Good morning, ladies and gentlemen, and welcome to the Masco Second Quarter 2020 Earnings Call. My name is Beverlin, 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 Beverlin, and good morning. Welcome to Masco Corporation’s 2020 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. Please limit yourself to one question with one follow-up. If we can’t take your question now, please call me directly at 313-792-5500.

Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risk and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We describe these risk and uncertainties in our Risk Factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted.

We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I’ll now turn the call over to Keith..

Thank you, Dave. Good morning everyone, and thank you for joining us today. I hope you and your families and loved ones are healthy and safe. This is certainly a difficult time for all of us.

Despite the numerous challenges created by the COVID-19 pandemic, I'm proud that the Masco team has demonstrated support for one another, support for our customers and support for the thousands of communities we serve. Our team has risen to the challenge, and I'm grateful for their dedication.

Similar to the responsiveness that Masco has shown throughout the pandemic, we're not standing on the sidelines in the fight against racial injustice and inequality. We're concerned about systemic racism, passionate about creating lasting change, and committed to doing our part.

Over the last five years, our enterprise-wide diversity and inclusion strategy has included actions within our company and our communities. We fully recognize that we have more work to do. But we've laid a solid foundation that will enable us to accelerate progress in the future.

At Masco, we are committed to creating an environment where all employees are included, all employees are treated with dignity and respect, and all employees have an opportunity -- an equal opportunity to thrive. Now, turning to our quarterly results. Please refer to slide four.

We executed extremely well in the second quarter and demand for our products improved as restrictions on production eased and our distribution channels reopened.

This strong demand resulted in a record sales quarter for our paint business and along with our focus on cost control resulted in better than expected decrimental margins in our Plumbing segment and strong incremental margins in our Decorative segment.

Combined, sales for the quarter decreased 3% excluding the impact of currency, significantly outperforming our expectations. Operating decrease just $5 million, while operating margins expanded 50 basis points to 19.5%.

Net income from continuing operations increased 3%, and earnings per share grew 14% to $0.84 per share, highlighting the strength of our capital allocation and portfolio move. Turning to our segments, excluding currency, Plumbing sales declined 13%.

Sales varied widely across our businesses in Plumbing, mainly driven by the extent of production facility and distribution closures. Our spa business experienced the largest sales decline in the segment due to facility closures.

However, production resumed quicker than expected during the quarter, and we were able to achieve a sales decline of less than half of what we originally forecasted in this business.

We continue to see record levels of demand and backlog for our spas, which speaks to our industry-leading brands and to the desire of consumers to enhance their at-home living experience. Our international Plumbing business saw significant improvement throughout the quarter.

Germany, our largest market, saw positive sales growth in June, while other European countries, such as the U.K. and Italy, have been slower to reopen.

Our North American Plumbing business also saw significant improvement throughout the quarter, with Delta achieving a record sales month in June, with strong strength in its trade, retail and e-commerce channels of distribution.

Our stronger than anticipated sales performance in Plumbing, together with our disciplined cost control resulted in decrimental margins of 28%, significantly better than expected. In our Decorative Architectural segment, extremely strong paint volume drove both top and bottom line performance.

DIY sales were up high teens for the quarter and even stronger in May and June. Sales declined low double-digits for the quarter, but we did see notable improvement in June.

With our leading Behr brand, we are well-positioned to continue to capitalize on the strength of the DIY market, and we remain committed to invest, along with our partner the Home Depot in the large pro opportunity.

As we discussed last quarter, we are in dynamic and uncertain times and accurately predicting the depth and duration of the impact of this pandemic is difficult at best. While we have withdrawn our full year guidance, here's how we are currently thinking about our expected third quarter performance.

We anticipate third quarter, excluding currency to be in the range of flat to up 10%, with Plumbing sales in the range of down 5% to up 5%, and Decorative Architectural sales growth to be in the range of 17 -- excuse me -- 7% to 17%. Third quarter operating margins for both the company and each of our segments are expected to be similar to last year.

Importantly, this outlook assumes no further shutdowns of facilities or points of distribution, which is obviously a concern as COVID cases spike in many parts of the country.

While the third quarter appears to be robust based on the demand we are seeing and the backlog for our products, we have concerns that demand could lessen in the fourth quarter, if government stimulus reduces and if the economic impact of the pandemic worsens.

Additionally, while we were focused on short-term cost control during this pandemic, we remain committed to driving long-term growth, and we will continue to invest in brand, innovation and service to ensure we win in the recovery. Lastly, I'd like to update you on our current thoughts on capital allocation.

We have suspended our share repurchase activity indefinitely due to the uncertainty of the current environment. I'll remind you that we repurchased approximately $600 million of our shares prior to suspending our activity at an average price of $39.30 per share. There is no change to our thoughts on M&A.

We remain active in the M&A market and have the balance sheet and liquidity to execute transactions during these uncertain times. Lastly, expressing confidence in our future prospects and the strength of our balance sheet. Our Board announced its intention to raise our annual dividend by 4% to $0.56 per share beginning in the fourth quarter.

