Good morning, everybody. I am Tim Weiss. I cover building products here at Baird. And we're happy to have Masco join us again at our Global Industrial Conference. Masco is one of the largest manufacturers of plumbing and architectural coating products, i.e., paint in the world. So from the company, we have CFO Rick Westenberg up here with me. And then we have Robin Zondervan, who is VP of IR and FP&A in the audience over here. So the format's going to pretty much be fireside chat. Feel free to raise your hand if you have any questions. And we can get to those. But thank you, Rick, for being here.
Thank you, Tim, for having me. It's good to be here at the Baird Global Industrial Conference, and thanks to everyone for joining here in the room this morning. For those joining by webcast, welcome, and good morning.
So maybe just first question, Rick. I guess Masco has undergone a lot of change over the last eight years. I know you're newer to the company. But you've spun out TopBuild. You sold windows and cabinets. You guys are basically a paint and plumbing company, this low-ticket, high-margin type business. I guess you've adjusted this portfolio. The cap structure has kind of changed. And I think you've kind of proven out this less cyclical thesis as we've gone through this kind of demand lull. So I guess where do we kind of go from here as a company kind of looking forward?
Yeah, Tim, I appreciate the question and the recognition for all of the efforts that the Masco company and the team has done in terms of reshaping our portfolio. And actually, most recently, we just, as you know, divested our Kichler Lighting business, so another move to really streamline the portfolio. And really, the intent of that has been to reduce the exposure to the cyclicality of the housing industry. Our portfolio now is focused primarily on repair and remodel, or R&R. About 90% of our business is R&R related. So that's about 10% new construction. And what that enables us to do, and our investors to do, is to participate in the housing business, in the building products business, without as much cyclicality and having to guess the ups and downs of the housing cycle. It allows more stability in terms of our earnings profile.
It allows us to deliver what we're targeting to deliver, which is 10% EPS growth kind of through this cycle. As you indicated, we are effectively a plumbing and coatings business. We also have a wellness business, Watkins Wellness. And going forward, that's really where our focus is, is to leverage our really strong brands, our innovative portfolio of products, as well as our service level to deliver above-market growth and margin expansion, which I'm sure we'll talk more about.
Yeah, yeah, we will. I guess just to think about 2025, everybody's going to ask you that question. But you don't have to give guidance. But I mean, what are some of the kind of key metrics or key swing factors that investors should kind of think about, whether it's finally seeing some growth, return to the R&R market, price-cost, those types of things?
Yeah, as you mentioned, we're not commenting about 2025 at this point. We'll provide our perspectives on 2025 during our Q4 earnings call in February. We're finishing this year, though, in a pretty stable environment. We're projecting, in terms of our plumbing business, to be plus or minus low single digits. And in our decorative architectural products business, to be down mid-single digits. That includes the divestiture of Kichler. I think in terms of if we look towards 2025, obviously, there's the macro environment with regards to interest rates. Obviously, the Fed has made a couple of cuts over the last several months. It hasn't really translated much materially into mortgage rates at this point or HELOC rates. And so that's going to be a factor in terms of not only the continued Fed fund cuts, but also how that translates into interest rates.
That, in turn, will have an impact on existing home sales and new construction. Again, Masco is less exposed to those factors, but it does contribute in terms of the overall R&R market. Consumer confidence, I think, is a big driver with regards to expectations. The consumer confidence has been resilient, given some of the ups and downs that we've faced. It's not as high as it could be. I think that's really what we're seeing as we've pivoted here from an impact of the pull-forward impact of COVID working its way through the system. We're seeing that work its way through to now pivoting more towards a deferral. People, just given the confidence and the outlook, there's a deferral of R&R spend. We think that bodes well as things pivot. We don't have a crystal ball in terms of 2025.
But longer term, we're pretty optimistic with regards to the fundamentals of the business. And we expect the R&R business, the industry, and for us in terms of our participation in that, to grow at a more "normalized" level of 3%-5% when things get back to normal growth levels.
Do you need existing home sales to come back? Does the market need that to come back? Does it need lower rates? Or can this pent-up demand that you and others in this industry have kind of talked about, can it get released without a rate component?
