馬斯科 (MAS) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Third Quarter Earnings Call. My name is Jamaria, 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.

Thank you, operator, and good morning. Welcome to Masco Corporation's 2021 Third Quarter Conference Call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer. Our third quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. (Operator Instructions)

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've described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.

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

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I'm proud of the way our team continues to execute in these dynamic times. In the third quarter, sales increased 11%, our fifth consecutive quarter of double-digit top line growth. This was against a strong 16% comp from last year. This growth came as we continued to face significant supply chain challenges. Certain raw materials were hard to come by, such as resins, microchips and even pallets. Freight congestion in ports and lack of trucking capacity contributed to increased delays in shipping and receiving goods and labor shortages continue to be a challenge. I would like to thank both our employees and our tremendous supplier partners who together have worked tirelessly to address these challenges. They have kept our plants running and our customers supplied, resulting in outstanding top line performance.

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

Moving to our segment performance, beginning with Plumbing. Sales increased 15%, excluding currency, led by exceptional growth in North America and international faucets and showers and our spa business. These results highlight the strength of our Plumbing platform diversity across geographies and channels. To support our continued international growth, Hansgrohe recently announced plans to invest in a new manufacturing facility in Serbia. This additional capacity will enable further growth and further strengthen Hansgrohe's capabilities to service customers. We plan to invest approximately $100 million in this project over the next 3 years.

In our Decorative Architectural segment, sales grew 4% against a robust 19% comp from the third quarter of 2020.

Pro paint had an exceptional growth of over 45% in the quarter, helping to offset moderating demand in DIY paint.

DIY paint declined mid-single digits against a tremendous comp of over 25% in the third quarter of 2020. We continue to see indications of DIY paint demand stabilization as demand was fairly consistent throughout the quarter.

When compared to our third quarter 2019 sales, our DIY paint sales were up over 20%, a clear indication of a reengaged homeowner and strong home improvement fundamentals.

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

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

Now let me give you an update on what we are experiencing with inflation. The second half of 2021 is largely unfolding as anticipated. We experienced low double-digit inflation in the third quarter, and we expect mid-teens inflation in the fourth quarter. We have taken pricing actions across both segments and expect to achieve price cost neutrality by year-end. It has been an extremely dynamic year. And our supply chain and commercial teams have done an exceptional job managing through the many challenges.

Because of this outstanding execution and continued strong demand for our products, we are maintaining the midpoint of our previous guide and expect to achieve earnings -- full year earnings per share in the range of $3.67 to $3.73.

Lastly, before I turn the call over to John, we are pleased to share with you that our comprehensive 2020 corporate sustainability report is now available on our website. This report demonstrates our commitment to environmental, social and governance responsibility.

During a year of unparalleled change, our team members remained committed to maintaining our strong reputation for ethical business practices, reducing our environmental impact and enhancing our DE&I efforts. I'm proud of the hard work we are doing every day to ensure that our employees feel a sense of inclusion, belonging and support. Our progress in ESG is a priority for our Board, and our executive leadership team. I hope you will take the time to read more about how our long-term sustainability influences the way we run our business, operate our facilities and contribute to the community.

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

Thank you, Keith, and good morning, everyone. As Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other onetime items.

Turning to Slide 7. Demand for our industry-leading brands remain strong, and our teams executed exceptionally well in a dynamic environment. This resulted in another strong quarter of double-digit top line growth. Sales increased 11% against an impressive 16% comp in the third quarter of last year.

Net acquisitions contributed 2% to growth, and currency had a minimal impact. In local currency, North American sales increased 9% or 6%, excluding acquisitions. This strong performance was driven by outstanding execution to achieve volume growth in pro paint, faucets, showers and spas and by increased selling prices.

In local currency, international sales increased a robust 15% or 18%, excluding acquisitions and divestitures against a healthy 9% comp. Gross margin of 34.2% was impacted by higher commodity and logistics costs in the quarter. We expect this inflation will have peak impact on our P&L in the fourth quarter. We will offset these costs with additional pricing actions and productivity initiatives and expect to exit this year price cost neutral.

