about – you obviously

mentioned you're restarting the share repurchase program, which I think is a good sign of your confidence in the

outlook and what you're seeing. Can you talk a little bit about maybe any potential to exceed that $100 million? Or

how we should think about this starting to kind of layer back in and you getting back to the levels that you've seen

in the past couple of years? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Sure, Susan. As we indicated, both Keith and I indicated in our prepared remarks, we're right now targeting

around $100 million for share repurchases in the quarter. And I think as we both indicated, there's a lot of

variables that go into the decision to what drives our share repurchase activity. It's going to be subject to market

conditions to the extent that we see pullback in the shares.

We'll be probably a little bit more opportunistic like we were earlier this year, when we repurchased $600 million

worth of our shares for less than $40 per share. So to the extent we see greater share pullback, we'll probably be

a little bit more aggressive to the extent we see the share price run high. We'll probably continue to devote that





$100 million, but probably not much more than that. Again, it's going to be a bit of a judgment call as we work our

way through the quarter. ......................................................................................................................................................................................................................................................

Susan Maklari Analyst, Goldman Sachs & Co. LLC Q Okay. All right. That sounds good. And then, just following up there, can you give us a little color on Kichler and

perhaps some of the trends that you're seeing there? And especially given some of those cost cutting efforts, how

we should expect that to start to come through as we look to 2021? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Lighting is a relatively less expensive purchase that you can create some pop and a new look in your house. So

much like many of our products, which are in that sweet spot of the price point and bang for the buck, if you will,

we also saw that in lighting. So we saw good growth across our channels, and Kichler participated in that growth.

As we said, Kichler grew. And as I mentioned before to an earlier question, we're on plan, maybe even a little bit

ahead of plan, and I'm pleased with how the team is performing. And our objective was to position Kichler for

growth next year, and we had growth this past quarter. So, I like what I'm seeing. ......................................................................................................................................................................................................................................................

Susan Maklari Analyst, Goldman Sachs & Co. LLC Q Okay, great. Thank you, both. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Truman Patterson of Wells Fargo. ......................................................................................................................................................................................................................................................

Truman Patterson Analyst, Wells Fargo Securities Q Hi. Good morning, everyone, and thanks for taking my question. First, among the two segments. Could you just

go through how demand trended throughout the quarter? And how it either ended in September or October or

even in – just for clarity, the exit rate? It seems like all of your businesses were positive on a year-over-year basis

in 3Q, but are they still trending that way? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A As we spoke a little bit, Truman, in the prepared remarks, Delta had a record last couple months in the quarter.

So nice acceleration through the quarter, and that's fairly consistent with the Plumbing segment, in general, had

good solid, somewhat consistent growth over in Europe, and Plumbing in the DIY space in – excuse me, in paint

and then Decorative, in general, pretty consistent. It was strong going in and remained strong going through. So

that gives you a little bit of color on the in-quarter kind of dynamics. ......................................................................................................................................................................................................................................................

Truman Patterson Analyst, Wells Fargo Securities Q Okay. Thank you for that. And then, not necessarily in paint or faucets, but in other building product categories,

we've heard of some supply chain issues or capacity issues in filling the robust demand. Are you all seeing that in

paint and faucets specifically? Or you have any capacity issues?





And then on the flip side, it seems like there's a little bit of inventory build in your channels. Do you think that

there's more to come that your retailers especially need to build additional inventory? And how are you thinking

about your own inventory levels over the winter? Are you looking to build up a little bit more than you normally do? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Right now, Truman, we're managing through with our current capacity. Typically, we would use the slower months

in the beginning of the year and early Q2 to build inventory. We didn't have that luxury due to restrictions and

uncertainty and everything that was going on at that point.

Now we do have plans to selectively add some capacity where we need it. We talked a little bit about the

resurgence and the increase in demand of one gallon filling – one gallon paint due to the tremendous shift over to

DIY, where the DIYers tend to buy more 1s than 5s. So we had to buy and purchase some additional capacity of

one gallon filling lines, that sort of thing. So there's some spot capacity in certain types of machinery where we've

had to add. But really, there's isn't been no significant capacity issues. At some point, we're likely going to

increase capacity in certain areas, but not in the immediate horizon.