I think it can. But a lower rate and existing home sales increase will be beneficial. And I think it's a good barometer in terms of I think it has an impact on consumer sentiment, consumer confidence, and people's willingness to invest in the home. I mean, at the end of the day, home price appreciation has been significant. Home equity is at all-time highs. And that gives people confidence to invest in their home. But I think catalysts in terms of interest rate levels and just the consumer psyche are going to be beneficial with regards to the pace of recovery when it does return.
OK. And when we just, you can say the market's going to be X or Y. But what have you done internally to make sure that Masco's growing above that market rate of growth?
Yeah. Well, where we participate, Tim, as you know, is really in a portfolio of brands and businesses that are market leaders in terms of the Delta Domestic Plumbing, Hansgrohe International Plumbing, the Behr Paint brand, Watkins Wellness. They have really strong brands, portfolio, and our investment in new products and innovation and our service level. So we are well positioned in terms of the strength of those three categories to really outperform the market. In addition, we're really focused not only on our core business, but in our adjacent businesses. So what I mean by that is we're investing in water filtration, Delta Reverse Osmosis water filtration. We're investing in different channel activity in terms of continuing to build upon our lead in e-commerce, on international plumbing geographic expansion, and in paint, again, some adjacencies in terms of applicators, aerosols, caulk sealants, et cetera.
So, not only focused on just the core business, which we think we're very well positioned when the market turns to grow above market, but also some adjacent businesses, which will enhance that growth.
That's good. So I guess your long-term guidance is 3%-5% organic. Is there an opportunity for Masco to do better than that? Could that be 4%-6%? Could it be 5%-7%? I mean, are there those types of investments where that organic growth rate at some point in the future could actually be faster than your kind of long-term guidance?
Potentially, yeah. We've seen that in the past as well. What I would say is, and as Tim alluded to, our stated expectation in terms of longer-term growth is 3%-5% organic and an incremental 1%-3% inorganic. And that's really the way we derive that is the R&R industry, again, which we're 90% indexed to, is expected to grow at about 1% greater than GDP. And our expectation is to grow above market. So that's how we get really to the 3%-5%. Obviously, if the market and industry grows faster, that'll enhance our growth. But for the reasons I mentioned in terms of above market growth and the adjacent businesses and where we're investing, obviously, we have a lot of confidence in terms of our vectors of growth. And so that could translate into higher growth rates.
But at this point, we're not basing our guidance in terms of our long-term objectives based on that. But we certainly would aspire to deliver on the growth.
OK. The election's been topical. Obviously, it's a week and a half after or a week after. I guess what's your preliminary analysis on the impact to Masco's business? And maybe just give us a little review on the components, where they're made, where things are assembled, and kind of any sort of offsets in terms of kind of global component or finished goods activity?
Yeah, so it's obviously a common question given what has happened over the last week. What I'd say there's, I think, three categories that people are focused on with the election results. One is tariffs. Second is tax policy. And then third is regulation. I think probably the primary focus of your question, Tim, is really on the tariff and the tariff implications. And let me address that. So Masco has done a lot to reduce our exposure specifically to China. And so to dimension that, in 2019, when the Section 301 tariffs were first implemented or raised to 25%, Masco had indicated that we had about a $825 million exposure from imports into the U.S. from China. We've subsequent to that, so over the last four years or so, have reduced that by about 40%.
Both in terms of proactively sort of changing our sourcing footprint, as well as the divestiture, so I mentioned the divestiture of Kichler. That also factors into the reduction of our exposure to the China import dynamic, so we've been able to reduce it by 40%. And we continue to work towards further diversifying our geographic sourcing footprint, so that's a priority. And it becomes an enhanced priority given the outcome of the election. But it still leaves a meaningful exposure, so that's still something that we're focused, and we'll be ready to respond. Obviously, we don't know what the policy will be or when it will be implemented. But we continue to focus on our sourcing footprint, as well as continue to drive cost reductions. And depending on the extent of any tariff action, pricing would be part of the equation as well.
So we can't switch a light switch and change our sourcing footprint. But it continues to be a concerted effort. The team is working through, as we speak, efforts to continue to mitigate and diversify the footprint.
And is your footprint? I mean, it's a global kind of plumbing industry, component industry. Is your footprint much different than your peers? Or is everybody kind of in the same boat, at least based on your insight?