This marks our seventh consecutive year of an annual dividend increase. With that, I'll now turn it over to John for additional detail on our second quarter results.

John?.

Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning the slide six. Sales decreased 4% and 3% excluding currency.

Foreign currency translation unfavorably impacted our second quarter revenue by approximately $13 million. In local currency, North American sales in the second quarter matched prior year. This performance was mainly due to lower volumes in our Plumbing business, which were offset by strong volume growth in our DIY paint business.

In local currency, international sales decreased 17% in the quarter, driven by lower volumes. Gross margins was 35.8% down, 90 basis points. Our SG&A as the percent of sales decreased 140 basis points to 16.3% as a result of our focus cost containment in the quarter.

We do, however, expect a portion of these costs to come back and impact the remainder of the year as demand improves. These costs are related to investments in advertising to further strengthen our brands, displays, support new program wins and additional funding to advance our e-commerce initiatives in the continued rapid growth of this channel.

Operating income was $344 million in the quarter, down $5 million from last year. The operating margins expanding 50 basis points to 19.5% despite lower volumes. Our EPS was $0.84 in the quarter, an increase of 14% compared to the second quarter of 2019.

While we do not normally provide monthly sales trends, in this environment we thought it would be helpful for you to understand the improvement we saw throughout the quarter. April was the low point, the sales down 22% due to numerous restrictions.

Improving to down only 3% in May and turning to growth of 14% in June, the restrictions were eased and some of the pent-up demand was fulfilled.

We anticipate continued solid demand in the third quarter, with sales expectations, excluding currency of approximately flat to 10% growth as this pent-up demand continues to get fulfilled with operating margins, similar to Q3 of 2019.

Many uncertainties remain that can impact these results, such as the effect of government stimulus programs and the impact of virus on the overall health of the economy and consumer. Additionally, it is important to note that our expectations for Q3 assumes no further closures of our manufacturing plants or points of distribution related to COVID-19.

Turning to slide seven. Plumbing decreased 13%, excluding the impact of currency, but improve sequentially during the quarter, with June sales up high single digits, resulting in better than expected segment performance. Foreign currency translation unfavorably impacted the segment sales by approximately $10 million in the quarter.

North American sales decreased 11% in local currency. A solid growth in our retail and e-commerce channels was more than offset by declines in our wholesale and specialty dealer channels. The trade channel was more impacted by the closure of wholesale locations and plumbing showrooms.

However, we saw a significant improvement and positive sales growth in the trade channel in the month of June. Our Delta sales in the quarter were down low single digit. We recover exceptionally well from a significant decline in April to a record sales month in June.

North American sales in the quarter were also unfavorably impacted by approximately 7% as a result of facility closures at our spa business in California and Mexico due to government orders. Spa manufacturing did ramp up in May and June as restrictions were ease.

However, Watkins continues to operate at less than 100% capacity due to ongoing employee limitations and labor constraints in our facilities, which we expect to continue throughout out the third quarter. International Plumbing sales decreased 17% in local currency.

Hansgrohe experienced a low single digit decline in the quarter in its home market of Germany. However, sales improved in June with mid single-digit growth. Hansgrohe saw larger declines in the quarter in other European markets, including the U.K., France, Spain and Italy due to a slower easing of restrictions in those countries.

Sales in China also declined low single digits for the quarter, a significant improvement from the approximately 20% decline experienced in the first quarter. Operating profit in the quarter was $159 million, and margins were 18.3%. Our decremental margin of 28% was better than expected due to improved volumes and solid execution on cost containment.

In terms of monthly sales trends, Plumbing sales were down in April 33%, improved to down 17% in May, and rebounded to 8% growth in June. Turning to the third quarter.

We expect sales, excluding currency, to be in the range of down 5% to up 5% as we currently see good demand for our products in North America, while international demand remains slower to recover. We anticipate margins will be similar to prior year margins of 18.7%. Turning to slide eight. Decorative Architectural grew 8% for the quarter.

The strong performance was driven by low double-digit growth for our paint business with high teens growth in DIY paint, partially offset by low double-digit decline in pro paint, resulting in a record sales quarter for Behr. Our outstanding DIY paint results benefited from the continued resurgence in DIY painting.

While it is still too early to call this a trend, we remained well-positioned with Behr's compelling quality and value proposition to capitalize on shifts in consumer behavior. While pro paint demand declined in the second quarter, we saw sequential improvement within the quarter, with June sales down only low single digits.

Our builders hardware business also experienced growth in the quarter, driven by solid performance in their retail in e-commerce channels. Growth was partially offset by lower sales in our lighting business.

As we mentioned on our first quarter earnings call, lighting sales were impacted by the loss as a portion of a private label program and inventory rebalancing it a customer, but results were better than anticipated. Sales were also negatively impacted by the closure of lighting showrooms due to state shelter-in-place orders.

