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. I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations.

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 are healthy and safe. This is indeed a challenging time for all of us. Despite the many obstacles presented by the COVID-19 pandemic, I am proud of how the Masco team has supported each other, our customers, and the many communities we serve. Our team has risen to the challenge, and I appreciate their dedication. Just as Masco has been proactive during the pandemic, we are actively engaged in the fight against racial injustice and inequality. We are committed to addressing systemic racism, fostering meaningful change, and doing our part. Over the past five years, our company-wide diversity and inclusion strategy has implemented various initiatives both internally and in our communities. We understand there is still much work to be done. However, we have established a strong foundation to help us advance further in the future. At Masco, we are committed to fostering an environment where all employees feel included, respected, and have equal opportunities to succeed. Now, regarding our quarterly results. Please refer to slide four. We performed exceptionally well in the second quarter, and demand for our products improved as production restrictions eased and our distribution channels reopened. This robust demand led to a record sales quarter for our paint business and, along with our focus on cost management, resulted in better-than-expected decremental margins in Plumbing and strong incremental margins in our Decorative segment. Overall, sales for the quarter were down 3% excluding currency impact, which was significantly better than our expectations. Operating income decreased by only $5 million, while operating margins expanded by 50 basis points to 19.5%. Net income from continuing operations increased by 3%, and earnings per share grew by 14% to $0.84, showcasing our effective capital allocation and portfolio strategy. Looking at our segments, excluding currency, Plumbing sales declined by 13%. Sales varied significantly across our Plumbing businesses, mainly due to the extent of production and distribution facility closures. Our spa business saw the largest sales drop in this segment because of facility shutdowns. Fortunately, production resumed faster than anticipated during the quarter, allowing us to achieve a sales decline that was less than half of our original forecast for this business. We are still experiencing record levels of demand and backlog for our spas, which reflects the strength of our leading brands and the consumers' desire to enhance their home living experience. Our international Plumbing business showed considerable improvement throughout the quarter. Germany, our largest market, experienced positive sales growth in June, while some other European countries, such as the U.K. and Italy, have reopened more slowly. Our North American Plumbing business also demonstrated significant improvement throughout the quarter, with Delta achieving a record sales month in June, boosted by strong performance in its trade, retail, and e-commerce channels. Our stronger than anticipated sales performance in Plumbing, together with our disciplined cost control resulted in decremental 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 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.

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 were at 35.8%, down 90 basis points. Our SG&A as a percent of sales decreased 140 basis points to 16.3% as a result of our focus on 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 expanded 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, with sales down 22% due to numerous restrictions, improving to down only 3% in May and turning to growth of 14% in June as 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 the virus on the overall health of the economy and consumer. Additionally, it is important to note that our expectations for Q3 assume 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 improved sequentially during the quarter, with June sales up high single digits, resulting in better than expected segment performance. Foreign currency translation unfavorably impacted 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 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 digits. We recovered 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 eased. 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 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 and 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 of a portion of a private label program and inventory rebalancing at 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 improved sequentially in the quarter, with year-over-year sales growth in June. Operating profit increased 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 and anticipate segment sales growth to be in the range of 7% to 17%, and margins to approximate 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. 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 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, at an 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.

Your first question comes from the line of Matthew Bouley of Barclays Capital.

Hey, good morning. Thanks for taking the questions. 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 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 really grow your market share while this underlying demand is so 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 occurs when we look at performance from a demand perspective, particularly in DIY compared to professional segments. By leveraging our strong position as a leading DIY brand, we are definitely gaining share, and we intend to continue this trend. Our focus has consistently been on three main areas. First, the safety of our employees is our top priority. Second, ensuring business continuity while closely monitoring our liquidity, which remains strong due to robust cash flow across our portfolio. Third, we have been focused on succeeding in the recovery, which includes making appropriate investments in branding and innovation. John mentioned some new displays we’ll be using, especially in the Decorative Architectural segment. It's a judgment call, but we are committed to investing wisely to succeed in the recovery, and that is our approach.

Thanks, Keith. Congrats on results.

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?

