Masco Corporation Price & Performance (MAS)

Thank you, operator, and good morning, everyone. Welcome to Masco Corporation's twenty twenty five First Quarter Conference Call. With me today are Keith Allman, president and CEO of Masco and Rick Westenberg, Masco's vice president and chief financial officer. Our first quarter earnings release the presentation slides are available on our website under Investor Relations. Following our remarks, will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about our future performance. Which constitute forward looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements. We've described these risks and uncertainties in our risk factors and other disclosures in our Form 10 ks 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 presentation slides which are available on our website under Investor Relations.

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

Thank you, Robin.

Good morning, everyone, and thank you for joining us. I want to start today by talking about some significant changes that have occurred since our last quarterly call. One of these changes was the announcement of my decision to retire as president and CEO of Masco, and the appointment of John Nudi as our incoming president and CEO. It has truly been an honor to lead Masco for over a decade. And I'm so very proud of all our employees and the work we've accomplished together. We've built and refined our core portfolio of leading brands, to focus on innovative repair and remodel products. We've embedded the Masco operating system throughout the entire company, which has allowed us to significantly expand our operating profit margins. And finally, we've delivered long term value to our shareholders. Achieving compound annual earnings per share growth of more than 12% over the last five calendar years. I'm confident that Masco is in great hands going forward under John's leadership. John has been on our board of directors since 02/2023, and I've seen firsthand his strategic vision, his commitment to customer service, and his recognition of the strength of our Masco team in delivering superior results.

I am currently working very closely with John in order to ensure a seamless transition. And we are excited about officially welcoming him to the Masco team. At the July. We also experienced significant changes in the geopolitical and macroeconomic environment. Including the enactment of new and broad reaching tariffs. The extent of the tariffs currently imposed on imports from China is substantial. And will increase our overall costs considerably. Particularly in our plumbing segment. Our experienced teams are actively taking steps in an effort to mitigate these increased costs. Our mitigation efforts are extensive, and include pricing actions, additional cost savings initiatives, and ongoing changes to our sourcing footprint. As we have done in the past, are rapidly responding to the shifting economic landscape. However, a high level of uncertainty remains around how these changes and associated higher prices will ultimately impact demand trends across our industry moving forward. Therefore, we will not be providing full year financial guidance this quarter. However, we do want to dimension how we are thinking about the impact of tariffs and the related mitigation actions in 2025. First, based on the tariffs enacted this year, we expect in your costs of approximately 400,000,000 prior to mitigation efforts Second, based on our extensive mitigation actions, we currently estimate that we can offset approximately 200 to $250,000,000 or roughly 50 to 65% of these costs during the current year.

We currently anticipate mitigating the remaining net tariff costs by the end of twenty twenty six. Finally, while it is reasonable to assume a potential softening of demand in the near term, we are not yet able to estimate the timing or extent of the impact on volumes that may result from the direct or indirect impacts of these additional tariffs. Rick will provide additional details in a few minutes, about these expected in year and annualized impacts from the inactive tariffs our related mitigation actions. Our teams have demonstrated their to manage through these environments in the past. From the COVID pandemic to unforeseen supply chain challenges to previously enacted tariffs. Therefore, we are confident that we have the right teams and plans in place to work quickly toward mitigating the various impacts arising from the recently enacted tariffs. Amidst all these changes, and the work we are doing to address their impact on our business, We remain focused on our core strengths. Our market leading brands, our exceptional customer service, and our innovative product portfolio. This quarter, we introduced several innovative new products and received a variety of awards across our businesses. A few of which are highlighted on slide five.

Beginning with North American Plumbing, Delta Faucet showcased multiple new and award winning at the kitchen and bath industry show held in February. Including the Pivot Pro three in one combination shower, the ShowerSense digital shower, and the BRISO Frank Lloyd Wright kitchen and bath collections. Additionally, Delta Faucet received multiple awards in recognition of their outstanding service to their customers. Including the prestigious JD Powers customer service excellence award which they received for the fourth year in a row. In our spa business, Watkins Wellness launched two new cold plunge products. Cold plunge is the ideal complement to our existing spa, and sauna portfolio. As customers can enjoy the multiple benefits of integrating both cold and hot therapies into their wellness routine. In our international plumbing business, Hansgrohe continued to demonstrate their leadership at the ISH sanitation and heating show held in March. Two of their new premium products, Rain Dance Alive and Evilegra, received IF design gold awards in the sanitary category. Since 2015, Hansgrohe has won more IF gold awards than any other manufacturer. In our decorative architectural segment, Bayer was voted the most trusted paint and stain brand. Among consumers in The United States and Canada by BrandSpark.

Demonstrating the continued strength and exceptional quality of our leading Bear brand.