In terms of the inventory position in the channels, I would say that inventory is probably a little bit light for where

we would like to see it and where our channel partners would like to see it. So we may see a little bit of inventory

fill as we move through the year. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Yeah. Truman, one thing I'd add to Keith's comments is that, I always like to take this time to acknowledge our

supply chain teams. They have done just a fantastic job of reacting to the increased robust demand that we've

been experiencing in the third quarter. And whether it's our supply chain teams internally, our folks and our plans

across the portfolio or whether it's our suppliers, everyone has acted in a coordinated fashion to really drive this

growth. And so we're really pleased with how the team has responded this quarter. ......................................................................................................................................................................................................................................................

Truman Patterson Analyst, Wells Fargo Securities Q Thank you all and good luck on the upcoming quarter. ......................................................................................................................................................................................................................................................


Operator: Our next question comes from the line of Keith Hughes of Truist. ......................................................................................................................................................................................................................................................

Keith Hughes Analyst, Truist Securities, Inc. Q Thank you. A question on Watkins, it sounds like you're still having some production issues. Do you have any sort

of feel for when that will get back to full production and alleviate some of the backlog you discussed earlier? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A





Keith, again, Watkins team is working day and night to deliver and fulfill on demand. When the Mexican

government releases the restrictions, is tough to tell. I mean, we don't have any good insight as to when that's

going to take place. But the Watkins team is running hard and fulfilling as best they can. And like I said in my

prepared remarks, they drove growth in the quarter despite some of these restrictions. And so we're really

pleased with how the Watkins team is delivering here in Q3 and Q4. ......................................................................................................................................................................................................................................................

Keith Hughes Analyst, Truist Securities, Inc. Q And second question on PRO paint. You talked about – it sounds like in the fourth quarter, you expected to be a

little bit better than what we saw in the third. Why is that? Is that something to do with your retail partner or is that

something more in the market? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A I think, Keith, it's just continued progress on the trends that we've been seeing. As you might expect, in Q2, we

saw a lot of pullback on consumers allowing paint contractors to come in in their homes, and we've seen a steady

improvement since Q2, and actually through Q3, we saw sequential improvement each month through the quarter

in our PRO paint sales. And so, based on what we're experiencing, we think that, that trend could continue here

as we go into Q4. ......................................................................................................................................................................................................................................................

Keith Hughes Analyst, Truist Securities, Inc. Q Okay. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A A lot of variability is there, Keith. What happens to the virus and what happens to the consumer psyche as it

relates to pros being allowed in your home, the fact that in the late year, it moves more towards interior. So,

there's a lot of variables that we have to think about. ......................................................................................................................................................................................................................................................

Keith Hughes Analyst, Truist Securities, Inc. Q Okay. Thank you. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Michael Rehaut of JPMorgan. ......................................................................................................................................................................................................................................................

Michael Rehaut Analyst, JPMorgan Securities LLC Q Thanks. Good morning, everyone, and congrats on the results. ......................................................................................................................................................................................................................................................






Michael Rehaut Analyst, JPMorgan Securities LLC Q First question, I just wanted to circle back a little bit to understanding some of the sequential trends that you're

expecting in the businesses on the top line, on the sales side in Plumbing and Decorative. And when you think

about the expected, still very strong growth rates, but a little bit of a decel in Plumbing from roughly 13% to 8% to

9%. Just trying to get a sense of what's driving that if all of that is perhaps the absence of the inventory restocking

that you referred to earlier or if there's other things at hand?

And similarly, in Decorative, I believe you had said earlier that you observed relatively consistent trends during

3Q. So again, just trying to understand the decel into 4Q. And I know, John, you had referred to somewhat of a

tougher comp, but I'm also looking at 3Q 2019 growing at 5%, 6% and 4Q 2019 down 3%. So just wanted to try

and better understand what's driving that as well. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Yeah, Mike, as you think about the transition of the growth from Q3 to Q4, that sequential, first of all, we had

extremely strong demand in Q3, which drove really good results. And as you said, we expect demand to continue

to be good as we go into Q4. But as you know, forecasting in this current environment is a little bit of a challenge.

And it's hard to say what impact the virus might have on our Q4 results. And there may be a little bit of a dose of

conservatism in that guide as well, as we're trying to dial things into the third quarter – or the fourth quarter, I

should say.

So from our perspective, we had 12% growth in Plumbing in the third quarter. We're looking at 8% to 10% growth.