SG&A as a percentage of sales was 16.7%. As planned, during the quarter, we increased certain expenses such as headcount, advertising and marketing, to a more normalized level to support our brands. We expect this increase to continue into the fourth quarter as these costs continue to normalize.

Operating profit in the third quarter was $385 million, with an operating margin of 17.5%. Our EPS was $0.99.

Turning to Slide 8. Plumbing does continue to be strong, with sales up 16% against a 13% comp in the third quarter of last year. Net acquisitions contributed 2% to this growth and currency contributed another 1%. North American sales increased 16% or 10% excluding acquisitions. Delta led this outstanding performance, delivering another quarter of robust double-digit growth driven by strength in their e-commerce and trade channels. With strong brand recognition and [channel] relationships, Delta continues to drive consumer demand for its products.

Watkins Wellness also contributed to growth in the quarter as both demand and our backlog remains strong. International plumbing sales increased 15% in local currency or 18%, excluding net acquisitions. Hansgrohe delivered strong growth as demand continued to improve across Europe in numerous other countries.

Hansgrohe's key markets of Germany, China and the U.K. all grew double digits in the quarter. Segment operating profit in the third quarter was $248 million, and operating margin was 18.7%. Operating profit was impacted by the planned increases in SG&A that I mentioned earlier as well as an unfavorable price/cost relationship. This was partially offset by strong incremental volume. We anticipate additional SG&A increases in commodity inflation will most significantly impact this segment's operating margins in the fourth quarter. We will mitigate the commodity inflation with additional pricing and productivity actions and expect to be price cost neutral as we enter 2022.

For full year 2021, we continue to expect Plumbing segment sales growth to be 22% to 24% with operating margins of approximately 18.5%.

Turning to Slide 9. Decorative Architectural sales increased 4% for the third quarter and 3% excluding acquisitions. Our DIY paint business declined mid-single digits in the quarter, against a more than 25% comp in the third quarter of last year. Despite this decline, DIY paint demand appears to be stabilizing as we have seen relatively consistent demand since July.

When comparing to Q3 2019, our third quarter DIY sales are up over 20%. Our Propane business delivered exceptional growth of more than 45% in the quarter as paint contractors are applying top-rated Behr paint to more commercial and residential projects. We expect demand in this channel to remain strong as propane contractors report growing demand for their services. When comparing to Q3 2019, our third quarter Pro sales are up over 35%. Segment operating margin in the third quarter was 19% and operating profit was $166 million. Operating profit was impacted by lower volume, increased commodity costs and higher marketing expense to support the new BEHR DYNASTY product launch, partially offset by higher net selling prices.

For full year 2021, we continue to expect Decorative Architectural sales growth will be in the range of 2% to 5% and operating margin to be approximately 19%.

Turning to Slide 10. Our balance sheet is strong with net debt-to-EBITDA at 1.3x. We ended the quarter with approximately $1.9 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Working capital as a percent of sales, including our recent acquisitions of 17%.

Finally, we repurchased more than 15.2 million shares in 2021 for $878 million. This is approximately 6% of our outstanding share count at the beginning of the year. We expect to deploy approximately $150 million for share repurchases or acquisitions in the fourth quarter as we continue to aggressively return capital to shareholders.

And turning to our full year guidance. We have summarized our expectations for 2021 on Slide 11. We continue to anticipate overall sales growth of 14% to 16% and an operating margin of approximately 17.5%.

Lastly, we are maintaining our 2021 EPS estimate midpoint but narrowing the range to $3.67 to $3.73, representing approximately 19% EPS growth at the midpoint of the range. This assumes a 252 million average diluted share count for the year. Additional modeling assumptions for 2021 can be found on Slide 14 of our earnings deck.

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

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

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

(Operator Instructions) Your first question will come from the line of Matthew Bouley with Barclays.