With that, I'll now discuss our first quarter results. Please turn to Slide six. In the first quarter, our top line decreased 6%. Partially due to our divestiture of Kichler the prior year. Excluding this divestiture, and the unfavorable impact of currency, sales decreased 3%. Primarily due to lower volumes in the Decorative Architectural segment. Gross margins increased 20 basis points to 35.9%. Operating profit was $288,000,000 and operating profit margin was solid at 16%. Earnings per share for the quarter was $0.87 Turning to our segments. Plumbing sales increased 1% in local currency. North American plumbing sales also increased 1% in local currency, driven by higher volumes in our spa and sauna business, and favorable pricing. Partially offset by lower volumes in our retail channel. International plumbing sales were flat in local currency, as higher volumes in Europe and slightly favorable pricing were offset by unfavorable mix. Operating profit for the segment was $219,000,000 and operating margin was 18.5%. We are pleased with our overall performance in the plumbing segment this quarter as sales were slightly higher than anticipated and operating margin was in line with our expectations. Turning to our decorative architectural segment, Sales decreased 16% or 8% excluding our divestiture of Kichler.

Overall paint sales were down high single digits and included a partial reversal of the inventory timing benefit that impacted q four of twenty twenty four. Excluding this impact, overall paint sales were down mid single digits. And DIY paint sales were down high single digits while pro paint sales were up mid single digits. Operating profit for the segment was $96,000,000 and operating margin was 15.6%. We are seeing ongoing demand pressure across the industry in DIY paint. Driven by dampened macroeconomic environment and expect that this will continue as the year progresses. However, we continue to grow in the pro paint category. Driven by the quality and performance of our products, the strength of our partnership with The Home Depot, and our expanded services and support for our pro customers. This has led to ongoing share gains as we continue to capitalize on the sizable growth opportunity in the propane market. As we look across both segments for the balance of the year, we anticipate demand softening as consumers spend more cautiously amidst this uncertain economic backdrop. However, as I mentioned earlier, the extent and duration of this impact cannot yet be determined until there is more clarity on the tariff policies, and the overall macroeconomic conditions.

Once that occurs, and as additional information becomes available, we will be able to provide further financial guidance at that time. Masco is a resilient company. And the long term fundamentals of the repair and remodel industry remain strong. Our product portfolio is well positioned to deliver meaningful results as we execute on our strategic initiatives and maintain our disciplined capital deployment. As I reflect on my tenure as CEO of Masco, it's the strength of our people and our teams that has allowed us to outperform the market and drive long term shareholder value creation. Especially in dynamic times. Our people are at the heart of what we do each day, and we remain focused on driving results through our leading global brands, innovative products, customer service. With that, I'll turn the call over to Rick for further details around our first quarter expected tariff impacts, and related mitigation actions. Rick? Thank you, Keith, and good morning, everyone. Thank you for joining. Before I get started, I'd like to take a moment to congratulate Keith on a successful twenty seven year career at Masco. Through his strong leadership, he has been instrumental in reshaping Masco's portfolio, driving significant operational improvements across the company, developing senior leadership talent, and delivering outstanding financial results.

On a personal note, I'd like to thank Keith for his partnership over the past year and a half and wish him all the best in his future endeavors. Now turning to our results. As Robin mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization charges, and other onetime items. Turning to slide eight. Sales in the first quarter decreased 6%. Or 3% excluding the impacts of our divestiture of Kichler and unfavorable currency. Our divestiture of Kichler in the third quarter of twenty twenty four decreased sales by 3% year over year in the first quarter of twenty twenty five. In local currency, North American sales decreased 7% but decreased 3% excluding the divestiture impact. International sales were in line with the prior year in local currency. Gross margin increased 20 basis points in the quarter to 35.9%. SG and A decreased $9,000,000 year over year driven by our divestiture partially offset by increased marketing expenses. SG and A as a percent of sales was 19.9% in the quarter. Given the current environment, are actively managing our expenses and taking appropriate cost savings actions. Operating profit was $288,000,000 in the quarter, and our margin was 16%.

Operating profit was impacted primarily by lower volume, and higher marketing costs.

Lastly, our EPS was $0.87 per share. Turning to slide nine. Plumbing sales decreased 1% in the first quarter, but increased 1% excluding the unfavorable impact of currency. Favorable pricing increased sales by 1%. Offset by unfavorable mix, which reduced sales by 1%. In local currency, North American Plumbing sales increased 1% in the quarter. This performance was driven by continued share gains in the e commerce channel and growth at our specialty spa and sauna dealers. Partially offset by softness in the retail channel. In local currency, international plumbing sales were in line with the prior year, driven by favorable volume and pricing actions. Offset by unfavorable mix. Hansgrohe achieved growth in its key market of Germany, as well as other European markets. This was offset by softness in various other markets, particularly China. Segment operating profit in the first quarter was $219,000,000 and operating margin was 18.5%. Operating profit was impacted by unfavorable mix and higher trade show costs during the quarter, partially offset by cost savings initiatives and a favorable price cost relationship. Turning to slide 10. Decorative architectural sales decreased 16% in the first quarter. The divestiture of Kichler lowered sales by 8%. In the quarter, total paint sales decreased high single digits.

