馬斯科 (MAS) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Masco's second quarter conference call. My name is Dorothy, 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, Dorothy, and good morning. Welcome to Masco Corporation's 2021 Second 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 second 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 hope everyone is staying safe and healthy.

We performed exceptionally well in the second quarter, and demand for our products was strong. This resulted in our fourth consecutive quarter of double-digit sales growth, and sixth consecutive quarter of both margin expansion and double-digit earnings per share growth. I'm extremely proud of our entire team as we successfully navigated numerous supply chain challenges to enable this growth.

For the quarter, sales increased 24%. Excluding acquisitions, divestitures and currency, sales increased 18%. Operating profit increased 27% and margins expanded 60 basis points to 20.1%, principally due to strong volume leverage. Earnings per share increased an outstanding 34%.

Our overall performance demonstrates the strength of our portfolio of lower ticket, repair and remodel products that are diversified across geographies and channels, serving both the consumer and the professional.

Turning to our plumbing segment. Sales increased 48%, excluding currency, led by exceptional growth from our North American and international faucet and shower businesses and our spa business. International plumbing grew 50% in the quarter, excluding currency as Hansgrohe sales rebounded sharply in nearly all of its markets. Strong operational execution and new products such as Hansgrohe's Rainfinity shower systems led to share gains in many of these markets.

New product introductions will continue as we launch the award-winning AXOR One collection in the second half of the year. This collection was designed by Barber Osgerby, an award-winning internationally acclaimed London-based industrial design studio. This continues Hansgrohe's legacy of combining leading contemporary design with innovative functionality.

North American plumbing posted strong growth of 47%, excluding currency in the second quarter, led by approximately 75% growth at Watkins Wellness and robust double-digit growth at Delta.

Delta Faucet delivered another record quarter with growth across all channels and particular strength in the professionally oriented trade channel. We continue to invest in new products in North American plumbing as well. And 2 days ago, we introduced a Frank Lloyd Wright collection by Brizo that furthers the brand's commitment to distinctive design and innovative products.

Lastly, in plumbing, at the beginning of July, we acquired Steamist, another bolt-on acquisition for Delta. Steamist is a leading manufacturer of residential steam bath products that will complement our strong trade and e-commerce product offering and is consistent with our bolt-on acquisition strategy.

In our decorative architectural segment, sales declined 5% against a healthy 8% comp for the second quarter of 2020. While bath and cabinet hardware, lighting and pro paint grew in the quarter, demand moderated for DIY paint.

Material availability and other supply chain issues also impacted our overall coatings business, as nearly all of our resin suppliers were operating under a force majeure declaration during the second quarter. Because of these issues, sell-through on our coatings products was better than sell-in and inventories in the channel were reduced during the quarter.

Due to lower-than-expected second quarter sales, and our expectation that material availability issues will persist but slowly improve, we are lowering our DIY sales expectation from flat to down low single digits for the full year. However, with the acceleration we saw in our pro paint business in the quarter, we are incrementally more optimistic and are raising our expectations to low double-digit growth from high single digit for the full year for our pro paint business.

For the decorative segment overall, we now expect growth to be in the range of 2% to 5% for the full year.

With respect to innovation in the decorative segment, we continue to invest in new products and are excited to launch a new high-end line of paint in the third quarter at The Home Depot called BEHR DYNASTY for both DIY and pro painters. DYNASTY is our most durable, stain-resistant, scuff-resistant, one-coat hide paint ever. It's low VOC, GREENGUARD and LEED-certified, fast-drying and has an antimicrobial mildew-resistant paint finish. This is yet another example of how our innovation teams continue to focus on the voice of the customer to deliver leading innovation and value for both the consumer and the professional.

Moving on to capital allocation. We continued our aggressive share buyback during the quarter by repurchasing 6.6 million shares for $447 million. As part of the accelerated share repurchase agreement that we executed during the quarter, we will additionally receive approximately 900,000 shares in July to complete that agreement, bringing our total shares repurchased year-to-date to 13.1 million shares for $750 million. This is approximately 5% of our outstanding share count at the beginning of the year.

Underscoring our strong financial position and confidence in the future, we now anticipate deploying another $250 million in the second half of the year for share repurchases and acquisitions for a full year total of approximately $1 billion.

Finally, like I did last quarter, let me give you an update on what we are experiencing with inflation and supply chain tightness. We continue to see escalating inflation across most of our cost basket, including freight, resins, TiO2 and packaging.

Inbound freight container costs nearly tripled during the quarter. We now expect our all-in cost inflation to be in the high single-digit range for the full year for both our plumbing and decorative segments, with low double-digit inflation in the second half of the year. Inflation in coatings will likely be in the mid-teens later in the fourth quarter.

To mitigate this inflation, we have secured price increases across both segments and are taking further pricing action across our business to address these continued cost escalations. We are also working with our suppliers, customers and internal teams to implement further productivity measures to help offset these costs.

Despite the increased inflation, we still expect to achieve price/cost neutrality by year-end. While cost inflation has clearly been an issue, material availability has also impacted our business. Our teams have done a tremendous job of qualifying new suppliers, developing material substitutions and shifting production to adapt to this dynamic environment and to serve our customers.