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

Matt, this is Keith. I'll take this, and John, you can add in if you have other comments. I think there are a few things that really contributed to that 45% growth that we saw in the quarter in pro. First and foremost, we had really outstanding supply chain execution. I can't say enough about our supply chain teams, our research and development teams that were able to move formulations and our suppliers. We've been working with this supply base and have been pretty consistent in our supply register for like 20 years. So those relationships really paid off in our hard work and supply chain and R&D. So really good availability of product and supply chain execution in general.

We continue to invest in our brands. We've talked about that and we've talked about that last quarter, and we continue to invest in our brands. And having that leading brand, having the leading quality, having the leading service levels, all contribute, especially in tough and dicey times like we've just gone through. And we continue to execute in terms of new product introductions and our innovation pipeline such as BEHR DYNASTY, a new line of aerosol paints, interior stains, [Cox] and other adjacencies.

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

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

That's great color there. Second one just on the Asian supply chain where you guys have a relatively robust footprint. So just I guess a 2-parter, any quantification you can give maybe on sort of the near-term cost impacts of everything going on with ocean shipping and transportation from Asia. And then just longer-term thoughts on any sort of supply chain repositioning that sort of come about as a result of all these recent challenges.

Sure, sure, Matthew. Not probably like everyone else that's reported so far this earnings season, we faced supply chain challenges coming across the Pacific. Yes, and we have seen elevated costs to get containers across to the United States. And we saw also as a result, seeing delays in getting product through the port systems here in the United States, whether it's on the West Coast or any of the other ports that we bring product in.

So the good news is, even though we've experienced some of that, we have also, as a result of pass-through some of the price increase down because of the raw material inflation, but because of some of the logistics inflation that we've experienced. And so that is -- we feel good about our ability to get that price, and that's a portion of which allows us to feel good about being price cost neutral as we exit here in 2021.

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

Congrats on that hard work.

Your next question will come from the line of Susan Maklari from Goldman Sachs.

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

Sure. As I think we've all read and seen broadly across the industry, there's been a broad-based inflation, and we're experiencing that same thing. We're seeing it in metals. Zinc and copper, as you mentioned, and that's across both our segments, particularly in the hardware and the decorative piece of architectural as well as, obviously, in brass and plumbing. We're seeing it in polymers. And again, that's across both our segments. Resins and paint, plastics in our plumbing valve drain, for example, with our cross-linked polyethylene and our cartridges for the valves. We're seeing it there. And then again, same sort of story across both segments and logistics, container costs continue to escalate. Even things like pallets and, of course, over-the-road trucking costs associated with some labor constraints that are broadly there in the trucking industry. So it's broad-based inflation. And we expect to continue to see that in the fourth quarter. And as we mentioned, done some good work, and we'll continue to do work in the fourth quarter as it relates to achieving price cost neutrality by the end of the year.

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

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

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

So a lot of work has gone into that, but we saw real strong growth, particularly in Plumbing and e-commerce and also in the trade channel. And then strong -- as we mentioned, strong pro growth in paint. So a really good performance across multiple channels and multiple geographies. And I think Susan, that speaks to the work we've done in terms of the portfolio of driving affordable, smaller ticket items that are involved in quicker remodels, if you will, and smaller jobs as well as obviously being part of that bigger ticket job when executed. So that diversity across geographies, channels, price points, et cetera, has really delivered for us a nice robust portfolio, and I think that's a big part of it.

Susan, maybe give you a little bit more color on one specific channel. Let me talk a little bit about the e-commerce channel and the recent acquisition of Kraus and how that aided our e-commerce growth. So Kraus we bought in the beginning, really at the tail end of last year, and the integration is going well, and they continue to perform above our expectations. When we've made some good investments along with Kraus' complementary products and online presence, and they help to actually strengthen some of Delta's market-leading offerings to drive future growth. One of the things we specifically have done is with the help of Kraus, we've launched Delta branded sinks online utilizing their offering. And this is really a good contributor to growth here in the back half of 2021. So e-commerce Delta was strong in e-commerce before we acquired Kraus -- the Kraus acquisition has really complemented Delta's strength in the online channel to accelerate its growth.

Your next question will come from the line of Mike Dahl from RBC Capital Markets.