Impacted by a partial reversal of the favorable inventory impact in Q4 of last year as mentioned in our February call. Excluding this unfavorable inventory impact, total paint sales were down mid single digits in the first quarter, with propane sales up mid single digits in line with our expectations and DIY paint sales down high single digits, below our expectations. DIY paint performance was driven by continued softness in the DIY market and we now anticipate this weakness to continue as the year progresses. Operating profit in the first quarter was $96,000,000 and operating margin was 15.6%. Operating profit was primarily impacted by lower volume including inventory timing. Turning to Slide 11. Our balance sheet remains strong, with a gross debt to EBITDA at 2.1 times at quarter end. We ended the quarter with $1,200,000,000 of liquidity. Including cash, availability under our revolving credit facility. Working capital was 18.7% of sales at quarter end. In line with q one twenty twenty four. Given our strong cash performance, we were able to return $196,000,000 to shareholders through dividends, share repurchases. Including the repurchase of $130,000,000 in stock in the first quarter. As it relates to capital allocation for the remainder of the year, there is no change to our overall framework.

We continue to expect to invest approximately $175,000,000 through capital expenditures, to pay a dividend of $1.24 per share and to deploy all available free cash flow towards share repurchases or acquisitions. Lastly, as Heath mentioned earlier, given the highly volatile and uncertain market environment related to tariffs, we are not providing 2025 financial guidance. However, I will try to provide some clarity around our tariff exposure and impact based on the currently enacted tariffs. As well as the estimated benefits from our ongoing mitigation actions. As discussed on our fourth quarter call, our current import exposure to China tariffs is approximately $450,000,000 representing a 45% reduction from our peak exposure in 2018. We estimate the total annualized impact from incremental tariffs to be approximately $675,000,000 before mitigation. This includes the incremental China tariffs of 145% which amounts to an annualized cost impact approximately $625,000,000 plus an approximately $50,000,000 of incremental annual expense from tariffs on steel and aluminum, and the 10% global reciprocal tariffs. Of this, approximately 675,000,000 total annual cost we expect a 2025 in year impact of approximately $400,000,000 before mitigation. With the impact largely occurring in the second half of the year. We are actively working to mitigate these additional costs through price increases, cost reductions, and continued efforts to change our sourcing footprint.

First, we expect to implement meaningful price increases over the course of 2025. Second, we are expanding our cost reduction efforts across the business. Delaying or eliminating noncritical spend while preserving investments in key growth areas of the business. Furthermore, we continue to work with our suppliers to achieve additional cost reductions. Based on our expectations, of the extent and timing of our price and cost reduction actions, We currently believe we can mitigate approximately $20,250,000,000 dollars or roughly 50 to 65% of the tariff costs in 2025. Leaving a net impact of approximately $150,000,000 to $200,000,000 in 2025 prior to any potential volume impacts. As we exit 2025, we believe our actions have the potential to mitigate 60 to 75% of the impact. Of the currently enacted tariffs on a run rate basis. We will continue to work to mitigate the remaining impact by the end of twenty twenty six, through accelerating changes to our sourcing footprint. It is important to note that these tariff impacts and mitigation estimates do not consider potential unfavorable impacts on volumes related to price increases, the overall market environment. These impacts remain highly uncertain as does the overall tariff, and macroeconomic environment. Additionally, these estimates are based on currently enacted tariffs and do not attempt to estimate the impact of potential future tariffs or changes in existing tariffs.

Needless to say, the overall environment remains highly uncertain. We will provide updates to the impacts on our business as appropriate, and expect to update our outlook for 2025 once we have more clarity. To echo Keith's comments, I would like to recognize and thank our teams for their tremendous efforts in responding to this rapidly changing environment. Our teams have a demonstrated track record, and I'm confident in our ability to navigate these challenging times. With that, would like to open up the call for questions. Operator?

Thank you. In order to ensure that everyone has a chance to participate, we would like to request that you limit yourself to asking one question and one follow-up. During the Q and A session. Your first question comes from Michael Rehaut with JPMorgan.

Thanks and good morning everyone. Thanks for all the comments. And John, welcome to the call and to the company. First, I'd I'd love to delve a little bit into some of the top line trends not only in the first quarter, but if you can provide any kind of commentary on April. You mentioned during the prepared remarks that your DIY paint was a little bit below expectations. I'm really more interested in in the trend line through the first let's say, roughly four months of the year both in paint and plumbing, And, you know, if you have any kind of insights into maybe you know, 2Q overall, how we should think about the top line?