However, these raw material constraints have limited our ability to build inventory of many of our products in the channels that we serve. We anticipate material availability to slowly improve in the second half of the year, and we expect to replenish inventory to the appropriate levels over this time.

The demand for our products remain strong, and with an improved outlook for plumbing based on the continued strength of both our North American and international operations, we are increasing our full year expectations of earnings per share to be in the range of $3.65 to $3.75 per share, up from our previous expectations of $3.50 to $3.70.

With that, I'll now turn the call over to John for additional detail on our second 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. We delivered another exceptional quarter as we capitalized on strong consumer demand, resulting in continued growth and increased backlogs. As a result, sales increased 24% with currency and net acquisitions each contributing 3% to growth.

In local currency, North American sales increased 15% or 12% excluding acquisitions. Strong volume growth in North American faucets, showers and spas led this outstanding performance.

In local currency, international sales increased a robust 50% or 49% excluding acquisitions and divestitures. Gross margin was 36.3% in the quarter, up 50 basis points as we leveraged the strong volume growth.

Our SG&A as a percentage of sales improved 10 basis points to 16.2% due to our operating leverage.

During the quarter, certain expenses such as headcount, marketing and travel and entertainment increased as planned. We expect SG&A as a percent of sales to increase in the third and fourth quarters as these costs normalize.

We delivered strong second quarter operating profit of $438 million, up $94 million or 27% from last year, with operating margins expanding 60 basis points to 20.1%.

Our EPS was $1.14 in the quarter, a 34% increase compared to the second quarter of 2020 due to volume leverage, lower interest expense and lower share count.

Turning to Slide 8. Plumbing growth accelerated in the quarter, with sales up 53%. Currency contributed 5% to this growth and acquisitions, net of divestitures, contributed another 4%.

North American sales increased 47% in local currency or 41% excluding acquisitions. Delta led this outstanding performance, delivering another quarter of robust double-digit growth. With its strong brand recognition and market leadership, Delta continues to drive strong consumer demand across all its product categories and channels.

Watkins Wellness also significantly contributed to growth in the quarter as both demand and our backlog remain strong.

International plumbing sales increased 50% in local currency or 49% excluding the acquisitions and divestitures. Hansgrohe delivered robust growth as demand continues to improve across Europe and numerous other countries. Hansgrohe's key markets of Germany, China, U.K. and France, all grew strong double digits in the quarter.

Segment operating margin expanded 230 basis points to 20.6% in the quarter, with operating profit of $274 million, up $115 million or 72%. This strong performance was driven by incremental volume, favorable mix and cost productivity initiatives, partially offset by an unfavorable price/cost relationship and higher spend on items such as travel and entertainment, marketing and growth initiatives.

During the quarter, we also completed the divestiture of HÜPPE, a small shower enclosure business based in Germany. HÜPPE sales were approximately EUR 70 million in 2020. This transaction closed on May 31 and net proceeds were not material.

Given our second quarter results and current demand trends, we now expect plumbing segment sales growth for 2021 to be in the 22% to 24% range, up from our previous guidance of 15% to 18%.

Finally, due to our improved sales outlook, we are increasing our full year margin expectations to approximately 18.5%, up from our previous guide of approximately 18%.

Turning to Slide 9. Decorative architectural declined 5% for the second quarter or 6% excluding the benefit from acquisitions. Our DIY paint business declined double digits in the quarter against a healthy high teens comp due to moderating demand and raw material supply tightness as resin plants affected by storms in the Texas Gulf Coast region in the first quarter continue to face production challenges. We expect these raw material headwinds to persist in the third quarter and now anticipate our DIY paint business to be down low single digits for the full year.

To help mitigate these challenges, we are working with our existing suppliers and qualifying new sources for materials to meet the demand of our customers, which remains strong. I want to thank our supply chain teams, which have done an outstanding job managing through these challenges.

Our pro paint business delivered strong double-digits growth in the quarter as consumers are increasingly willing to allow professional paint contractors in their homes. We expect demand in this channel to remain strong and now anticipate low double-digit growth for the pro paint business for the full year, up from our previous expectation of high single digits as pro paint contractors' order books continue to grow.

Our builders' hardware and lighting businesses each delivered growth in the quarter as they continue to capitalize on increased consumer demand.

Segment operating margins were 22.1% and operating profit in the quarter was $188 million due to lower volume, partially offset by cost productivity initiatives.

For full year 2021, we now expect decorative architectural segment sales growth will be in the range of 2% to 5%, down from 4% to 9% due to lower-than-expected second quarter sales and persistent raw material constraints.

We continue to expect segment operating margins of approximately 19% as productivity initiatives and pricing help offset higher input costs.

And turning to Slide 10. Our balance sheet is strong, with net debt-to-EBITDA at 1.3x. We ended the quarter with approximately $1.8 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, was 16.9%, an improvement of 120 basis points over prior year.