Lighting sales improve sequentially in the quarter, with year-over-year sales growth in June. Operating profit increase in the quarter by 17%, driven by incremental volume and focused cost containment, such as reduced marketing and advertising spending.

In terms of monthly sales, Decorative sales were down approximately 9% in April, but were up 13% in May, and up an outstanding 23% in June. Turning to the third quarter. We expect the strong demand for paint to continue in anticipate segment sales growth to be in the range of 7% to 17%, and margins to approximately prior year margins of 18.9%.

We also anticipate higher investment in the third quarter in advertising and marketing in the segment, and additional display expense in our builders hardware business related to a program win at a retail customer. And turning to slide nine.

Our balance sheet remains very strong, with net debt to EBITDA at 1.3 times as we ended the quarter with approximately $2.1 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.

Note that our quarter-end cash balance includes a $200 million benefit due to the deferral of taxes on the sale of our cabinetry business. This tax was paid on July 15. Working capital as a percent of sales was improved 50 basis points versus prior year to 18.1% due to lower inventory levels and an improvement in accounts payable.

Lastly, during the second quarter, we received 2.3 million shares at no additional cost to complete our $350 million accelerated share repurchase agreement, and average share price of $36.62.

As Keith mentioned, our share buyback activity remained suspended therefore, we continue to estimate our 2020 average diluted share count will be approximately 266 million shares. And with that, I'll turn the call back over to Keith..

Thank you, John. The COVID-19 pandemic may have lasting structural effects on the economy, consumer behavior and homeownership, all of which we will continue to assess. There could be increased interest in single-family housing with more space in the house and more distance from neighbors.

Increased remote working could lead to higher remodeling spending. Homeowners may take on more do-it-yourself projects, especially easy-to-do projects, such as painting as opposed to having other people in their homes.

And record low mortgage rates and lack of supply could lead to home price appreciation, which historically has a strong correlation with our sales. All of these factors bode well for our lower ticket repair and remodel products.

The changes we have made to Masco over the past few years, our culture of execution and our commitment to continue to invest in brand, innovation and service to support our customers, positions us well to drive long-term growth and value creation. With that, I'll now open up the call for questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Matthew Bouley of Barclays Capital..

Hey, good morning. Thanks for taking the questions. Hope, everyone is doing well. I guess, I wanted to start perhaps on the sales guidance for Q3. It's a relatively wide range. And thanks for all the details around the monthly cadence.

But I'd be curious if you could give some color on sort of the starting point for the quarter, and how July trended in both segments? And kind of what's keeping you a little more conservative on providing such a large range there? Thank you..

Matthew, July was strong for us. And we are starting off the quarter confidently. However, when we think about the large range, I think, it's clear that there is volatility and variability as we look forward in terms of what can happen with the consumer.

And that's fundamentally what's drived -- what's driven our thinking as it relates to the range on possible top line..

Okay. Understood. And secondly, just on DIY paint specifically. Obviously, very strong results and it seems like it's going to continue strong through the summer months at least. And I hear you on making some investments there into Q3.

What are you doing, or what's kind of the intent around share through this? Is there an ability to kind of maintain or even -- or really grow your market share, while this underlying demand is the strong? Or does it make more sense to kind of limit the promotional investment and sort of ride the underlying wave there? Thank you..

No question. There's an opportunity to gain share and we're doing just that. A significant change as we look at the performance from a demand perspective, DIY related to pro. And when you overlay that with our strong position with the leading DIY brand, we most definitely are gaining share here, and that's our intent to continue to do that.

We -- as we've talked about consistently, Matthew, our focus has been on three things. Number one, is the safety of our employees, full stop. That's our focus. Number two, is to make sure we're ensuring business continuity and keeping a close eye on our liquidity and we have very strong liquidity as a result of the strong cash flow of our portfolio.

So, that's strong. And number three, consistently we've talked about winning in the recovery. And part of that winning in the recovery is making sure that we're investing appropriately in brand and innovation. John talked a little bit about some new displays, particularly in this Decorative Architectural segment that we'll also be spending in.

So, it's a judgment call. And it's a feel, if you will. But we are committed to ensuring that we spend appropriately to win in the recovery. And that's how we're thinking about it..

Thanks, Keith. Congrats on results..

Thank you. .

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

Yeah. Thanks very much, guys. Good quarter. I wanted to ask you a little bit about what you're seeing in the U.S. with respect to inventory levels and restocking. Wondering if it's happening yet, how long could it last? And I'd imagine that would probably be more impactful in maybe your wholesale/specialty dealer channel.

Just want to confirm, was that like down as much as high teens in second quarter?.

I'm sorry, Steven. I didn't hear that last portion of your question..

I'm sorry.

The wholesale and specialty dealer channel was in Plumbing, was that down as much as high teens in 2Q?.