Thanks Mike. Just to be clear, I'm I'm on the call today, and and John will be joining us in July. Yep. No. Got that. Wasn't sure if he was there, but okay. Yep. Fair fair enough. So with regards to how the overall top line trends are looking, as we sit here kind of mid mid April. And ecommerce I'll take a channel cut at it first. In ecommerce, we continue to have really nice strong performance. So that continues to be a favorable aspect of our business. We've been investing in that both in terms of technology and people for quite some time. Have what we believe to be a leadership position in that. Continues to grow and and do well for us. We did particularly well in in international plumbing. That continues to be strong for us.

In Central Europe. We're seeing and and getting more stabilization, specific in our home country of Germany where we're the share leader. And that continues to to to go well. Course, we're having a little bit of a slowdown, if you will, in China. It's higher end part of our business, so that's giving us a little bit of of a mix hit geographically when we think about the overall international plumbing demand. In in China. In The US, we're seeing in plumbing a little bit of softening, in both the trade and the retail channel, but particularly in the retail channel. And then on the paint side, very strong performance in our pro paint segment. We continue to what we believe to be, outgrow the market and gain share. So we're gaining share and we're holding share Very strong net promoter scores continue with our our customers. And the value proposition that we're able to deliver with our partner, the Home Depot. Remains strong. We are seeing some softening in the DIY paint market We've this is this has been relatively consistent, and we can expect again, this is a view in terms of the future. But we expect this softening softness to continue through the remainder remainder of the year.

So I think we've got pockets of good strength and continued growth. That are favorable. But over and overall, I would say that our view is that the consumer is tentative. Particularly as as we look at the volatility that exists in in, both geopolitically and and from a macroeconomic perspective. So hopefully, that gives you a little bit of view across the around the horn.

No. No. That that's very helpful, Keith. Appreciate that. I I I guess, secondly, maybe to try and dimensionalize a little bit specifically when you talk about [indiscernible] mitigation efforts on the tariffs and specifically the price increases which I would assume would be the the primary offset or mitigation action for the back half of this year at least and correct me if I'm wrong, on that, but if we're talking about $20,000,000,250,000,000 dollars maybe you could kind of dimensionalize that in terms of maybe what that would mean in terms of an average price increase for your key plumbing products? And if you've seen any type of prior instances of demand elasticity or inelasticity you know, or or or the amount that, you know, you would expect maybe demand to react off of those price increases, let's say, a vacuum? I know that's obviously a lot of different macro drivers in influencing demand as well. But but if you have any cost on that.

Sure, Mike. It's Rick. I'll take a shot at that. So as we articulated in terms of our mitigation components of our mitigation actions, there's obviously a number of facets to it. The main buckets are are pricing, cost reduction, and sourcing footprint changes. And as you anticipated, at least in the near term, I e 2025, the bulk of of those actions are gonna be pricing and cost reductions. Those are the things that we can pull in the near term. Sourcing footprint is something that we continue to focus on. We've made meaningful progress in terms of changing our sourcing footprint over time. The team continues to execute and to accelerate that. But it will take a longer horizon to effectuate some of those sourcing changes. So as it pertains to 2025, it is primarily price and cost. The bulk of the majority of that is pricing as you anticipated. We are not gonna quantify, the pricing magnitude per se. Or the price increases. They vary by business unit. And they vary by, you know, product category. And then and then it's over the course of 2025 as as you would anticipate The tariffs, started to roll into effect on February 4, continued in March, then again, it escalated in April.

And so our pricing has been responsive to that, and we're gonna continue to to execute on that. As it pertains to elasticity, I think we're in a bit of uncharted territory as it pertains to that. We obviously are confident in the strength of our brands and our and our and our products. So we think there's some resiliency there. But, ultimately, just given not only the elasticity dynamic, but the uncertainty of the macroeconomic and the consumer sentiment. Are are unknowns. And quite frankly, that is really the root of of why we were we prudently decided not to provide financial guidance just given the uncertainty. But the teams, you know, rest assured the teams are are are hyper focused with regards to developing and executing mitigation strategies. And as Keith mentioned in his his remarks, you know, we've got confidence given the the team's experience and capabilities that will you we'll navigate this as we've done in the past.

Great. Thanks so much, Rick.

Sure, Mike.

Your next question comes from Stephen Kim with Evercore ISI. Your line is now open.

Thanks very much guys, and yeah, we obviously appreciate all the, all the efforts here. To to to give us some some framework. For how you're going to manage this tariffs thing. I guess I wanted to drill in on the pricing.

I guess with respect to being in uncharted territory because of consumer sentiment and those impacts, mean it seems like in DIY paint, you're already starting to see that, and you haven't even taken any pricing actions really, I'm assuming yet. I'm curious if you think that maybe what you're seeing in the consumer is maybe some stockpiling ahead of some tariffs and maybe they're cherry picking or prioritizing some products where they think that they could be vulnerable and would maybe not be one of them. And and if you think that had any impact on what you saw in the quarter or if there's anything else that would provide a little bit of color for why DIY paint in particular would have been impacted. It feels like, more than some of your other products, particularly pro paint seems like it did better. Just if you could help us drill in a little bit more about what you saw in the DIY paint that caused the, you know, the mess relative to what we're looking for?