As we discussed last quarter, we had terminated and annuitized our U.S. qualified defined benefit plans in the second quarter and had an approximate $100 million final cash contribution to the plans to complete this activity. This removes approximately $140 million of pension liabilities from our balance sheet and will benefit our free cash flow by approximately $50 million to reduce cash contributions starting in 2022.

Also, we received approximately $166 million from the redemption of our preferred stock related to the recent sale of our former cabinet business.

Finally, as Keith mentioned earlier, as of today, we repurchased 13.1 million shares in 2021 for $750 million. We expect to deploy an additional $250 million for share repurchases or acquisitions in the remainder of this year.

Collectively, these actions demonstrate our confidence in our business and our commitment and ability to further strengthen our balance sheet while aggressively returning capital to our shareholders.

Turning to our full year guidance. We have summarized our updated expectations for 2021 on Slide 11. Based on our second quarter performance and continued robust demand, we now anticipate overall sales growth of 14% to 16%, up from 10% to 14%, with operating margins of approximately 17.5%, up from 17%.

Lastly, as Keith mentioned earlier, our updated 2021 EPS estimate range of $3.65 to $3.75, represents 19% EPS growth at the midpoint of the range. This assumes a 252 million average diluted share count for the full year. Additional modeling assumptions for 2021 can be found on Slide 14 in our earnings deck.

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

Thank you, John. We had an outstanding second quarter, driven by our strong brands, our innovation pipelines and most of all, our people, as demonstrated by outstanding execution by our supply chain teams.

Our strong performance demonstrates the strength of Masco's balanced and diversified business. Masco has a broad portfolio of lower ticket, repair and remodel-oriented home improvement products. Our products are broadly distributed across geographies and channels for both consumers and professionals.

Additionally, our markets remain strong, and we expect home remodeling expenditures to drive growth in 2022.

The fundamentals of our repair and remodel business are strong, with year-over-year home price appreciation of over 15% in May and existing home sales up over 23%. Both metrics have a strong correlation with our sales on a lag basis. And the consumer is strong with nearly $2 trillion in savings and an increased desire to invest in their homes.

Lastly, we continue to invest in our business and are well positioned for long-term growth. We are bringing new, innovative products to market, fueling our growth and expanding our leading market share. And with our leading margins and strong free cash flow, we will continue to deploy capital to reinvesting in our business, acquiring complementary bolt-on companies and returning cash to shareholders in the form of dividends and share repurchases, all to drive long-term shareholder value.

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

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

I could start on, I guess, DIY coatings. It sounded like you're attributing the reduction in the revenue guide more so to supply chain than to a real change in your demand outlook. I think you said sell-through was better than sell-in.

So if you could just provide a little more color on that, I guess, have you found that demand in DIY specifically is really not that different than what you previously thought? Or do you think the consumer is pulling back a little bit more than expected there as well?

Matt, I would say that demand did moderate a bit more than we expected, but certainly, material availability and other supply chain challenges played a role in the decline in the quarter. And of course, we had some tough comps.

The impact of the storms in Texas and the Gulf Coast region continue to limit resin supply. But really, this is an industry-wide phenomenon. And nearly all of our resins, as I mentioned, where suppliers were operating under a force majeure declaration in the second quarter. There was a plant explosion, in addition, at a supplier that supplies our alkyd resin, really for the industry, but that affected us.

So we do expect -- while they're not over yet, we do expect these material availability issues to persist in the third quarter and then slowly improve. So we now expect, as I mentioned, our sales growth to be in the range of 2% to 5%, down from our previous expectation of 4% to 9%. I would like to reiterate that our supply chain teams have done an outstanding job, and they'll continue to do so.

Understood. Really helpful color there. The second one is on a similar topic, but just thinking about raw material constraints broadly. It sounded like it really did constrain your ability to build inventory beyond just paint, if I heard you correctly, perhaps paint was most acute.

But I'm curious if you could outline kind of where else beyond paint that you think demand may have been running ahead of what you were able to produce. And maybe any color around the timing of when you think you can catch up from a production perspective.

It's been pretty broad-based, I think. We'd like to have more inventory in our channel, to put it very directly.

When we think about spas, we have never had a backlog of this size in spas, and the demand continues to be real robust.

We're doing a good job in our international front, but there's pockets in certain products where we could afford to have some more inventory in the channel. The same is true in North American plumbing.

And we're getting in better shape. We're not all the way there yet, but we do expect to, throughout the back half of the year, put our inventory positions in the channel back to where they belong.

Your next question comes from the line of Susan Maklari with Goldman Sachs.

My first question is around -- you mentioned that as a result of some of the supply chain issues that you are seeing inventories that are obviously continuing to fall and are really lean in the channel.

Can you give us some sense of what this means in terms of your ability to get those inventories back up? And is it something that potentially could kind of bleed into early 2022 now as you think about all the headwinds that are out there?

It's difficult to prognosticate on the future. We've seen more than just the Texas Gulf issue that we had in resins, there was a plant explosion, as I mentioned. But I would tell you that we intend over the back half of the year to get our inventory back in shape.