Yes, Steven, it's John. I would say no. I have a couple of points to make. Sell-through has been very good, likely better than sell-in across our channels. Once the trade channel began to reopen, we saw very positive sales trends there. So, to clarify, our sales were not down; it was less than that for the teams you mentioned.

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 continued 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 through the summer months.

Okay. Great. Thanks for that. Just to clarify, so are you saying that you feel like in Q3, 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 Q4 or even further?

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

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’s very similar.

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 Q3 and Q4? I mean, will they actually be down on a year-over-year basis, or do you think those trends upwards again?

I don't believe they will decline year-over-year. I think we will see some additional investments in SG&A compared to last year, particularly in areas like advertising and returning some headcount. We had previously implemented a hiring freeze and wage freezes across the company as we entered the second quarter. However, with the recovery in demand, we are beginning to reintegrate some of these elements. As mentioned, some of the displays supporting Liberty in their retail program will also impact SG&A. I anticipate that we will gradually reinstate some advertising that we had significantly reduced in the third quarter. Overall, I feel optimistic about our position. We are closely monitoring the situation and will respond quickly to any changes in our SG&A spending.

Okay. Thank you, guys.

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

Thank you. Good morning everyone and congratulations on all the hard work. I would like to focus a bit on Q3. I appreciate the additional details regarding July. When you mention that the highest end of the Q3 range is a few points below June and possibly July, are you observing anything in your order book or looking ahead to the last two months that suggests you might be around 10 points below what you're experiencing in July? Additionally, concerning operating margins, they appear to be similar to last year but slightly lower sequentially. How much of this can be attributed to the return of some temporary cost measures, such as reduced advertising and other expenditures? How much of this is due to those costs coming back as opposed to just seasonal factors?

Certainly, seasonality plays a role in this. Looking at paint, our strongest quarter is Q2, which then slightly decreases in Q3. Volume, especially in paint, reflects this seasonality. The main factor will be the costs we plan to reinvest into the business for Q3. Throughout this period, we focused on maintaining business continuity and liquidity, especially given the uncertainties around demand due to the pandemic. We exercised caution, and it's positive that we have shown the ability to manage our expenses in this unpredictable environment. We are balancing our spending control with necessary investments for our recovery. Currently, we believe it is the right time to begin reintroducing those investments. We have discussed successful programs, including displays and associated costs we need to invest in to support them. We will continue to enhance advertising and promotions to strengthen our brand and gain market share as we recover. However, we anticipate some increased costs in the third quarter, particularly in hiring and potentially higher shipping expenses as we work to smooth out our supply chain. Considering all these factors, we expect 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 solid order book, and as John mentioned, the sell-through has been very strong, even stronger than the sell-in. This allows us to continue to put some inventory back into the channel, and our order book remains robust.

Thank you.

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

Hello, everyone.

Good morning, Ken.

Good morning.

What a quarter! Regarding Plumbing, I have two questions. First, what is the Plumbing SKU mix you are observing? Specifically, I'm interested in the rough gross fittings in the U.S. and whether retail is experiencing an increase in traffic from the trade. Stanley mentioned record retail, so are we simply seeing people shop at retail instead of the trade, which may not be doing as well? Additionally, I would like to know about the rough trends in the U.S. regarding fittings.

Generally, the rough category usually includes a higher proportion of new construction compared to the finish category. While it is possible to do a remodel or repair job involving faucets, for instance, rough plumbing requires more extensive work behind the scenes. Therefore, the rough segment experienced a more significant impact due to the temporary shift we noticed early in the quarter away from new construction. However, we are beginning to see improvements in rough during the last month of June in the quarter. To summarize, I would say that the finish segment performed somewhat better than rough regarding the demand mix. Regarding retail versus wholesale, the situation remains consistent with what we and others have reported. When points of sale and distribution, such as plumbing showrooms, are closed, the volume tends to decrease. We observed a shift toward retail and e-commerce during the initial two months of the quarter. In June, we're noticing a rebound, and we are experiencing a positive resurgence in showrooms as customers increasingly engage with that channel as it reopens.