I don't view that as significant deceleration as we go into the fourth quarter. That said, third quarter did have some

inventory restocking in it. And so, we're probably thinking that there's probably a little less inventory restocking as

we go into Q4. We'll see how that plays out.

On the Decorative Architectural side, to the point you made in your question, the pull forward definitely has an

impact, we think, on our Q4 revenue growth rates because we're currently not expecting that type of activity to

recur here in the fourth quarter of 2020.

I'd also say that Liberty Hardware, which is a smaller – one of the smaller businesses in the segment, had a

terrific quarter, full stop. I mean, they had a really, really strong quarter. And as we go – and they also had a load-

in here in the third quarter due to a program win they had at one of their retail customers, and so we don't expect

that activity to recur.

And similarly to the Plumbing segment, Mike, we talked about a little bit of inventory restocking in Q3. We don't

expect that same level of inventory restocking to take place in Q4.

So as we pull it all together, yeah, the transition or the growth rates from Q3 to Q4 are a little bit more muted in

Q4. That said, we think 8% to 10% growth in this environment is still quite strong. And quite honestly, with 150

basis points of margin expansion that, we think, represents a very good quarter. ......................................................................................................................................................................................................................................................

Michael Rehaut Analyst, JPMorgan Securities LLC Q Absolutely, and appreciate that. Thank you. I guess, secondly, on the margin side, obviously, it's great to see the

reinvestment in the business. And when you're talking about the margins that you're generating, that strategy





makes perfect sense in terms of trying to maintain those high margins and reinvest for the top-line. Obviously,

that's baked into your 4Q guidance. How should we think about 2021 in this regard?

And when, Keith, you had talked about before, perhaps, being able to maintain a margin above your long-term

targets, is that with reinvestment spend kind of kicking up? Or how do you see that factor impacting profitability?

Is that something where it could be a 50 bp or 100 bp type of investment or the levels could still stay above those

long-term targets with a higher reinvestment rate? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A My comment – again, it's too early to call 2021, and we'll talk more about that next quarter. We do expect growth

in 2021. We think that the fundamentals of the consumer, when you look at what really drives our business, that is

as it's configured now, it significantly swings on home price appreciation, housing turnover.

And you look at those numbers, we're looking at, let's call it, 5% home price appreciation and 6.5 million of

existing home sales. So those are big numbers. Now, those aren't sustainable numbers, but that certainly gives

us a lot of confidence going into 2021.

So my comments about continuing to grow and driving margin expansion, that's how we think here. We always

want to grow above market and we want to continue to expand margins. So, our increased investments were

factored into my thinking and my comments that I made there.

Now, I will say that when you think about the optimum spend for value creation, I'm not going to sit here and say

that 16.5% SG&A is the optimum. It's more than that. And we're going to continue to drive long-term – mid and

long-term value creation. So there will be an increase in SG&A. It's not sustainable at 16.5%, because that's not

the right thing to do to drive value creation.

So, we're going to increase those investments, but we also are very carefully watching these cost reduction levers

we have and how much we increase, because we don't know, no one knows, where this virus is going to go over

the coming months. But as we learn more, we're going to maintain our commitment to the future. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Stephen Kim of Evercore ISI. ......................................................................................................................................................................................................................................................

Stephen Kim Analyst, Evercore ISI Q Thanks very much, guys. Yeah, I had two questions for you, both kind of related to the virus, because you've

given a lot of good information in other areas.

And obviously, I'm not asking you to predict the future, but if we take it from the negative perspective, I'm curious

as to what you think – what you're anticipating the effects might be on your business if we were to go through

another wave of shutdowns, kind of like what we did earlier on. I would imagine it's going to be a little bit different

this time.

And you talked about some differences between the US and Europe, in the terms of the way that we handled it

the first time. What do you imagine – how do you imagine the effects may be a little different, in particular, as it

relates to your business? I'm thinking, do you think inventories would hold more stable through a shutdown wave,





for instance? And are there other impacts that are important for us to consider for your business, if we were to

tighten up again? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A That's a crystal ball kind of question, and I wish I had one. The way we think about what could happen, either

positive or negative, kind of turns on a couple things; one is the discretionary spend.