Okay. All right. My next question is around the margins in the plumbing segment. You've delivered about 20.5% or so in the first half of the year there. The guidance though implies that the second half will come down relative to the first half, and understanding that you've got some price cost headwinds in there and things.

But can you just give us some more color on how we should be thinking about that relative step down? And any thoughts on third quarter versus fourth quarter in there and some of those trends?

Yes, Susan, it's John. Maybe I'll take this one and -- so you're right, we obviously delivered very strong margins here in the first half of the year and in the second quarter as well.

Given our guide, it does imply a little bit of a step down in margin in the back half of the year. We're pleased with how we've executed so far.

But as we mentioned on previous calls, we do need to put some money back into the business in the form of investments. And they'll take the form of travel and entertainment, as I mentioned, but they also take the form of some growth initiatives.

And you may recall in some of our prior calls, we said that we thought in 2020 that we may have delayed as much as $40 million of investment spend, just to make sure we appropriately contain costs as we were going through the pandemic. And so as we see things begin to improve here significantly, we continue to expect that some of that spend will return. And as I mentioned in my remarks, some of that spend actually started to return in the second quarter as we began to make some investments in marketing and growth initiatives.

So we believe that a lot of that spend will start to come back in the second half of the year. And that will take additional investment in our leading brands. Some of the innovation that Keith mentioned in his prepared remarks in service to ensure that our customers are in full supply of our products.

And so we think that that will also contribute to future growth of the business to better meet our customers' needs. At the same time, as we kind of alluded to in our prepared remarks, there's going to be a little bit of a price/cost headwind as we go into the back half of the year. We've always talked about a little bit of a lag in getting price and cost flowing through our P&L. And generally, in the plumbing segment, it's about a 2-quarter lag. And so that's the second piece that will impact the margins in the back half of the year.

So those 2, a little bit of an incremental spend and then also that price/cost lag. That said, we are very confident that we'll be price/cost neutral as we exit the year.

Your next question comes from the line of Ken Zener with KeyBanc.

So amazing environment you guys are operating in. Could you talk to -- obviously, there was a larger coatings company that reported. Is there a way for you to talk to or quantify how supply/inventory is affecting your coatings business, whether it's DIY or pro? A.

And then are you seeing -- because of those constraints, are you seeing channel shifts at all within the pro perhaps because of those type of constraints or limited availability of coatings?

I would say that our inability to have our inventory position where we want it, say, first half compared to what we expect in the second half was an -- had an impact on revenue. I'm going to fall short of going down specifically quantifying [my math].

That's understood.

But we think that inventory is going to help us in the back half. In terms of channel shift, we pride ourselves on having broad distribution across multiple channels. When you look at our -- you're talking coatings now, but if we look at plumbing, we have very strong position in retail, which is both a pro and a consumer channel. We have a leading position in trade, which is principally more oriented towards the pro. And then in e-commerce, which is mainly consumer, we have a leading position there.

Similar story when we look at coatings, where we have a strong pro franchise as well as we always talk about, the strong DIY.

So we like our positioning of where we are in terms of broad channel distribution. So that if there are particular shifts, be it pro to DIY, or online to trade, et cetera, we have it covered. And I think that's a good, a significant reason why we're able to perform in this dynamic environment.

In addition to our strong teams that have been able to address these issues, we're where our customer wants to buy, and we're quite agnostic to these kind of shifts if they happen.

Yes, Ken, the one thing I would...

But I guess...

Keith's comments is with respect specifically to the pro, we're continuing to invest in that pro initiative. We think that's a really strong growth driver for us over the course of the next several years. And we and our channel partner, The Home Depot, look to continue to invest to grow the pro paint business.

Yes. Just sticking with that on a simple question. It seems like there might be, right, higher margins from pro versus DIY. And could you kind of describe it? Seems like these paint initiatives, I know you always have them, but this -- the SCUFF, I think, is how you described it.

I remember when Behr did the primer and paint, one coating, and that was quite a leadership introduction. Do you think these latest -- like the SCUFF and some of the pro stuff is really able to pull in more demand on that pro due to the quality compared to perhaps other competitors?

Yes. We're really proud of the Behr product development teams, research and development. We have been on the leading edge of development really since that company started. And paint-and-primer-in-one was a big one. We also work on commercial developments as it relates to the color selection center and being able to match colors and those sorts of things.

So this DYNASTY introduction is one of another of a long line of things that we have demonstrated the ability to do and will continue to do. Whether or not this is going to be as groundbreaking as paint-and-primer-in-one, we'll see. But this is our best paint ever, no question about it. In terms of scuff resistance, the number of one-coat hides that we have, the coatings that we have on it in terms of mildew and antibacterial and all those other sorts of things.

So this is a very big deal for us, and I'm extremely proud of it. And I'm also -- it's what we expect and that's what we're going to continue to do.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

Keith, John, I just wanted to -- first, a quick follow-up along the same lines of kind of the cadence that was asked about margins, I guess, (technical difficulty) side, specifically with respect to dec arc.