Yeah. Steven, it's John. No. I would say no. Actually -- a couple of points I like. Sell-through has been very good. It is probably better than sell-in across our channels. And we've seen -- once we saw the trade channel start to reopen, we saw a very good sales trends there. And so no.

Our sales were not down -- the teams that you described, it was less than that..

In terms of inventory, Steven, it really varies a lot business-to-business. As you know, we had some shutdowns in Q1, driven by government orders that certainly put a dent in our inventory levels as consumers continue to buy our products.

And paint, for example, we're seeing an unprecedented amount of demand, particularly demand for the one gallon DIY friendly containers. So, there were some inventory fluctuations both from a business-to-business perspective, as well as within our businesses. But our facilities are ramping production back up. We're catching up on that backlog.

And we believe we're in a good position to serve our customers as we go in here through the summer months..

Okay. Great. Thanks for that.

Just to clarify, so are you saying that you feel like in 3Q, you can pretty much catch-up on whatever destocking occurred? Or do you think that this is something that we're going to be talking about through 4Q or even further?.

No. I think we're going to catch-up..

Okay. Thanks very much..

Your next question comes from the line of John Lovallo of Bank of America..

Hey, guys. Thank you for taking my question. First one, maybe I'll just try Matt's question one more time. The June sales trend is obviously very strong, plus 14%.

I mean, would you say July was comparable to that at least on a year-over-year basis?.

Yeah. John, I think it was -- yeah, I think it's very similar. Yeah..

Okay. That's helpful. And then maybe just turning to SG&A. The $39 million or so pulled out on a year-over-year basis is very significant. And I know you guys talked about some investment in displays and e-commerce and so forth.

How should we think about absolute dollars of SG&A on a year-over-year basis in 3Q and 4Q? I mean, will they actually be down on a year-over-year basis, or do you think those trends upwards again?.

I don't think they will be down year-over-year. I'm sorry, there'll be -- I'm sorry. I think, SG&A year-over-year, John, we'll have some additional investment that we're going to make in the things that we described, like advertising, some headcount coming back in. And as you might expect we really pulled back on headcount. We had a hiring freeze.

We have wage freezes across the enterprise as we came in the second quarter. And as demand has come back, we're starting to look at putting some of those things back into the system.

One of the things that goes through SG&A, as Keith mentioned, and I mentioned in my prepared remarks that some of the displays that will be going into to support Liberty in the program win that they had at retail. So, I think, we'll have some additional investments.

Some advertising that we pulled back on pretty significantly will come back in the third quarter. So, I think, overall, I think, we'll be in good shape. I can tell you we are monitoring this very, very closely. And to the extent that we see any changes, we'll be very quick to react on our SG&A spend..

Okay. Thank you, guys..

Your next question comes from the line of Michael Rehaut of JPMorgan..

Thanks. Good morning everyone and congrats on all the hard work. Just -- again, kind of zeroing in on 3Q a little bit. And number one, I appreciate the additional color around July.

If you're talking about the high end of the 3Q range being a few points below June and maybe July, are you seeing anything in your order book or anything from -- in terms of like a forward look into the last two months that puts you -- maybe 10 points at a midpoint below, what you're seeing in July? And then, I guess also on the operating margin side.

When you look at operating margins being similar to a year ago, but down a bit sequentially, how much of that is maybe the coming back of some of those temporary cost measures, holding back on some advertising and other types of spend? How much of that is a function of some of those costs coming back rather than perhaps just seasonality?.

Well, certainly, seasonality is a part of that. If you look, Mike, at paint, Q2 is our heftiest quarter. And then it backs off a little bit in Q3. So, there's an element of seasonality when you look at volume, particularly in paint. The biggest driver would be costs that we are planning to put back into this business when we look at Q3.

And I think we had a keen focus on business continuity, as I mentioned, in liquidity, and we did not know what this pandemic was going to deal with us in terms of overall demand. So, we were cautious.

And we -- I think, it's favorable that we were able to demonstrate that we do have the levers to be able to control our spend, because this is an unpredictable environment. So, we're balancing that spend control with investment to win in the recovery.

And we feel where we sit today that it's appropriate for us to start to layer that investment back in. We've talked about program wins and the displays, the costs that we need to put in to support that program. That's a good thing.

We're going to continue to drive advertising, promotions those sorts of things in terms of continuing to build our brand and continuing to take share in this recovery.

We also admittedly have some increased costs as we look into the third quarter, as it relates to hiring costs, over time, there will be a little bit of premium freight as we're continuing to smooth out our supply chain.

So, when you roll all those in and you look at that variability, that's why we're making the call for Q3 margins to be similar to last year..

And then, just on the sales question, again. I appreciate it..

On the order book, what are we seeing?.

We have a real solid order book. And we have -- as John mentioned, the sell-through has been very strong, stronger than the sell-in. So, we have some ability for us to continue to put some inventory back into the channel, and our order book is strong..

Thank you..

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

Hello, everyone..

Good morning, Ken..

Good morning. .