So is the discretionary spend of the consumer going to continue to be at a rather high level now, as it relates to

reduction in spend in other areas, like entertainment and going out, et cetera. And what could potentially happen,

if there was a reduction or no stimulus if the virus got worse, those sorts of more downside scenarios.

So where does the discretionary spend go? Is there more or less discretionary spend? Then the second

component is what share of wallet of the consumer is going to be spent on the home? Obviously, we've seen a

significant spike in that share of wallet, being spent on the home. And will that continue?

I don't think it's probably prudent to think that, this is going to stay, at these elevated levels in perpetuity. Probably

would revert back to the mean. But at the same time, we do believe that there has been some structural changes

to the DIY market. And we talked about last quarter some of our own research, and I've certainly talked to other

people in the industry and our channel partners in terms of some of their research, and you simply can't deny that

the Millennials have entered in and entered in big into DIY.

And that is earlier than we expected. We expected it, but it's earlier. So that could represent a structural

expanding of the DIY pie, if you will. So don't have a crystal ball answer for you, but those are three things that

we're thinking about as we evaluate positive and potentially negative scenarios. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A And Stephen, I guess, maybe to add my own color on that. I mean, I think, like Keith said, I think consumer

demand will be there. I mean, as we saw what happened in the spring as we worked through the pandemic, the

consumer was there and they were spending and they were investing in their home.

And like Keith said, given the trends that we're seeing, and given the research that we've seen, we think

consumer demand will be there. The thing that we've got to keep our eye on, like because we're still contending

with our Watkins operation is what happens to production, and if the shut down affects any of our facilities. And so

that's the one thing we've got to keep in the back of our mind as well. ......................................................................................................................................................................................................................................................

Stephen Kim Analyst, Evercore ISI Q Yeah. Thanks. Fair point. Next question relates – actually, it's kind of a flip scenario. Let's say, sometime in the

next foreseeable future, we actually get a vaccine and we get a more rapid reopening or reopening that's more –

on the more rapid side, let's say, a more positive like bullish outcome. One of the foreseeable things that a lot of

folks are talking about now for your business, and of course, you've addressed it before, is that you might see a

slowdown in DIY paint, because you had a little bit of pull forward, maybe.

And so in particular, I suppose, with Dec Arc, I'm curious if you could address what areas you think you might –

are there areas where you're doing some contingency planning today ahead of a potential slowdown in the event





of a vaccine? And what are the operational challenges that you could reasonably foresee? And what would your

action plan look like? I'm not asking for a lot of specifics here, but just generally, what are the areas of your

business that you're anticipating you may need to pull a lever for? If you could give us some insight into how

you're thinking about that. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A I think it would probably be mainly on discretionary spending. I really wouldn't see significant structural cost

reductions. When you think about where our brick-and-mortar capacity is and how it's lined up, we're in pretty

good shape there. We had good utilization going into the pandemic, and we have outstanding utilization now.

So I think on the upside scenario, we could see a potential investment and some capacity down the road. We

obviously work very hard to get more out of the assets that we have, do better with what we have sort of thing in

terms of efficiency and how we use our assets. And then the downside, we would flex down on the discretionary.

It's kind of how I would see it. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Yeah, Stephen, maybe the way I would approach it is, we've got a great investment in our PRO franchise. And if a

vaccine to your little description were to come true or come through faster, I think we could double down on our

PRO investment and grow that business faster than we've been growing it in the last several years. I mean we've

experienced double-digit growth in our PRO paint business historically. And if the consumer decides not to paint

their homes anymore and they want PROs to do it, we'll be right there with our channel partner to meet that

demand. So I think that's the way I would position the business going forward, if your scenario were to emerge. ......................................................................................................................................................................................................................................................

Stephen Kim Analyst, Evercore ISI Q Great. Thanks a lot, guys. Appreciate it. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Garik Shmois of Loop Capital. ......................................................................................................................................................................................................................................................