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

At the risk of maybe being redundant to what I've already talked about. I can't overstate what our supply chain teams have been able to do. And it's a product of a great partnership with Home Depot and the simplification and the focus that we have. We work hard to understand the Home Depot consumer, and we work hard to understand the Home Depot supply chain. And fundamentally, everything that we do is geared towards and focused on that customer and those consumers. And because of that, I think that makes us fleet a foot. It makes us -- it helps us be able to do the sorts of things that we need to do and react quickly when times get tough. It's just -- it's mind boggling when you think about the types of formulations that we had to go through in our R&D department in terms of changes and revalidations to be able to move from one supplier to a next, be it on colorant or resins and really, that's across our entire business, but specifically in paint.

I think when you look at our formulations and how -- what goes into our formulations and what was particularly tight in terms of capacity, I think that gave us a little bit of advantage. And it has not been easy. We have changes to the challenges, and we continue to have challenges. But fundamentally, I do think it has to do with the extreme focus and dedication we have on a specific customer and the consumers and the ability to manage that versus, say, having a more complex lineup where we have different types of coatings and different types of customers and those sorts of things. So it's an attribute to simplification, 80/20 focus on our teams and absolutely the highest quality workforce, particularly in supply chain and R&D.

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

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

Yes. We're excited about DYNASTY. I'll tell you, it's going very well. It's our best paint ever, best scuff resistant, most one color, high color, it's fast drying, lead certified GREENGUARD. It's just extremely good paint. It's our highest price point yet. But when you match it with those attributes, it's a good value. I mean, my father bought some of it. Let me tell you he's as [excited as they get] and while that's only 1 point, it's indicative of what kind of value this can bring. And it's an example of how our deep and extended relationship with Depot can really help. We consistently bring that innovative new product and market-leading attributes, and we do that. I like to think of our teams fighting above their weight class. We are focused and to your earlier question on supply chain, it kind of shows itself here with DYNASTY, very happy with DYNASTY in the launch.

Your next question comes from the line of Phil Ng from Jefferies.

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

Yes, Phil, it's John. You're right. The comps as we go into the first part of 2022 will be tough. Obviously, when we post 31% growth in Q1 and 53% growth in Q2 in plumbing, I should say, 25% overall, 24% in Q1, 24% in Q2, those are tough comps to go up against. I said, as I mentioned in my prepared remarks, we've got continued good backlogs in a number of our businesses that we've got visibility into. We mentioned the fact that Watkins, our wellness business, continues to have a very strong backlog of probably several hundred million dollars. Our Plumbing businesses, both Hansgrohe and Delta, to the extent that we look at their backlogs, they are bigger than they would historically be at this time of the year, given the seasonality of things generally slowing down. So we do think that the first part of growth going into the first part of '22 will be good, but obviously, we're up against some pretty tough comps. Beyond that, Keith, I don't know, paint is -- we got a little bit less visibility into the backlog of paint other than on the pro business, where we see some of the commercial projects coming through.

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

Phil, I would say that if you think about the macro trends where we stand right now, the macro trend is really set up for a good 2022. The 2 big ones that we watch because it really does impact our low-ticket repair/remodel portfolio of products that we have, our existing home turnover and home price appreciation. As you know, those 2 have been very good. And you layer those 2 on to the fact that the consumer's balance sheet is very good. All statistics say that there's $2 trillion of more savings as a result of the pandemic that the consumers are sitting on now. And the fact that the home is for the vast majority of consumers, it's their largest investment. We think this environment bodes well for continued investment in homes. We're hearing about backlogs of big-ticket projects with contractors. So we think the supply chain tightness that the consumers have experienced have contributed to that backlog of big ticket projects. And so going into '22, we think the environment is set up for good growth.

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

Yes. It's very difficult to predict the supply chain in this environment. I think some things will have a little bit more lasting impact. I think logistics will probably remain tight well into '22. Our, if you will, the blood pressure metric that we look at is our fill rates coming from our supply base and our timeliness and accuracy of delivery dates versus promise. And those are starting to improve. Now we have a long way to go; we're not back to where we need to be. But I would say in terms of our supply and incoming, we are starting to see some improvement and a little bit of stabilization as we look at those 2 key metrics.