Is the thought, given some of the supply constraints you're talking about, that 3Q ends up looking a little similar to 2Q and then a bit of a rebound in 4Q? Or should we expect more even performance between 3Q and 4Q because it seems like overall, the back half is expected, plus or minus, flat in that segment?

Yes, Mike. Good question. So as we look at the back half of the year, we think it's going to be a pretty even performance across the last 6 months based on what we're seeing out in the marketplace, based on the supply that Keith was just talking about and understanding how seasonally things flow through in terms of demand.

So it looks like to us right now like a pretty even back half of the year.

Okay. And my second question is on capital allocation. It's great to see the buyback and the increased guide. It does seem like just broadly speaking, there's been an uptick in M&A.

I was wondering if you could comment about just specifically in your segments there, it seems like there may be some assets that shake loose. What are you seeing in the pipeline? And what are you seeing in terms of the competition for deals? Because it seems like right now, your guide is still predicated mostly on buybacks.

Really, Mike, not a whole lot of change in terms of what we're seeing. It's been pretty similar to what we've seen now for the better part of the year.

What we have and what we're doing here at Masco is we have a new deal team. And we have a new business development team that's been moved under John's leadership, and they're building momentum, clearly. And doing a good job, both in terms of cultivation as well as executing the deals.

The valuations, I would say, as is broadly understood and seen is still quite high compared to historical averages. And that really, I think, informs and was a key driver of our strategy of focusing on bolt-ons where we need to have synergies.

So the pipeline is robust. We're moving various assets through that pipeline in terms of the evaluation. We continue to do that, and it continues to look robust.

Having said that, we're patient. And we will make sure that these acquisitions are the right strategic fit for us, like you see with Work Tools International's or with Kraus in plumbing on the e-commerce side that bolsters our leadership in that channel.

So we're going to continue with our strategy. We've got an outstanding team that's working it, and we expect to continue with this type of deal flow.

Yes, Mike, maybe just a couple of extra comments to supplement Keith. I would say that the 3 acquisitions that we did at the end of last year are all on plan.

I mean so the working teams that -- the integration has gone well. The interaction with our existing businesses has gone very well. And so we're -- they're right on the business case. And so we're very, very pleased with those results.

And maybe some -- as Keith was talking about, there's a lot of activity. The pipeline is robust. And part of the reason we've been playing at a lower -- the smaller bolt-ons is we see better value down there at this point. As Keith mentioned, very, very robust pricing at -- in some of the larger transactions that have been seen in the industry. And so we just think there's better value at the lower end of the middle market right now. And so we're going to continue to play down there, I think.

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

I guess a bigger picture looking out to 2022, you do have tougher comps. Certainly, a lot of favorable secular drivers.

Do you see your growth algorithm returning back to that mid-single-digit range for the overall comp for next year? And how do you think about growth in your DIY paint business next year?

Well, there's no really returning to the growth algorithm, we haven't changed it. Our long-term growth algorithm is the same. It's 3% to 5% organic growth, 1% to 3% acquisition growth. We're committed to buy back in that range of 2% to 4% of our shares. And that puts us into that 10% EPS growth through cycles on average, plus the dividend yield of 1% to 2%. So 11% to 12% return on our name. So that hasn't changed.

And we believe strongly in that. We believe that we will do that and execute that from the 2021 levels. And we'll do it in a way that we continue to expand our margins. And as we've talked before, we're not talking multiple hundreds of basis points of margins improvement, but we continue to have very solid drop-down in both of our businesses, call it, in that 25% to 30% range, and we don't see that changing.

And we're going to continue to generate strong free cash flow and reinvest that in our business, and return it to the shareholder in a very careful manner that drives shareholder value. So no real change in our algorithm, and we expect growth to continue.

What we're seeing in our product demand continues to be strong. And as I've talked about consistently and continue to believe it and we're seeing it, the millennial entry into the home market, moving out of the more congested cities into larger homes as families form, et cetera, is a real deal, and that's a tailwind for us.

Any color on the outlook for DIY next year?

Yes, Phil, I guess, from my perspective, I'd think of it more of a -- as a low single-digit growth for DIY because of the trends that Keith just cited. I mean I do think that there's a good fundamental underlying demand out there driven by these trends.

And so returning to that kind of pre-pandemic, which we've been -- we were guiding low single-digit growth for DIY is what we probably -- is what we expect for next year.

That's super helpful. And then any color on how your channel is performing. We've seen some data points out there that suggest retail might be seeing some normalization of trends after a pretty strong year and perhaps a pickup in wholesale.

So just curious what you're seeing out there in terms of the channels and what that means for Masco, appreciating you're very diversified.

Yes. Well, that's probably a good question for our channel partners, but I'll tell you that in general, we're seeing strong demand across the board.

Certainly, in plumbing, we maintain our leadership in the retail space. Very strong position and strong growth in trade. International, we've seen broad pickup across our international businesses, particularly in our main markets in Central Europe and in China. So that's strong. So it's really broad-based in terms of demand drivers, channels, geographies. We're in a good spot.

Yes, Phil, maybe a little bit more color to Keith's comments. I'd say, demand's probably -- strong growth spread has been a little bit stronger on our trade side of our business, partly because if you think about the second quarter of last year, most of those outlets were closed.