Yeah, to our understanding, it's very similar. I think we're largely in line, and you probably heard from some of our competitors that they've been doing similar actions with regards to diversifying their footprint, but we think we're pretty evenly lined up, and we've got a pretty good trajectory, but I think it's a good point, Tim, because this is an industry dynamic. This isn't a Masco-specific issue. This is an industry issue and a broader economic economy issue, so we think we're pretty well positioned. I think there are some, particularly in the private label space, that are perhaps more exposed to an enhanced tariff regime, but I think we're reasonably well positioned relative to the others in the industry.
OK. Any questions from the audience? Take care.
What are you sourcing from China specifically?
Yeah, so most of the sourcing is on the plumbing side of the business. So very limited on the coatings. So it's primarily components, some finished product, primarily in plumbing and hardware is really the componentry that we're sourcing.
Back here.
It can hold out during the quarter that retail and e-commerce outpacing trade, which I guess is kind of a reverse of where it has. But can you elaborate on that and how you think about relative growth rates in the next few?
You don't want to repeat the webcast?
Yeah, no.
Thanks for the reminder, Tim. So the question is, we commented in our recent Q3 earnings call that retail and e-commerce did reasonably well on a year-over-year basis. And that contrasts a bit with regards to what we had seen more recently, kind of in the first half of the year, where wholesale, on a channel mix perspective, was performing a bit stronger than retail. And that's an accurate portrayal. So in the first half of the year, we saw wholesale. And again, let me provide some context. Our expectation from a plumbing perspective is that our revenue would be plus or minus low single digits. And so we're talking about matters of modest degrees. But in the first half of the year, wholesale held up a bit more robustly. And that was really on the strength of the consumer.
What we saw here in Q3 specifically is retail performed a bit more resilient, but again, it's a matter of degrees, so I think, generally speaking, for the full year, we don't see a meaningful difference between the channels, with the exception of e-commerce. E-commerce has been a continuous and consistent growth engine for us, particularly on the plumbing side and particularly at Delta, and so that will be growth on a year-over-year basis on a full-year perspective, and just given how we believe we're the leader with regards to e-commerce in the North America plumbing space, and so we're really poised to build on that lead.
Does the experience with Kichler change how you guys think about M&A going forward, any end markets, multiples, any of that? And then secondly, can you just comment on thoughts on the PPG divestiture and what you think that might do to the environment?
Yeah, so the question for those that may not have heard is, as I mentioned a couple of times, the divestiture of Kichler, which is a lighting business, which represented about 3% of the sales, how does that reflect with regards to our thoughts on M&A going forward? And the second part of the question is our thoughts on the PPG divestiture of their decorative architectural products here in North America. So on the first one, on the Kichler divestiture, again, it was a relatively small transaction, about 3% of our sales. But what it does is it really streamlines our portfolio and really aligns it with kind of the three core business areas: the plumbing, painting, and wellness. And that's how we think about it from an M&A perspective going forward is we're focused primarily on bolt-on acquisitions.
For example, the Sauna360 transaction that we did last year, as well as Steamist, steam showers, et cetera, those were bolt-on transactions. How we're focused in terms of cultivating our M&A pipeline is really with those particular segments in mind, so plumbing and decorative architectural products. We're not averse to a bigger transaction as long as it fits within those categories. For us, it's really focused on finding the right type of opportunity that is strategic in nature, so within one of our pillars that has either within our core business, adjacent business, or technology enablement. That is something that has a financial profile that is consistent with our expectations at Masco. That's a little bit of our focus in terms of M&A going forward.
As it pertains to PPG, as we've commented in the past, we took a look at those assets. We obviously made a decision not to pursue that. It just wasn't something that we ultimately found a fit for. But at the end of the day, we're really focused on our Behr Paint business and continuing to be successful in competing against the likes of PPG, Sherwin-Williams, and others in the industry, both on a DIY and pro paint business perspective.
Maybe on that point, Rick, maybe just sticking with decorative architectural, could you just talk about your overall relationship with Home Depot? I think sometimes, and really specifically on the Behr side, sometimes people are just kind of uncomfortable with the client concentration maybe that you have. But the relationship does seem a lot more symbiotic than maybe it does appear on the surface. So maybe just kind of maybe frame that relationship. And maybe that's more of an asset than a liability kind of as a relationship in general.