Your next question will come from the line of Adam Baumgarten from Zelman.

Just looking at Decorative on the implied 4Q guidance, it's somewhat similar revenue growth compared to 3Q. Do you expect a similar pro outperformance to continue through the end of the year?

Yes. We -- I think, again, we would expect the pro to remain strong as we go through the balance of the year. Whether it's going to be the same 45-plus percent growth we realized in Q3 is yet to be determined. But based on what we're hearing from Pro contractors based on the projects that we're hearing in terms of contracts or backlogs, we do think the Pro demand will continue to be quite good.

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

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

Your next question will come from the line of Garik Shmois from Loop Capital.

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

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

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

We've talked about this, and we haven't changed our outlook. And that is that we have a nice dropdown on incremental volume. We'll exit the year at price cost neutrality. There still is questions about where commodities will move, if at all, in 2022 and a commitment that if they do, we will handle that as we have in the past with productivity and further price if needed. So when we throw that all together, as we've talked in the past, we're looking at margin expansion, not in the hundreds of basis points, more in the tens of basis points, but our commitment and how we drive our leadership teams and how we structure our variable compensation for those teams is growth above market and margin expansion. That's fundamentally part of our culture and how we drive our businesses and that's what we will achieve in '22.

Your next question will come from the line of Deepa Raghavan from Wells Fargo Securities.

Let me start with some October trends. Just curious how that has trended so far? Are you seeing any seasonality or rebounding? Anything that you're able talk to on October so far, please?

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

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

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

It was a nice quarter though. Thanks so much.

Your next question will come from the line of Keith Hughes.

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

Keith, as we look at it, we did see good volume growth in plumbing, both domestically and internationally. So -- and don't forget acquisitions contributed to growth as well. But if you could factor out the acquisitions, I'd say if you had to weight the 2 of volume mix versus price, I'd say in plumbing you're much more heavily weighted on volume than you would on price in the quarter.

Okay. Looking at the difference in growth rates, excluding acquisitions between North America and international, international a bit higher, was there certain regions internationally that really stood out that pushed it higher than the U.S.?

Yes. So internationally, yes, the 3 that we mentioned that grew double digits were Germany, China and the U.K. And as you might expect, Germany and China had a relatively easy comps compared to -- given the third quarter of last year. China was actually growing nicely in the third quarter of last year and continued to grow. So that was a bit of a positive surprise for us, just the strength of the Chinese market over there.

But other than that, if you factor out those 3 large markets, (inaudible) broadly across the 140 markets that Hansgrohe sells into, nearly all experienced some form of growth. I mean there are a couple small -- very small markets that we sell into that didn't grow. But, boy, I'd say 135 of the 140 countries we sell into grew in the third quarter.

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

A couple of questions on dec arc, specifically paint, Keith, I'm reminded about how Behr has this long-standing history of just excellent fulfillment, and it was good to see that, I guess, that really was a standout again this quarter. In the DIY segment of the business, if we look at things kind of in terms of kind of a 2-year stack in your commentary, it kind of suggested that there might have been a modest volume acceleration in 3Q. But I'm assuming that -- I'm just wondering, was that all just price? Did you actually see any kind of volume acceleration in 3Q? And then on the Pro side of the business, builders scrambling around sending guys to Home Depot to go get paint to get homes closed. I'm wondering how much of a benefit do you think that was to be up 45% and do you think that business can be sticky?

So a couple parts to your question. Firstly, yes, we did see some positivity in terms of gallonage when you look at DIY Q3 '21 versus Q3 '19. So we did see some slight positive gallonage there in terms of overall volume. Obviously, with the price, we saw some very nice revenue volume when you do that comparison stack over '19. In terms of -- was our supply chain performance versus competition a factor in getting a look from some pros, I would say yes. And it's incumbent on us to make that as sticky as we can. And we'll see, I'll tell you, I feel good about it.