And so that growth is -- here in the second quarter has been quite strong. So maybe just a little bit more color there for you.

Your next question comes from the line of Deepa Raghavan with Wells Fargo Securities.

I'll start out with a broad question. As things start to return to normalcy post-COVID, especially in the last 1.5 months or so, any trends or end markets that surprised you to the positive or perhaps underpaced your expectations? We can start there.

I think on the positive, our international growth is really solid, and that was nice to see and probably, I would say, even a little more robust than we expected. So that was -- broadly speaking, that was positive in terms of the overall.

Okay. Any trends that underpins your expectations?

I'd say, Deepa, there's a couple of things that continue to, I think, trended favorably for us. The demand for spas has been consistently strong over the course of the last several quarters. And that demand continued here into Q2. And so we've got a good look for the balance of the year at that business.

And then even like we just mentioned, our North American trade plumbing business was extremely strong and e-commerce as well. Those trends continue to remain very strong for us. And we're very pleased with how the businesses are performing pretty much across the board here in the second quarter.

In terms of -- on the downside, DIY paint was a little lower than we had thought. There was some significant supply chain constrictions that we didn't anticipate.

But our pro paint was stronger than we expected. So when we look at, say, where we're going to finish '21 compared to '19 in paint, we're still up mid-teens. So it's healthy. The demand is strong, but I will say DIY paint was a little lighter than I thought it would be.

Got it. My follow-up is on your price/cost equation. How much of this inflation that you're talking about in 2021, you are going to take into 2022, given the lag?

Should we think about price/cost heading into 2022 would turn positive, like early 2022 probably turns positive price/cost? Am I right in thinking that way? And two, how much -- is there a quantification of how much inflation you're carrying into 2022 if you snap the line here on inflation?

Yes, Deepa, we probably won't go into that level of specificity that you're requesting on how much we carry into 2022. But to your general point, could, as we look going into '22, see a little bit of a tailwind because we got price and costs have moderated. If they indeed just stay at the current levels, yes. I mean that's definitely a possibility as we go into the first part of next year.

I think the main point we'd like to make and leave with you is price/cost neutrality at the end of the year. And by that, I mean that we will have actions in place, productivity improvements, working with our suppliers to drive cost down, material substitutions and, of course, price. We will have that in place at the end of the year that matches the inflation that we're currently seeing.

So to your point about snapping the line, at the end of the year, we'll be price/cost neutral.

Your next question comes from the line of Keith Hughes with Truist.

Within Decorative Architectural Products, could you just comment on the performance of Kichler or Liberty Hardware? Any kind of growth number you're seeing from them in the quarter and expectations for the second half?

Yes, Keith, both Liberty and Kichler grew in the second quarter. So they're continuing to trend.

As we laid out at our Investor Day in 2019, particularly for Kichler, we kind of identified 2020 as a year for it to return to growth, and that's exactly what's going on in that business through the second -- end of the second quarter. So we feel good about how Kichler and Jai are driving that business. And so we're pleased with that.

As we look at the back half of the year, you may recall that on our third quarter call last year, we did cite the fact that Liberty had a very, very strong quarter. And so they're going to be up against some tough comps as they go into the back half of the year.

That said, the team down at Liberty is looking to continue to drive that business, and we're pushing them for growth. So we'll continue to see how that plays out. But we do know that they've got a very tough comp here in the third quarter coming up.

Okay. And then final question. I know we talked about inflation a lot but if you -- in '20 -- based on your expectations right now in '21, if we add up all the pricing you've got, all the raw material pricing you're seeing, will price/cost in dollars in '21 be negative? I know the run rate sounds like it's going to be at parity to end of the year, but what about for the full year?

Yes. Yes, Keith, I would guide you to think that, yes, that we will be negative because as we've been saying, we think we'll be price/cost neutral towards the end of the year. So I think we've got a little bit of price/cost to absorb here in the back half of the year before we get to that neutral position.

And so because of that, and because of what we experienced in the second quarter, we will be price/cost negative for the full year.

Your next question comes from the line of David MacGregor with Longbow Research.

You mentioned the investment back into the product and into the marketing. And I'm just wondering on DIY is if we head into a period of tougher compares, how are retailer expectations evolving, if at all, with regards to your level of promotional channel support?

Again, that's a decision that's made by our channel partner. And obviously, we support that and we develop that strategy together. But ultimately, it's their decision.

I would say that our promotional activity is about the same, and we'll finish out this year at about the same as it was last year. And we, generally speaking, our channel partner likes to compete on quality and service and brand because we're leaders in all 3 of those categories. And I don't see that changing much.

Okay. And second question, just with respect to pricing, how much pricing should be -- or should be achievable, I guess, through just new product introductions? It sounds like you've got a pretty substantial new product introduction calendar lined up here. Just wondering how much pricing you should be able to get from that as opposed to price increases on legacy product?

Yes. It varies across category. And it really is from a segment or from a channel to channel, there's differences.