Sure, Tim. No, I appreciate the question, and we do get it quite frequently. So just for the broader group's context, we've got an over 40-year relationship with Home Depot. It is a customer-vendor relationship, but I would characterize it more as a partnership. For us, it's also an exclusive relationship, meaning the Behr brand is exclusive to the Home Depot. It is symbiotic, if I can borrow your words, Tim, in terms of the relationship. We represent about 80% of Home Depot's paint sales. We are a huge component of their coatings share of aisle. For us, we're committed to being strong partners with the Home Depot and growing profitably together. We represent a huge portion of their paint sales.
We also drive a lot of, and paint in itself drives a lot of foot traffic into the Home Depot. And so there's benefits that accrue with that consistent relationship and having the Behr brand synonymous with the Home Depot. And the Behr brand has been a preeminent DIY paint brand. But it's also become a growing pro paint brand. And to touch upon that for a moment, the Home Depot, as I'm sure you're aware, is really focused on growing in the paint, sorry, in the pro space. And paint's a key lever to that. And so we partner with the Home Depot, are really focused on the pros that paint.
And so for us, it's really a beneficial relationship because for the pro construction or contractor that's looking for one-stop shopping, they can go into Home Depot, which is the leader in their industry, and buy various products, including paint. So it's symbiotic in the fact that paint drives traffic into the Home Depot store. And the pros that are in the Home Depot store will naturally pick up paint. And Behr, being a really reputable, strong brand, kind of drives that hand in hand.
You picked up a lot of share in pro during COVID. And you kept a lot of it. So now your pro business is what, $900 million?
It's $900 million.
Something around there? What's the go-forward kind of initiatives with pro to continue to grow that part of the market? Because obviously, you have a lot of store traffic with pros. But how do you think of outside the store? Home Depot's starting to get into other distribution outlets outside of the orange boxes and doing more within kind of pro distribution. So what are some of your initiatives at Baird to continue to kind of grow that paint business and take share?
Yeah, so for context, the three years leading up to 2023, we grew our pro paint business by a stack comp of 60%. And so that far outpaced the market and led to market share gain. This year in 2024, we're expecting low single digit pro paint, which we think is in line or slightly better than the industry, so really consolidating our share gains. In terms of the initiatives that we're doing, and again, it's a partnership with the Home Depot. So we're doing it hand in hand with them. I would really cite three initiatives. One is increasing and leveraging pro sales reps that are focused on the pro and on paint. So that's a key driver and just driving throughput through that avenue. Second is delivery options.
So, for example, buy online, pick up in store, or onsite delivery to reduce the friction for pros that paint or professional pro painters to be able to interact with a big box in terms of being able to deliver on the paint and the Behr paint. And third is loyalty programs. So really, in the spirit of consolidating our share gains and retaining the pro painter, the loyalty program is obviously an instrumental part of that. And so we're aligned 100% with the Home Depot with regards to those initiatives and continue to leverage that to make headway. I think, as I mentioned before, the Home Depot is focused on the pro and some of the acquisitions, for example, SRS is consistent. We're aligned in terms of our focus on the pro and leveraging the big box and other channels that may be pursued.
Okay, and then on the DIY business, I mean, obviously, COVID was a big surge and then whatever came after it, maybe a retrenchment of existing home sales at 30-year lows. Where is the volume on the DIY business today relative to pre-COVID, and I would think that that's a pretty kind of linked business to existing home sales, so it does seem like there is a little bit of embedded cyclicality maybe within the DIY business and paint if we would see an uptick in things like existing home turnover.
Yeah, so you articulated a couple of dynamics that have been at play. So obviously, I think we're all aware of the real pull forward. Is there a mic issue? OK. A real pull forward of R&R activity and specifically DIY activity during 2020 and 2021. And we're seeing the repercussions of that or the hangover effect, so to speak, of that. And that's starting to stabilize. But what I would say is DIY is, and as a consequence of that pullback in terms of your question, as in terms of the relative volumes, we're down, and the DIY industry is down from a paint perspective about double digits relative to 2019. So it is down notably. But we're seeing ultimately a return to stabilization. We're expecting 2024 to be down high single digits in line with the industry. And we don't have a crystal ball when it turns.