Hey, Steven. Keith, with with regards to stockpiling, We we don't have specific data where we've went out and and queried the consumer to see if they're stocking up and and and putting faucets in their basement or stacking up gallons of of paint and anticipating a anticipation of future projects. I doubt significantly that that that that is the case as we see rather consistent POS data that, you know, it's not not indicate indicative of something like some sort of a pre COVID stockpile of some consumer goods or something of that sort. So I discount that and I'm confident in that even though I don't have data. With regards to the DIY paint performance, this is something that we've seen consistently now for jeez, a a number of years where if you recall, you know, having been following us for a while, Steven, where DIY paint was a flat to slightly down kind of market overall for call it, five years. And, of of recent times as we see the demographic shift, of, the baby boomers who were very much strong and avid painters, now getting to an age where they're choosing to use a professional to install the paint rather than than themselves.

And the backfill of the millennials, which we are seeing. And we do believe that and our data shows that they are not only DIY but multiple project DIY rather than say a one and done. So it's just not it it hasn't come to the level of where it's backfilling that. So there's clearly a shift from DIY to Pro. So that's a component of it. Secondly, when you think about sensitivity, we believe that the consumer that is in that DIY market tends to be more price sensitive and more sensitive to overall macroeconomic concerns like we're in now, than a more affluent customer. So when when we interestingly, when we look across our portfolio, we we continue to see the the higher end consumer hanging in there relatively robustly when we look at know, our higher end plumbing brands, for example. We do see, continue to see some pretty good demand. So I think it's a combination of the the consumer itself in that DIY space as it relates to sense sensitivity to price, and a migration from a heavy consumer that is continuing as it relates to the baby boomer, starting to hire a pro. Now when I step back, and and look at what type of of of assortment I would wanna have leading into these kind of of [indiscernible] As it relates to what's going to be the most resilient in tough times, what's going to be able to rebound, it is in fact a lower ticket repair and remodel product, particularly the products and the assortments that we have that give, quote unquote, a a very nice bang for the buck.

So I think when you combine that the the strength of our assortment that we've built over time, together with the experience of our leadership teams, even though these are tough times, I think we have a a nice hand to play.

That's that's really interesting. Just wanna of pull on that thread a little bit more, Keith. So initially, you were talking about the fact that the price elasticity was typically more felt, immediately by the lower end consumer. I was curious as to whether you thought that that could actually lead to maybe a richer mix. But it sounds like what you're saying is that maybe that might happen in the near term, But then on a longer term basis, you actually think that the lower end, which is maybe more need based, is going to be more resilient. So I want to make sure I'm understanding that what you're describing there is a bit of a dichotomy. [indiscernible] from a timing perspective. And then that kind of leads into my broader question, which is about how dynamic you can be with pricing. We're not used to situations where you're sort of needing to increase price and then maybe take it back and all that. But we're living in a world right now where the primary driver to your need to raise price is actually quite unpredictable. And so I'm curious if you could talk about your ability to be dynamic with your pricing, as we may be heading into uncharted waters there?

Yes, great questions. In terms of the mix, while we are seeing the the the premium consumer hanging in there, I do believe and we did see a little bit of a mix hit. This quarter. And I do believe in tough economic times, generally speaking, there will tend to be a trade down. We've worked hard as we've discussed in the past and in prior calls to use our operating system to reduce the margin performance across both pricing segmentation in the assortment as well as various channels. So that we are more agnostic to shifts across channels or across price segments. But there there there will be, I believe, a a mix a mix shift down. Now a this environment, an an interesting thing to consider is while while I believe there will be and we are seeing a mix shift down, in in prior, cycles like this. I've seen the private label portion of the assortment takes takes some share. We, you know, we generally perform pretty well because we're across all the segments. But it's a little it will be, I believe, a little bit different dynamic due to the high concentration of China buy in that private label type of pub.

Piece of the assortment. So I do think there will be within segments of the assortment, there will be a trade down. With the caveat of I'm not so sure about what's going to happen on the on the private label side. With with response to pricing and, being able to be dynamic with the pricing, you're exactly right. And that is, what we are driving our leadership teams towards. Is the ability to not only understand our assortment, and to have a keen dataset on where that sweet spot is between price and volume. Obviously, we're this is a multipronged approach. If We do not believe that pricing alone is the best, most competitive tool set to manage through these dynamic times. We think it is, a combination of pricing, cost out, supplier negotiations, and footprint changes. So we're driving across that whole basket of initiatives. But the ultimate objective here is to reach the profit profit maximization point as it relates to the combination of all those factors. Volume and price being primary. So the the ability to be dynamic with our pricing, to be able to execute to to understand the pry the max the best price to be at and to be able to execute that.