But I think if you think about it in terms of general price increases across all of our categories for the year, in the high single-digit range for the full year, I think that's where we'll be.

And then in terms of new products, it's really not so much a price increase. It's really pricing for value, and it depends on the new products. Some of the new stuff that we're coming out on the high end with Axor that I talked about in my prepared remarks and in Brizo in our high-end plumbing, that is a very high-priced segment that has good margin with it.

In other cases, where we're launching in a leaner, maybe lower price point segment, there wouldn't be as much, let's say, pricing, if you will. So it varies.

But clearly, the lifeblood of our system here is innovation. And we continue to drive that, as you heard from all of our new product introductions that we have in play at the moment, and that will continue.

Your next question comes from the line of Garik Shmois with Loop Capital.

Just curious on the pro paint side, maybe a little bit more qualitative. But is there a sense that that segment is back to "normal" levels given the constraints of the pandemic last year and homeowners' hesitancy in letting contractors into their homes?

Yes. It feels to us, Garik, like it's at normal levels, and it's continuing to grow. That's what we'd like to see out of that business. And so we feel like we're in a really good position to continue to the growth of that business, as we continue to invest in feet on the street and relationships with contractors and getting more share of wallet with the existing contractors. So we feel really good about how that growth is developing here.

Okay. And then just on Watkins, just given the strength that we saw in the quarter, I know you had headwinds last year given the production issues in Mexico and some of the regulations that the government was putting in place there due to COVID.

Just any color on if you're back to normal, it seems like you are and just the capacity in Watkins and what the plan is there, just given the strength in the business?

Yes, we're definitely starting to get back on our feet. And the production system is dialed in, and we'll continue to increase our output.

But boy, demand is strong, and our backlog continues to be at record levels. So I think as we have the aging population in America and a -- clearly, a more tuned in population as it relates to overall wellness, both physical, emotional and mental health, this is a tool that really aids that. So we think there's some fundamental tailwinds here.

And as we do across our entire business, we look at capacity and capacity expansion, and I would expect that we'll be adding capacity here.

Your next question comes from the line of Adam Baumgarten with Zelman.

Just curious on the paint side with raw materials, wasn't a major call out this quarter. How impactful were higher raw materials in 2Q? And is the way to think about it that the back half is going to be where you feel the brunt of the increases?

Yes. So there is modest headwind in the Q2, but the more impactful part of the price/cost relationship will be felt in the back half of the year, Adam, on that one. Because I think what Keith mentioned was we're continuing to see escalation in costs, not only in the resin side but on TiO2, in packaging, in transportation and logistics has been going up. So there's a lot of cost pressures that we're seeing there.

But as we continue to say, we do think that we'll continue our pricing conversations and we do believe we can exit the year at a price/cost neutral level.

Got it. And then just sticking with paint. You gave last quarter in 1Q, DIY was up in the teens. You kind of talked about double-digit declines in 2Q.

Can you give us what that looks like year-to-date, just so we can kind of forecast for the back half?

Year-to-date, I don't know if I've got those numbers but -- off -- at my fingertips.

We're thinking about down low single digits for the year.

Your next question comes from the line of Eric Bosshard with Cleveland Research.

In the decorative architectural segment, curious on the sell-in expectations in the back half of the year. I know, Keith, you commented you thought you'd make progress on inventory in the back half.

But do you expect to ship in more? And is that -- how does that link between your ability and the demand from your retail customers to bring in more inventory?

Yes, it's directly linked. I mean it's the relationship between that -- the retail demand and the POS and our production capabilities.

And as we believe these challenges will get relieved over the course of the year that we'll be able to build that -- build inventory in the channel. We also have a little bit of benefit from the DYNASTY load in.

So does the net of that mean that you -- you commented that the sell-in was less than the sell-through in the second quarter, is there a path for that to reverse in the back half of the year or for you to make that up in the back half of the year? Or what should we expect in terms of the relationship between those 2?

Yes, that's right. We do expect to build inventory in the back half.

Okay. That's helpful. And then secondly, in terms of the sell-through momentum in paint for the back half of the year, is the expectation that it looks similar to the experience of 2Q or that it improves relative to 2Q? How should we think about that?

Yes. I think it would be similar to Q2, Eric, from what we're seeing right now in the market. Perhaps up a little bit, maybe even a little bit better in the second half.

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

I just want to clarify one thing with respect to your comment about sell-through being a little bit better than sell-in. Typically, when you've got supply shortages and lack of inventory on the shelves, there's a sense that demand is materially better than what you were able to provide. But you actually said that you thought that demand had weakened in DIY more than you had thought.

And so I was curious as to how you know that? How did you know the demand moderated if you didn't have actually enough product to sell. And so you actually feel like you could have sold more if you have more product. Just trying to reconcile those 2. Was it that you had an inventory decline, particularly severe in like your most popular categories, but then in some other SKUs you just simply undersold your expectations? Just trying to understand that a little bit better. And where you think the customers actually bought if they didn't buy your product because it seems like these are industry-wide supply chain challenges?

Yes. There was a slight impact of lost sales due to lower inventories. But I don't think we are missing a ton of sales due to stock-out conditions.