What a quarter? Focused on Plumbing, I have two parts. First, what is the Plumbing SKU mix you're seeing? So, kind of rough gross fittings -- focused on the U.S. and then kind of the thoughts about if retail is picking up a lot of traffic from the trade. So, I mean, Stanley talked about record retail.

So, are we just seeing people going to retail and it wasn't so bad in the trade? And then also just between the rough trends in the U.S. and fittings, is the first question..

I think, generally speaking, the rough tends to have a little bit more new construction component to it than finish. As you can certainly do a remodel or -- repair and remodel job with a faucet, et cetera, versus going under the deck and working with stops or working with rough plumbing.

So, there was a little bit of a tougher impact on rough as it relates to the temporary shift we saw earlier in the quarter away from new construction. Now, we're starting to see that build in the last month of June in the quarter, as it relates to rough.

But to answer your question, I would say that finish fared a little bit better than rough for that demand mix. In terms of retail versus wholesale, I think a pretty consistent story to what us and others have been saying. When you have points of sale and points of distribution closed i.e. plumbing showrooms, that volume goes down.

So, there was a shift to retail, a shift to e-commerce that we saw in the first, call it, two months of the quarter. And then, in June, we're seeing that start to come back. And we're seeing actually some very nice traction in showrooms as people are starting to interface with that channel more as they're reopened..

And is there a big difference in the consumer behavior in Plumbing specifically in the U.S. versus Europe? If you could kind of contrast that if it might offer some insight? Thank you..

I don't know that I'd say so much that it is consumer behavior so much. We really haven't seen that. And the best way to tell that really is to look at channels of -- and traffic and channels and look at mix. Really, what we're seeing, I would say, broadly speaking is that Europe has been slower to recover than our recovery here in the United States.

And that may say something about our infection rates here in the United States versus Europe, frankly. But it's been a little slower in Europe. You look at the U.K. Just thinking here, Spain, Italy, I would say those countries approach to -- reopening has been significantly less aggressive than the United States.

And that's where I would say there's a difference more so than say consumer behavior..

Thank you..

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

Good morning. Thanks for taking my questions, and that's quite good quarter against such a fluid backdrop. First question, I had just on Deck Arc and paint specifically. You kind of commented that pro paint got back to down low single digits in June. If I -- if we think about that business being I think roughly 20% of the total coating segment.

It sounds like that was maybe like a two point drag in the quarter based on the overall trends. So, when you're looking at the guide for 3Q, up 7% to 17%.

Any thoughts on just like how to frame what pro paint expectations are, and how much that could either contribute or continue to drag on the segment results?.

Yeah. Mike, so, first of all, the pro business is about 25% of our paint sales. And as we look forward to Q3, we expect it to be just modest growth from here on. I mean, we don't expect significant -- slight improvement from where we're at today, but not a significant improvement is what we're counting on -- in the third quarter..

Okay. Got it. And then the second question just back on margins. I appreciate the -- certainly, the investment and some of the cost returning at the same time, if at the midpoint or back in a growth environment.

And you normally lever on that and at least in Plumbing, not sure about on Deck Arc, but in Plumbing, you may also have some cost tailwinds from raw mats potentially.

Is the reason for flat margins than overall? Just is it timing of when these investments come through on a year-on-year basis? Or is it -- I guess, trying to think about how to frame whether the investments are significantly larger in general, or whether it's truly just kind of catch-up from deferred 2Q into 3Q, so a little more stacked year-on-year than you'd normally be?.

Yeah. Mike, I'd say it's more of the latter part. It's more just kind of a catch-up from some of the Q2 spend that we did not incur. And across all segments, it's pretty much the same story that we're putting the other displays for the builders hardware business.

A lot of the investment that we're putting back into the business, as Keith mentioned a couple of minutes ago, it's similar, right? We're reinvesting in some of the headcount, because we're slowly loosening the headcount freeze that we had or the hiring freeze that we had on. We are starting to reinvest in the brands appropriately.

We're not trying to get too far out there. But we think appropriate investment in the brand makes sense at this point to continue to support our brands and the brands with our retail partners. In terms of price cost, I'd say, as you think about the commodity basket that we're seeing, Mike, now -- break that apart, I guess, into the two segments.

Zinc has been relatively flat, maybe up a touch. Copper has risen in the last month or so. And so, today, it's above where it was a year ago. So that could be potentially a little bit of a headwind in the future. Recall that, it takes about two quarters for raw material deflation to flow-through and hit our P&L.

So, maybe a little bit of the tailwind that we'll enjoy on the commodity side will help offset some of the tariff impact. And we'll continue to feel as we go into the second half of the year on the Plumbing side of the business.

Then if you turn into the -- and look at the raw material basket on the Decorative Architectural side, our TiO2 has been relatively stable through the year, and we expect it to be -- continue to be stable through really the balance of the year. The one area that we have seen a little bit of easing is on resins.