But as we work through that pull forward effect, as I mentioned before, with regards to the COVID R&R and DIY pull forward effect, we'll see some stabilization and return to growth. And Behr specifically is really well positioned as a preeminent DIY paint brand to take advantage of that. We think the fundamentals of the R&R industry are strong. So as I mentioned before, the home equity value, the age of the housing stock, existing home sales, as you alluded to, Tim, are at multi-year lows. And that is a key driver of DIY paint sales. Because as you would imagine, as people prepare to sell their homes, they tend to paint their house, at least select rooms. And then those that repurchase or purchase the house will paint. So you've got really a double benefit: existing home sales.
And so that is something that has suppressed DIY here in the near term. But as that rebounds and normalizes, will be a catalyst for growth as well. To be fair, we're not expecting outsized growth with regards to the DIY paint business. But we do think we're well positioned to outperform the market when it does return to growth.
Any paint questions?
Yeah. Opportunity do you think to expand distribution into SRS now that it's been acquired?
That's a good question. So SRS, sorry, the question is, do we Masco or Baird have an opportunity to expand distribution really through Home Depot via the SRS distribution acquisition? We'll see. I think at the end of the day, SRS is really focused on pool landscaping and roofing. So it doesn't really touch the paint category. But what I would say as a broader dynamic, the Home Depot and their focus on the pro and focus on being available for the pro and accommodating the pro from a distribution perspective, I think bodes well in terms of the flexibility that we'll demonstrate in terms of accommodating whatever the Home Depot believes is the right channel approach to the pro. And so I think that that just is upside opportunity for us from that perspective.
Maybe just switching over to plumbing quickly. How do you feel about your plumbing business relative to the category overall? I mean, it does, at least when we look at statistics, it does seem like you guys are gaining share. So I guess, A, do you believe you're gaining share? And then B, kind of which areas of the market do you feel like you're growing faster?
As a general matter, we feel really good about our plumbing business and all elements of it, quite honestly. It's been an area of strength for us in terms of outperforming the market, which I'll talk to in a moment, but also margin expansion. We've increased our margins by, we're expecting to increase our margins by 100 basis points each of the last couple of years, and that's in a challenging environment, so it really, in terms of not only how we're positioned in the market, but also the underlying performance and earnings potential of the business, we're really pleased with it and optimistic that that'll continue going forward. In terms of kind of area by area, our North America plumbing, so our core plumbing, for example, Delta, we think is performing at or better than market.
I mean, it's tough to tell because the share information isn't as readily available. But based off of the data points that we have, we believe we're performing in line with or potentially better than the market, and we certainly have been over the last number of years. From an international plumbing perspective, I think it's a lot more clear that we're outperforming the market, so the industry overall, from an international, I mean, outside of North America, we're expecting to be down low- to mid-single digits and China specifically to be down double digits for the second year in a row. That's the industry. From our performance perspective, we're plus- or minus- low-single digits. In Q3, we actually delivered growth in our international plumbing business, so that was a clear outperform. Now, we're not projecting growth for the full year.
But I think it's a testament to what the Hansgrohe team has been able to deliver in the face of a challenging environment. And that empirically demonstrates our outperformance relative to the market. And in China specifically, we've been able to outperform the market and be down more in the single digit space. And that's really a combination of a pipeline, a project spend that we had, as well as our shift to more R&R. So in China, we're about 50% R&R, 50% new construction. Obviously, the new construction, as we all are aware in China, has been down significantly. We're a bit more balanced. And that's helped our relative performance. And then lastly, in terms of our Watkins Wellness business here in North America and globally, that's a clear leader, both organically and inorganically.
We've been able to demonstrate share growth here in the North America market, but also internationally as well. So I would say across the board, feeling really good about our core businesses and how we've been performing and our expectations going forward, both from a top line and a bottom line perspective.
Then you mentioned e-commerce before. Can you just kind of size that business for us as part of plumbing? And then just what are the areas within e-commerce that you're attacking? Is it the Build.coms of the world? Is it supporting e-commerce through the home centers? Just where are you investing to kind of grow that business?
Yeah, so e-commerce for our plumbing business represents about 17% of our sales, and that's been gradually increasing over the last number of years, and we expect that to continue to grow going forward, and it is through a combination of both in terms of the home center dot-coms as well as Amazon and others in terms of traditional e-commerce, and so it really has been a strength for the Delta brand specifically, as I mentioned before, and something that we're a leader in and plan to capitalize on that leadership position.
Great. We're out of time. So please join me in thanking Rick and the Masco team for being here with us today.