So my point on the inventory sell-through mismatch is that there's an opportunity for us to build inventory and to have better service. But I'm not so sure -- I wouldn't tag a whole lot of lost sales onto the inventory position. It's more of an inventory being lower than we want. Certainly, there was some of that, but not a whole lot.

Okay. That's clear. And then secondly, Keith, you talked about how there's a lag historically to home price appreciation into R&R demand. But clearly, if there's anything -- one particular metric in the housing market that is -- has completely blown away any historical comp, it is the home price appreciation, the rapidity of it -- I mean, the broadness of it and the magnitude that we've seen already.

And I'm curious as to how you think the impact on R&R may be different as a result of this abruptness in magnitude. Do you think that it may manifest itself a little bit more quickly? Do you think it may manifest itself more at the high end or certain large ticket versus smaller ticket? Just wondering if you could give us some color on how you're thinking about that now.

Well, I think a couple of things. For sure, when a family's asset in their home is worth more, they're more likely to spend to remodel it.

And when you look at the effect of COVID, and I think that while certainly, there were some waning impacts that will go away, there are some impacts here that are staying. And that is really how we believe the consumer is viewing their home, that there will not be a 100% return to work. And the environment at home is different. People are doing more things in their home, they're doing them differently, and they're spending more time in their home.

So we think there's a couple of lasting things here in that these are catalysts. And part of the reason why we're so robust and so happy with how we've positioned our portfolio with regards to our price point where we enjoy small projects, do-it-yourself, and we're clearly part of the large projects that are done by the professional.

We're in markets in Europe that are pulling up, and we're obviously well penetrated here in North America. So the home price appreciation is a very strong indicator of a robust DIY market as is the changing view of the consumer as it relates to the purpose of their home.

Your last question comes from the line of Michael Rehaut with JPMorgan.

Clearly, an interesting quarter. I was curious, a lot of focus on the paint side. I was hoping to get a little bit more breakout of the North American plumbing business, if you could talk to -- and I apologize if I missed this earlier in the call, talk to the trends that you've seen in retail, maybe things closer to the DIY spectrum versus wholesale channels and how the trends have progressed there, maybe comparing it to the -- obviously, the DIY and pro in paint?

Well, real strong trade business for us in the past quarter, and we expect that to continue. People are more comfortable with pros coming into their home for a longer time. So it's -- where in the throes of the pandemic, maybe you'd let an appliance repair person in for a quick repair, but you certainly wouldn't want someone in for a major remodel. That's changing.

And that principally, not totally, but principally flows through our trade channel. So we're seeing a nice pickup in the trade channel.

Having said that, the dynamic of more and more pros buying in retail is very real. Certainly seeing good foot traffic in retail. And our e-commerce business continues to do very well. And our acquisition, as John spoke about, of Kraus is really going well. We've continued to invest in that. For example, we just launched the Delta-branded sinks online, utilizing the Kraus' offering with the Delta brand. That's real leverage, and that's going well.

So as I said in my prepared remarks, we are seeing broad-based solid market demand and growth, international, domestic, trade, retail, e-commerce, we're really hitting on all cylinders.

Okay. I appreciate that. Maybe just for the second question to take a step back. I was hoping maybe you could just give us a sense of the e-commerce as a possibly even as a percent of revenue across your 2 different segments.

Obviously, it lends itself a lot more to the plumbing side, decorative, and in particular, paint, a heavier product, maybe more difficult to ship. But maybe just give us a state of where you are in both segments and where you think you might be able to take the business over the next 2 or 3 years?

Mike, it's John. And you're right, e-commerce has been a good growth vehicle for us over the course of the last several years. And actually, it's grown quite significantly.

And so if you think about 2019, our e-commerce sales as a percent of our total sales were roughly 5%. And in 2020, that grew nicely. It's now -- we finished 2020 at about 9%.

And if you break that down by segment, our plumbing product sales were roughly 12% on the e-commerce platform or channel. And as you might expect, and you kind of alluded to in your question, a little bit lower than that in the decorative architectural segment, about 4% because of all the things you cited. Color selection is a challenge for people still to order paint online. Though we do have -- I would say that the Behr team has done a nice job of investing in shipping and distribution and fulfillment. And so that's not going to be a limiter to our ability to transact online. It's more of the consumer choosing to select the color online than anything else.

And as we look forward, we think we're well positioned to continue to grow our e-commerce presence. Because if you consider plumbing products, they're packaged perfectly to ship onesies, twosies to consumers as they order their faucets or showerheads online. And so we think we're in a great position to do that. The folks down at Delta have done a great job of adding the capability to the Jackson distribution centers, they fulfill online. So we feel really good about how we were set to serve plumbing growth going forward.

And to the extent that the paint continues to become more [sought] online, we're well positioned to continue to fulfill there as well. So we really like how we're set up as this trend continues to grow here in North America.

I'd like to thank all of you for joining us on the call today and for your continued interest in Masco. This concludes today's call. Thank you.

Ladies and gentlemen, you may now disconnect.