And we do -- we are seeing a little bit of potential for that to maybe Q2 to be the bottom of that and to see a little bit of inflation as we go into the last half of the year. So, there's the potential for some price cost headwinds in the second half of the year on the Decorative Architectural side..

Okay. Thanks. That’s really helpful..

Yeah..

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

Thank you. Good morning. My first question is a bit higher level. It feels like from your commentary that what we've been seeing over the last couple of months is that some of the mix shift that we historically see in recessionary periods really has not come together to the same extent.

Do you think that that's accurate? And I guess, how are you thinking about mix shift going forward and the sustainability of some of the trends that we've seen?.

I think, Susan, that is an accurate statement. In terms of the mix shift that maybe you would say is typical of, let's say, a recession that we haven't seen.

And there's several different theories on why that is, perhaps is more affluent customers that would buy the higher level mix, haven't really been affected in terms of unemployment or haven't been affected by the pandemic so far. So, that's an aspect of it.

But we are seeing good high quality mix at that high level and we're seeing it across our segments. We talked about record backlog in our spa business, and that's a high dollar discretionary purchase. And we have a very solid demand. So, I think that's a fair statement.

In terms of where we think mix will go as we look through the rest of the year, we really don't think it's going to be much of a factor. We had a little, call it, channel mix early on in the quarter as retail was stronger than trade.

And we have a little bit of a mix headwind in Europe as that economy has yet to really pullback through, but we anticipate that when we look at the full year impact that really isn't going to be that material as it relates to mix..

Okay. That's helpful. Keith in your comments you talked about capital allocation. And it sounds like the M&A pipeline is perhaps ticked up a little bit for you.

Can you just give us a little more color on what you are seeing there? And how you are thinking about perhaps M&A relative to shareholder returns and that kind of breakdown?.

The pipeline has really been about the same. We continue to work and to drive it. We have interesting targets. I think, probably in this type of an environment, there's less of a willingness to sell, clearly. But we're still talking to people.

So, I wouldn't expect much activity or much difference in terms of how we think about M&A and shareholder return, and how that fits into our capital allocation. As I talked about, really no change. Our capital allocation strategy is to fund the good idea of our businesses and to support our core business, first and foremost.

And we're going to maintain a respectable and healthy dividend and continue to grow that dividend. And then as it relates to share buybacks and M&A or acquisitions, we're going to be patient. And I think, we've demonstrated that. And we will take advantage of episodic times to buy our stock a little bit more heavily as we have in the past.

And we'll also be patient and make sure that our M&A targets, our shareholder value creating and that there -- by and large, we're looking at bolt-on to our existing segments. And that hasn't changed..

Okay. Great. Thank you. Good luck..

Thank you..

Your next question comes from the line of Seldon Clarke of Deutsche Bank..

Hey, good morning. Thanks for the question. What's the right way to think about either incrementals or decrementals in either Plunging or Decorative if sales come in at the -- either book end of your guidance? Are there -- I know you talked about some temporary costs.

But would those scale with revenue growth, if you come in Decorative, for example, at the higher end of the 7% to 17% range? Or should the fixed cost base stay fairly consistent?.

Yeah. Seldon, I would tell you that our incrementals really haven't changed much. Overall, from a company perspective, we're in that 30% to 35% range. The Plumbing segment, should be an approximately that same range 30% to 35%, the Decorative Architectural segment will be a little bit less than that, closer to the 25% to 30% range.

So, that should reflect some good leverage of our fixed cost. But really no significant change from what we've experienced historically..

Okay. That's helpful. And then just a couple of quick ones on the spa business. First is just how much seasonality is there in that business? And you talked about seeing a significant amount of pent-up demand.

But did you lose any market share in the second quarter, or all the major manufacturers constrained from a production standpoint?.

When you look at the industry, everybody is constrained at this point. So, you're right on that assertion for sure. There's no question about it. In terms of seasonality, typically, this is a very seasonal business.

However, with our strong order book and our backlog, we anticipate that seasonality through the summer/fall and into the winter, frankly, to not be there this year. We've got a tremendous backlog and we're looking forward to filling it..

Yeah. Quite honest. So -- and this is clearly not a demand issue. This is a supply issue. I mean, this was -- we were not permitted to manufacture. And so, to Keith's point, we're seeing really good strength in this business..

Okay. I appreciate your time. Thanks, guys..

Thank you..

Your next question comes from the line of Adam Baumgarten of Credit Suisse..

Hi. Thanks for taking my question.

Just in paint, curious if you saw any meaningful difference in sales growth between exterior and interior, and maybe how that trended throughout the quarter?.

Sure. Yeah. Given the nature of the season, generally in the second quarter, we saw stronger sales in next year paint than we did in the interior paint.

During the second quarter, Adam -- and probably a little bit stronger than we would normally see versus historical second quarters, but I take it that's the nature of the current environment in the pandemic..

Got it. And then, just to confirm on the Decorative guidance for 3Q on sales.