Quickly. Both ways. Both up and down, together with a very strong drive, on the cost outs, we think is the is the right right dynamic. And again, in these kind of times, it's it's really about the people, and it's about the systems we have in place. And the portfolio that you're dealing with. And we are dealing with what I believe to be the best possible portfolio we could [indiscernible] products and businesses that we could have going into an environment like this because we set out to build that. Less cyclical, more resilient, high margin. We're also dealing with a an ex an extremely experienced team. You know, our, we recovered from COVID, and we we brought higher margins to our investors. When we had unheard of price escalations, We were able to manage that with higher margins. More price, and took market share. When we were when we were dealt with absolutely unheard of supply chain challenges, whether you talk about a ship blocking the Suez Canal or a freeze in Southern Texas Texas that practically took down the petrochemical industry to a paint colorant plant exploding. We we were the most dynamic in that environment, and we took significant market share in paint, for example.

Through those. So, we're a battle tested team. And, whilst nobody wants this sort of macroeconomic challenge, we're ready for it both with our assortment and with our dynamic pricing capability and with our dynamic supply chain.

Got it. Best of luck. And, yeah, appreciate all the color. Thanks.

Thanks, Steve.

Next question comes from Sam Reid with Wells Fargo. Your line is now open.

Awesome. Thanks so much. I wanted to touch on the new build channel. I know you have some exposure here in on the plumbing side. There's been some talk about one of your large competitors attempting to take share in new builds. Have you had to adjust your go to market strategy with respect to price and maybe just contrast price realization potential from tariffs in new build versus some of your more traditional and retail trade channels. Are you expecting to get more price realization in retail and trade versus, say, the builders given the dynamic?

Yeah. We're we're we're we're a we're a remodel repair and remodel company. I think our mix is north of 85% of repair and remodel. And we approximately, And and and we pick and choose the new build customers that we go after that value the the innovation and the service basket that we bring to them. So that's that that is not a part of our our our focus. In terms of a specific pricing strategy and how we're looking to price across channels and ability to get price and how hard or easy it is different channels. I'm not gonna get into that. We're not gonna get into our specific pricing strategies for obvious reasons. But I will tell you that we have it's not only just the the dynamic capabilities in our systems to get price. It's also our talented sales force and our commercial folks. And it's and it's the the value we bring with our our our strong brands and innovation pipelines to give us that. Must have position on the shelf, so to speak. So it's a it's a it's a whole collection of what Masco brings. And and, we're gonna continue to drive that.

And I feel good about our our our capabilities entering into these challenges.

No. That's helpful, Keith. And then, maybe switching gears, and you sort of alluded to this in your your response to Steve, but maybe just to put a finer point on that. You know, just wanna think through brand performance quarter to date. So, you know, you sell brands like Delta, you know, which maybe are a little bit more over indexed to home centers. You sell brands like [indiscernible] Then index to higher income consumers. Just curious if there's been any noticeable differential in terms of performance across those brands quarter to date. You know, as the consumer has digested the early effects of of tariffs. Thanks.

Yeah. Well, as as I said, earlier, we're seeing some strong performance in ecommerce and in our international plumbing businesses. It's it's tough, as I've always said, to to really nail down specifically the market size quarter to quarter. But when we look across our businesses, versus and performance versus competition, I'm very comfortable in saying we're gaining share in e commerce we're gaining share in in international plumbing, and they're they're doing a great job there. With regards to in the showroom and the higher end, we've got pockets of our higher end still hanging in there. In geographies internationally where we tend to have a higher mix, there's still hanging in there well, so less affected. And we are seeing some pressure, as I mentioned, in retail and specifically in the DIY paint area.

No. That's helpful. I'll pass it on. Thanks.

Your next question comes from Anthony with Citi. Your line is now open.

Good morning. And Keith, congratulations for everything.

You've done at Masco in the next chapter. Thanks.

Rick, you talked about changes in sourcing, and I'm wondering if you can talk about kind of how you're attacking this maybe versus the last round. Of tariffs and I guess the first Trump administration or maybe even during the pandemic? Is this moving out of China into Asia or Mexico and Canada or back to The U. S? And if you can just talk about sort of the activities involved and has some of the sort of low hanging fruit in terms of resourcing been picked? How do you think about it? Sure. Good morning, Anthony.