Garik Shmois Analyst, Loop Capital Markets LLC Q Hi, thanks. I just wanted to follow-up on the comment you just made just around capacity. Just with the step-up in

demand, it sounds like there's a pretty solid outlook into 2021. I mean how far away are you from having to

perhaps add some capacity, whether it's in Plumbing or paint? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A We've been – I'll talk first, maybe Keith can add some color afterwards. So I mean our teams have done a great

job of driving efficiency within our facilities such that, Garik, we don't need to add any brick-and-mortar capacity in

the near term. We are – as Keith mentioned earlier, we are investing a little bit in our 1 gallon capacity in the paint

side because that's where the demand has been the strongest over the course in the last couple of quarters. That

said, if demand continues to go at the current pace that it is, I would estimate that we might need to expand some

of our facilities probably in the 2022 or 2023 timeframe. It's not going to definitely be a 2021 investment. But that





might be the soonest that we have to do it. We'll have to see how the demand plays out over the course of the

next couple of quarters. ......................................................................................................................................................................................................................................................

Garik Shmois Analyst, Loop Capital Markets LLC Q Okay. Thanks. And just had a quick question on Plumbing. You called out good growth across the board, retail e-

commerce. You sounded particularly bullish just on what you're seeing in trade in August and September. So just

kind of wondering what is driving the acceleration in the trade channel? And what the outlook is there? Thanks

and congratulations. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Yeah, I think consumers were becoming more comfortable and feeling more safe to go into plumbing showrooms

than to go into those areas of the trade channel that they really shutdown for a while – literally shutdown and then

a shut down in the sense of not being comfortable going in them. So I think the consumer engaging with that part

of the channel as it relates to showrooms was a big plus. And we're very strong in the showroom. So that fit right

into our sweet spot. So I think that was a big component of it all. So to a degree, the consumer is a little bit more

comfortable with having plumbers in their home, and there's a component of repair where when something like

that breaks, it has to be fixed. So whether it's a washer dryer or, in our case, a faucet or a shower system. So I

think those are the dynamics that drove the trade. ......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Tim Wojs of Baird. ......................................................................................................................................................................................................................................................

Timothy Ronald Wojs Analyst, Robert W. Baird & Co., Inc. Q Hi, guys. Nice job. Thanks for squeezing me in. I just had one question really about promotions. And just curious

kind of what you're hearing as your customers think about 2021 around promotions at this point? Do you think

things revert back to maybe a normal promotional type environment? Or do you think there's some incremental

kind of investment or catch-up investment that your customers might ask of you next year? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Tim, it's that time of year where we're typically working through the promotional cadence for the subsequent year.

And as we think about it right now, and promotional cadence is driven by our retail partners. We don't necessarily

drive that. We work with them on how our participation will play out. But our guess at this point is they're going to

be thoughtful about it like they were this year to the extent that the virus is more muted, to your point, I would

expect to see a more normal cadence of promotional activity to the extent that there's a more aggressive virus out

there and they want to limit consumers going into their stores, they may pull back on that. So it's hard to

determine right now exactly how it's going to play out for 2021. But we're going to work very closely with our

channel partners to figure out how we can best and most effectively participate in whatever promotions they

decide to run. ......................................................................................................................................................................................................................................................

Timothy Ronald Wojs Analyst, Robert W. Baird & Co., Inc. Q Okay, great, good luck on rest of the year, guys. Thanks. ......................................................................................................................................................................................................................................................





Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Okay... ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President, Masco Corp. A Operator, is there one more question? ......................................................................................................................................................................................................................................................

Operator: And ladies and gentlemen, our final question will come from the line of Phil Ng of Jefferies. ......................................................................................................................................................................................................................................................

Philip Ng Analyst, Jefferies LLC Q Hey guys. John, thanks for squeezing me in here. Just one, really quick one, good to see PRO paint recover,

when we look out to 2021, you've got some pretty tough comps on the DIY side.

So I'm just curious, do you have enough momentum on the PRO side in Kichler? Or maybe we have just stronger

growth across the board in DIY, where you see Deco actually being up next year from a growth standpoint? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Phil, Keith here. It's too early to call 2021. As I said, we do expect growth in 2021. And we have a strong

consumer. We have a strong brand. We have the best service.

When you talk about our DIY paint, we have a great channel partner. So we would, and we always do, invest and

drive our teams for growth. And that's how we're thinking about it. So... ......................................................................................................................................................................................................................................................

Philip Ng Analyst, Jefferies LLC Q Thanks a lot Keith. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director, Masco Corp. A Yep. Thank you, Phil. ......................................................................................................................................................................................................................................................


Thank you to everyone for participating in the call. I really appreciate it. Please stay safe. And we will talk to you

next quarter. Thank you. ......................................................................................................................................................................................................................................................

Operator: Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now

disconnect.





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