Are you assuming positive sales growth for the pro paint business? And also, will Kichler and Liberty be up in that guidance that you gave?.

So, Kichler and Liberty will continue their growth, so it will be modest overall in the segment, because they are relatively small pieces of the segment. And then, we are expecting modest growth for the pro business in the third quarter..

Got it. Thanks. Appreciate it..

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

Hi. Thanks. Just want to follow-up on the pro question.

Do you think we're at a point just given the trends that you're seeing in July and expected in Q3, there were more -- levels for pro demand? I guess conversely, if not, do you think that over the next several quarters and years, potentially that you're going to see a secular shift in that category due to the resurgence of DIY interest?.

Garik, I'm going to ask you to repeat the question. There's a little bit of interference on the call when you were asking your question..

Sorry. No. Just wondering if you're starting to see pro paint sales normalize into July and in the third quarter.

And then, possible, if not, do you worry that there could be a secular shift away from this category due to the resurgence in DIY interest?.

The -- we are seeing throughout the quarter, we are seeing pro pick up a little bit. It was strong in exterior, as I think people obviously are more comfortable having people on the outside of their home than inside. And we saw -- as we mentioned in our prepared remarks, the lift up in the quarter.

In terms of -- if we're concerned about that, the resurgence of -- or lack of resurgence of the pro, no, we're not. We have a solid plan and track record for share gain in the pro and we're going to continue to do that. But fundamentally, we have the leading DIY brand, and DIY is our sweet spot, for lack of a better word.

And we're excited about this, particularly when we look at some of our research where we think a full, call it, 30% of the painters that have painted in the pandemic, were first time painters. And if you peel that back, about half of those first timers were millennials.

Now, this is a thesis that we have been talking about for some time as it relates to the millennials coming into the market, forming households and that big cohort being able to be a tailwind for our DIY business. And we do think that this will be a structural shift. And we are poised and ready to take advantage of that.

So, our -- having both a -- an incredibly strong brand in DIY and a growing and solid business in pro, I think it's a good spot to be..

Okay. Thanks for that.

A follow-up question is, are there any incremental costs associated with transitioning to one gallon paint production in a way maybe from five gallon? And how quickly -- or is there any sensitivity if you have to toggle between the two quickly in production?.

Yeah. There's a little bit of inefficiency, obviously, because you are not running your plant smoothly with one gallon fill rates as over five. One of the things we will be doing is we will be investing in additional one gallon capacity here in the coming months and so -- in support of this trend.

And so, we feel confident that we can improve our efficiency and get back on track there..

Thank you..

Your next question comes from the line of Truman Patterson of Wells Fargo..

Hi. Good morning, guys. Nice results, and thanks for taking my questions. First on Kichler, there are some moving parts there, previously you had to push price pretty meaningfully to cover the increased tariff costs. It seems like demand is rebounding in that category in June.

But can you just discuss has that continued into July? And are your margins starting to normalize in that business? Are you actually able to recapture the tariff costs in this environment?.

Yeah. We are seeing continued improvement in the demand throughout the quarter and then into July here. So, that's a good sign. We continue, as we've talked about, to work to strengthen this business. And we've worked on restructuring. We talked last quarter about closing a DC and some workforce rationalization. So, that's advancing well.

And we're largely on track for our turnaround plan with this business. And we're continuing to drive it. So, we feel good about the team down there and the progress that they've made.

We continue to advance our strategies, cost strategies, brand building strategies, 80-20 and assortment simplification so that we can invest in growth more, and it's on plan..

Okay. Okay. Thanks for that. And then, just following up on a few other questions. DIY has been very robust past few months, double-digit growth rates plus. I don't think anybody expects that to really continue forever.

But more recently, in July, have you seen any sort of deceleration or consumer fatigue, or anything in the DIY category?.

No. No, Truman. Not at this point. And July continue to be very strong..

Okay. Thank you..

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

Hey, good morning, everyone. Appreciating how the pandemic is impacting the U.S. and your international business is having an impact on demand for plumbing this year. But if we zoom out to 2021, how are you thinking about the growth profile of your U.S.

versus international Plumbing business? Any big delta out there?.

I think, we're equally positioned and well-positioned both -- on both sides of the Atlantic here. We've got the strong franchise of Behr. We've got both ores in the water, if you will, as it relates to DIY and pro in an effective way where we've worked to have -- significantly improved our margins in pro.

So, we're very much in tune to growing both sides of that business. Leading brand in Delta in the United States that continues to grow well, and as we said, had a record quarter in June. So that momentum is continues to be strong. And then when we look over in Europe, we've got an outstanding brand with Hansgrohe.

And because of the nature of that brand, we're able to operate really around the world, quite profitably and still have a significant amount of white space and share gain potential and opportunities. So, I think, we feel equally strong and feel good about our share gain and our growth opportunities, both here in North America, as well as abroad..

Okay. That's really helpful. And then just given the strength you're seeing in Plumbing and things kind of firming up with Kichler in recent months.