So as you alluded to, we've been on a on a sourcing footprint journey for a number of years, really dating back to 2018, 2019. And we've successfully reduced our our exposure or tariff import exposure to China by about 45% And that that journey continues even predating tariffs that were in were enacted this year. The team had been working very methodically to to to migrate our footprint, to different jurisdictions. I'm not gonna get into the specifics of the strategy. But it it has been something that the team has continued to do in a very cost effective way. Clearly, given the, increase in tariffs, specifically on China, we've we've accelerated or are accelerating those efforts. As we articulated, it it is something that we're working through this year, but will stem into next year as well. As it pertains to The US, we do have it's worth noting, a very strong and robust footprint in The US. We've got 29 manufacturing facilities, and a similar number of of warehouses and distribution centers in the majority of our sourcing for The US market is in The US. But we have a diversified and and and extensive supply chain Like many multinational companies, it's it's it's international in terms of sourcing and and similar to ours, it is.

And, you know, from our perspective, we're on a resilient, diversified and robust supply chain. And and we'll factor that in as we continue to make moves.

In terms of the specific geographies, something that we continue to evaluate running scenarios as it pertains to what may happen in the future.

Quite frankly, that's part of the challenge in terms of the uncertainty and the dynamic environment of the tariff. Policy as it stands today. But but rest assured, the team is working very assertively in terms of not only reducing our exposure to China, but making sure that we've got a robust and resilient supply chain going forward. Okay. That that's very helpful.

And then just a follow-up, you talked about, I think, April demand by channel. I'm just curious, did you see consumers or channel partners partners really pull back hard following the tariff news itself, which I think was April 2. Or is the volume impact that you're talking about maybe more anticipatory or something that you sort of expect to occur? The volume trends, I think, that Keith articulated are really what we've seen year to date. So as our articulated in Q1, opening remarks in terms of our strengths from an ecommerce perspective, as well as a propane standpoint in international plumbing. And our our continued you know, industry weakness and DIY pain are are ones that we've seen kinda year to date. Really, we haven't seen any meaningful inflection point as it pertains to post the April 2 announcement. I think it's just introduced a numb amount of [indiscernible] Volatility in the market as it pertains to expectations and consumer confidence as we've all seen. And that's something that is really highly uncertain in terms of how it's going to play out. But it's still early days, and we're we're monitoring and tracking the situation very closely. Given the uncertainty, that's why we've elected not to provide an outlook not only on the market, terms of our financial expectations for the year.

In in terms of inventory, if that was what you were getting at, we really what what we've seen is what I would classify as as typical seasonal trends. On inventory. We did have some beneficial inventory that we pull forward last year in q four that we talked about on the last call. And we saw a partial unwinding of that. This quarter. But I would say, no significant changes as as it relates to inventories in the channels. Okay. That that's very helpful. I'll turn it over.

Your next question comes from John Lovallo with UBS. Your line is now open.

The first one is on the partial reversal of the inventory timing. That you talked about on the paint side. It seems to imply that there's some more that needs to be worked through. Can you just help us kind of quantify the impact that's expected in the second quarter?

Sure, John. So just to maybe the reversal that we saw in Q1. So the way I would think about it is a couple of fold. One is our paint sales in q in q one were down high single digits. Adjusted for the reversal of the favorable inventory build in q four and and one of in our key channel partner we were down mid single digits. So the difference between high and mid single digits The other way to triangulate it is is we are we are down 16% year over year in terms of our decorative architectural product sales. Half of that related to our Kichler divestiture. And the other half related to basically volume. And half of that volume or roughly 4% related to the partial unwind of the inventory. As it pertains to what we see going forward, it's not an exact science. Obviously, varies quarter to quarter year over year. But what I would say is that inventory levels in in the channel are still higher year over year.

We've big chunk of that reversed in q one, but there is presumably potentially more quote unquote normalization to be expected. We're not gonna size that at this point.

It's there's still something that we think is still a potential headwind going forward. And that's reflected in terms of our expectations. Understood. The follow-up would be then just on the SG and A side, the 19.9% is a percentage of sales. Understanding that there's some loss of leverage there and you talked about higher marketing costs. I guess I wanted to focus on the higher marketing costs I mean, can you quantify what that was in the quarter and the ability kind of pull those out here as we move forward?

Sure, John. Yeah. The higher marketing costs are principally related to the higher trade show costs in Q1. That we communicated, in our q four call in February that we expect to see in q one. So it's not only the the cave ish show in Vegas, but principally the, biannual ISH Show In In Frankfurt. And so from a from a standpoint of of year over year, that's that's a big driver in terms of know, quote, unquote marketing cost. In terms of sizing, I guess, I would how I would characterize it is, in terms of our plumbing segment, we were down $9,000,000 year over year in we'd say a majority of that could be attributed number of factors, but a majority of that could be attributed to the higher trade show cost. And that's that's a q one phenomenon. Got it. Thanks very much.

Your next question comes from Matthew Bouley with Barclays. Your line is now open.