This new DYNASTY brand is being applied and installed by some professionals. We're obviously seeing our pro line of paint that continues to be installed by professionals, and it's working well. And the brand has pull with consumers. And so when you think about the pro and the resi repaint as well as some of the commercial and more multifamily looks that we're getting, I think we fare well. But it's incumbent on us to start to develop that kind of loyalty in those pros like we have in other pros. So I think it was certainly a factor, and we'll work as hard as we can to make it sticky.

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

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

Your next question will come from the line of David MacGregor from Longbow Research.

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

Yes, we are across Masco.

Okay. And carryover pricing for 2022? What are your thoughts there?

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

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

We had a very, very solid performance in plumbing, plumbing trade, in particular. E-commerce continues to be -- we believe we're a leader in e-commerce, and we continue to, we believe, gain share. I'll tell you that it's very difficult to accurately pin down overall market volume in a particular quarter. So that we'll see as we end the year and we go through our models that we use to estimate total market size. But I believe we're gaining share in trade plumbing and e-commerce. Certainly, we think we're gaining share in our spa business and our wellness business in Watkins, that continues to perform quite well. And when I look at our growth in Europe versus what our competition is doing, I believe we're gaining share in Hansgrohe as well. But again, it's difficult. I'd like to speak with absolute numbers and run it through our market model and it's very difficult to see the actual market size quarter-to-quarter. But we're doing well in Watkins, doing well in Europe with Hansgrohe, certainly in plumbing and the pro paint you talked about.

Your next question will come from the line of Ken Zener from Key.

Paint, up 4% headline. As noted, the volumes were down, which contributed to that operating margin. Could you maybe discriminate if you look at the paint PPI index, it says PPI was up about 10% in the third quarter. Could you maybe give us a sense of that pricing magnitude? And then for those 3 buckets that hit operating margins, the volume, commodity costs and marketing expenses, can you maybe give us a sense of magnitude of those buckets? That's it.

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

Right. And then the impact for the volume versus the other -- the commodity costs for the margin impact?

So if you think about -- yes, so obviously, with volumes being down, that had a pretty negative impact on the margins as well as some of the investments that we put back into the business during the quarter. I think those are the 2 probably the bigger impacts with pricing being a small offset to those.

Your next question will come from the line of Steven Ramsey from Thompson Research Group.

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

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

Great. And then maybe taking that topic and thinking broader the supply chain and labor issues, are they forcing you to make changes to fill demand and support margins in the near term that will have to be kind of reversed or changed in a major way as the supply chain environment normalizes over the next 1 year plus.

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

I guess what I'm getting at is the near-term changes to manage this environment that you're having to make, will those have to be reversed in a major way as the supply chain and labor market normalizes over the next 3 to 6 quarters?

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

We do have a question in queue from a participant that did not record their name or their firm name, but they are calling from a 216 area code.

It's Eric Bosshard, Cleveland Research. Two things, first of all, the incremental pricing. Do you have to take incremental pricing now or in 4Q to offset the incremental inflation?

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

In both -- is that in both businesses?

Across the company.

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

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

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

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

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

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

It's John. I think a good way to think about our M&A strategy is take a look at the 4 recent acquisitions we've done in the last year. So we did 4 -- of the 4, each of them are very aligned with the strategy of one of our business units. So in the case of Kraus, Delta is looking to grow their e-commerce strategy and Kraus is a great complement to Delta's already strong presence in the e-commerce channel, and it's going to enhance that.

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

And so if you think about where we're focusing our efforts, it's on these smaller bolt-on tuck-in type businesses that have an alignment with the strategy of one of our business units. And really, that's really focusing on both paint and plumbing. So our team that we've got in place is doing a great job of the cultivation of smaller businesses. I would anticipate there will be future acquisitions. Obviously, we can't foreshadow the timing of those, but teams are working hard. Part of the reason that we're focusing on these [treatment] also is, to your point, the valuations as you move up in terms of the size are quite high. I mean -- and so we see better value in the lower middle market. And so that's where we're focusing our efforts at this time. And then I think we'll continue to focus on our efforts in that lower middle market over the coming months and quarters.

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