Any concerns that we should be mindful of in terms of logistics importing components from China due to the pandemic? And does that pose a risk on just kind of meeting that demand, whether it's on the plumbing and lighting side?.

I'd tell you I really have to hand it to our supply chain. And when I say supply chain, I mean the folks that work in our factories, the folks that plan our inventory and our suppliers. We have really leaned on that group.

And manufacturing is not typically setup to go from 60 to 30 in a matter of a couple of weeks and then jump from 30 to 90 in the following month.

And our supply base and our factory and the professionals that work there have done a phenomenal job in, particularly from a supply chain standpoint and a supply base and our big suppliers, they have been there to support us. And we're not going to forget that. We're very thankful for the supply chain that we have. And we do not -- things can change.

Clearly, this is a dynamic environment. But we do not anticipate any significant or material issues as it relates to our supply chain..

Okay. Thanks a lot. Appreciate the color..

Your next question comes from the line of Keith Hughes of SunTrust..

Hey, Keith..

Mr. Hughes, your line is open..

Can you hear me now?.

Yeah. We got you..

Sorry. I have connection issue. Let me start again. On the Watkins business, I know it played a role and the decline in the second quarter.

Can you give us any sort of feel for how much that will be affecting the Plumbing business in the third quarter?.

Yeah. Keith, I would say it would be a modest headwind in the third quarter, because there's still not up to 100% capacity even though they've got very strong demand, and the team there has done a terrific job at responding to that demand.

Because of some of the capacity restrictions that are still in place, they -- it will still be a bit of a headwind, but not significant..

Okay. Thank you..

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

Good morning. Just a quick question, high level, I guess, pontification. I mean, given that Q2 has come back strongly and the Q3 results are expected to be pretty solid. And you talked about the factor shaping up for single-family R&R being very positive. There's still a lot of macro uncertainty.

But it's still -- I would just like to get your thoughts on bridging 2020 into your original, but now taking off 2021 guidance, given at the Investor Day, it seems achievable.

But just curious if the factors are setting up now for 2021 to be a strong year?.

Yeah. I think so. We look at -- we're reviewing that original Investor Day targets, and we think it's very possible that we could be in there. As I recall, Plumbing at 18% to 18.5%, Deco in that 17.5% to 18%, Masco overall at 16.5% in terms of margin. Yeah, I think that is doable.

We have, without a doubt, seeing the benefit of our portfolio reconfiguration. Certainly, the pandemic played into that. But when you look at our resilience, the fact that low ticket items and the DIY orientation are right in the sweet spot of where the consumer wants to be at this point where they want to spend their money.

I think that bodes well for what 2021 could be for us. I will also say, Steven, that we're in a dynamic environment, and that we're not -- we are not giving guidance for the full year here in 2020. We're certainly not going to give specific guidance for 2021.

But as we look at small ticket, DIY, the overall health of the consumer and how we're positioned against that, it feels pretty good..

Great. Thank you..

Your next question comes from the line of Justin Speer of Zelman & Associates..

Good morning. Thank you, guys. Just a quick question on the spa disruption.

Could you reiterate what that was to the growth in the Plumbing business? And then does that fall into North American or international, or both? Just curious if you could back out the small disruption for your North American international markets just to see the distinction between the two?.

The interruption or the headwind for spa was really driven by a California state order and by a Mexican national order, and that's where we have the majority of our manufacturing. So, we were down, couldn't produce for quite a period of time.

In terms of the accounting, international, John?.

Yeah. So, Justin, that's all in our North American Plumbing results..

Okay. Okay. And so, I'll get that from the transcript. But as you look at the two geographies, the North American geography trending a little bit better obviously, than the international geography.

Is there any major distinctions in terms of behavior as folks shelter-in-place in North America versus international markets as you see it? Or is there anything else that explains some of the disconnect in terms of the differences in growth?.

I think it's -- as I mentioned a little bit on a prior answer, I think it's more country and nationally oriented as it relates to closure and associated reopening cadence U.S. versus international than it is so much consumer behavior.

We are -- our demand for spas which interestingly enough -- our spa business is one of the most global we have in Masco as it relates to percent of volume from outside North America and we have strong demand in Europe as well..

Okay..

And Justin, just to save your some time, the North American impact of the spa business was 7%..

Okay. That's perfect.

And then the last question for me is just on the -- switching gears to the paint business, point of sale or the sell-through versus the sell-in, was it -- is it fair to say that the sell-through was stronger -- it sounds like it was, but stronger than what you reported in your results?.

Yeah. That's correct..

Is it -- I guess, from that standpoint, how does that work from a channel inventory standpoint? Is this going to throw off typical seasonality of a typical buy-in or sell-in trends for you as you think about the third, fourth quarter?.

Not significantly, Justin. No..

Okay. Thank you very much..

Ladies and gentlemen, we have reached our allotted time for questions. Thank you for participating in today's conference call. This concludes the call. You may now disconnect..