Good morning, everyone. Thank you for taking the questions. And of course, congratulations to Keith and best wishes on retirement. So on the 2026, the idea that be able to mitigate most of it by the end of next year. I guess first if you could just clarify was that mitigating the entire $675,000,000 or just the the $400,000,000 of in year costs? So just a clarification there. But more broadly next year, is it is it a similar playbook of kind of pricing first followed by cost and sourcing? So you would need to take additional price Or in 2026 does it perhaps more come from sourcing as you've kind of shifted that over the next several months? Thank you. Yes. Sure, Matt. It's Rick. As it pertains to the mitigation actions, as we articulated this year, in year, we would anticipate that our actions would mitigate about 50 to 65% of the in year 400,000,000 impact. But by the end of the year, by the end of twenty twenty five, we would expect that run rate mitigation to be closer to 60% to 75%. As pricing and other cost actions take hold To answer your specific question, as it pertains to 2026, our our our actions are are targeting to mitigate the remainder of the annualized impact of 605,000,000 by the end of twenty twenty six.

Now as as a as a caveat, that is really the the raw numbers. We aren't factoring in or anticipating or or guiding towards an expectation of what the volume impacts could be, the direct or indirect. But as it pertains to our mitigation actions, we are targeting to mitigate the the full 675,000,000 by the end of 2026. And then, you know, in terms of the proportion of the mitigation efforts in 2026, we would anticipate that to lean more heavily into, sourcing, sourcing footprint changes more so. Than price or cost, of course, we'll continue to drive cost. And and there will be targeted pricing actions across the assortment undoubtedly. But the majority of it would come in '26 from resourcing. Footprint. Yep. Got it. Okay. Perfect. Thank you for that color. And then secondly, obviously you guys took down the slide around the kind of '26 margin targets, which is seems entirely unsurprising. 2025 is a starting point is unclear, But just to ask the question and put it out there, do you view any kind of change to the structural profitability potential of the business? Or is it just simply the former where there's too much uncertainty and this is more of a a timing issue?

Thank you. We had strong margin performance in '24. Our pipeline looks of of cost initiatives is very solid, very very confident in the margin targets that we set out in 2026. So, for for us, it's not so much a question of if we can drive to those, it's when. And and looking at the uncertainty that we're facing now, that's why we pulled our financial guidance. But we're confident in the ability of this business continue to drive improved margin performance. Got it. Thanks, Keith. Good luck, guys.

Your next question comes from Mike Dahl with RBC. [indiscernible] Career. Congrats, and congrats on being able to step away and enjoy the next phase.

I wanted to drill down on on the actual numbers around the tariffs. It seems like the majority of your exposure that you're outlining is coming from China, but you do have exposures in Vietnam and Southeast Asia and in Mexico. So maybe could you give us a little more clarity on your cost of goods exposure to those areas just since the tariff environment is uncertain where we ultimately land. And with Mexico specifically, yeah, how much of your product being shipped to The US is exempt under USMCA?

Sure, Mike. It's Rick. You articulated and as we've outlined, our biggest exposure from a tariff perspective is our imports from China. As evidenced by the fact that the current annualized impact based off of the currently enacted tariffs six twenty five of the six seventy five relates to China. I think that evidences is evidence of of the disproportionate exposure to China. In terms of our other exposures, we're not going to quantify them, certainly not at this point. I think I I think in terms of dimensionality, as we we did share that in terms of the other tariffs that were enacted, on steel and aluminum and the 10% reciprocal tariffs that amounted or totaled to a 50,000,000 annualized impact. So that puts it into perspective, I believe. As it pertains to Mexico and Canada, we've articulated this on a prior call. We do have a meaningful exposure from from a Mexico import perspective. Principally related to our walk ins wellness business because we have a couple of facilities in Mexico that import into The US. And so that's something that we're tracking very closely. Canada isn't as meaningful, but something that we're monitoring closely. And to answer your last question, in terms of US USMCA exemption, the vast majority of our products, are qualified for USMCA exemption.

Okay. Thanks for That's helpful. My follow-up question is just as a point of clarification, I think your prior guidance just assume the 10% tariffs on China and that you would effectively fully mitigate those. So when we're thinking about building the year, you know, is it really just like, this entire amount that you're outlining is a effectively incremental. So the 50 to 200,000,000 of of cost that you can't offset in your that is entirely incremental plus whatever the the volume decremental is. Is that right?

Yeah. Mike, your recollection is correct. And we provided our guidance on our February call, the 10% China tariff was in effect and what was baked into our guidance at that time. So incremental to that has been a 35%, so one forty five minus 10% in terms of incremental China tariffs. The 25% steel and aluminum tariffs, and the 10% global reciprocal tariffs are all what I would consider incremental to what we had contemplated and had known, quite frankly, on our February call.

K. Okay. Thank you.

There are no further questions at time. I will now turn the call over to Robin for closing remarks. We'd like to thank all of you for joining us on the call this morning.

For your interest in Masco.

That concludes today's call. Have a great day. Ladies and gentlemen, this concludes your conference call for We thank you for participating and ask that you please disconnect your lines.