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 wouldn't necessarily characterize this as a change in consumer behavior. We haven't really observed that. The best way to assess the situation is by examining the channels and traffic, as well as the mix. Generally speaking, Europe has been slower to recover compared to the recovery we've seen in the United States. This might reflect the differences in infection rates between the U.S. and Europe. In countries like the U.K., Spain, and Italy, the approach to reopening has been considerably less aggressive than in the United States. This indicates a difference that stems more from their strategies rather than from consumer behavior.

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

Good morning. I appreciate the opportunity to ask my questions, and it's great to see a solid quarter given the uncertain circumstances. My first question is about Deck Arc and specifically pro paint. You mentioned that pro paint returned to low single digits in June. Considering that this sector represents about 20% of the total coatings segment, it seems this may have contributed a two-point drag on the quarter based on overall trends. As we look ahead to the guidance for the third quarter, which is projected to be an increase of 7% to 17%, could you provide some insights on the expectations for pro paint and how it might impact the segment's results?

Sure. Mike, the pro business constitutes about 25% of our paint sales. As we look ahead to the third quarter, we anticipate modest growth moving forward. We're not counting on any substantial improvement from our current position, just a slight increase in the third quarter.

Okay, understood. Regarding the second question about margins, I appreciate the investment and the costs returning concurrently, especially in a growth environment. Typically, you would see leverage from that. In Plumbing, there may also be cost benefits from raw materials. Is the reason for flat margins overall due to the timing of when these investments materialize year-over-year? I'm trying to understand whether the investments are significantly larger in general or if this is just catching up from deferred costs in Q2 to Q3, resulting in a more concentrated impact year-over-year than usual.

I would say it's more of the latter situation. It's primarily a catch-up from some of the Q2 spending that we didn't do. Across all segments, the narrative is quite similar regarding the investments we're making back into the builder's hardware business. As Keith mentioned earlier, we're reinvesting in some of the headcount as we gradually ease the hiring freeze we had in place. We aim to invest appropriately in our brands to support them and our retail partners. Regarding price costs, if we break down the commodity basket, zinc has remained relatively flat, possibly increasing slightly. Copper has seen a rise recently and is now above last year's levels, which could pose a bit of a challenge down the line. It typically takes about two quarters for any reduction in raw material costs to impact our profit and loss statement. Therefore, some potential tailwinds from commodities might help counterbalance certain tariff impacts as we progress into the second half of the year for our Plumbing sector. Looking at the raw material costs in the Decorative Architectural segment, our TiO2 has remained stable this year and we expect that stability to continue. However, we have observed some easing in resin prices, and there is a possibility that Q2 might be the lowest point, with some inflation expected in the latter half of the year. Thus, we anticipate some pricing pressures in the second half of the year in the Decorative Architectural area.

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 pull back 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 remains largely unchanged as we continue to make progress. We have some intriguing targets, but in the current environment, there seems to be less interest in selling. However, we are still in discussions. I don't anticipate significant activity or changes regarding our approach to M&A and shareholder returns, which are both integral to our capital allocation strategy. Our focus is on funding promising initiatives within our business and supporting our core operations above all else. We will maintain a solid and growing dividend, and when it comes to share buybacks and acquisitions, we will adopt a patient approach. We have shown that we are willing to take advantage of specific opportunities to repurchase our stock, as we have in the past. Additionally, we will ensure that our M&A targets create shareholder value, primarily seeking to enhance our existing segments, which remains unchanged.

Okay. Great. Thank you. Good luck.

Thank you.

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

Good morning. Thank you for the question. How should we think about the increases or decreases in Plumbing or Decorative if sales reach either end of your guidance? I know you mentioned some temporary costs, but would those adjust with revenue growth, particularly if Decorative hits the higher end of the 7% to 17% range? Or will the fixed cost base remain relatively stable?

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 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 honestly, this is clearly not a demand issue; it is a supply issue. We were not allowed to manufacture. To Keith's point, we are 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. In the second quarter, we experienced stronger sales in exterior paint compared to interior paint. This performance was likely better than what we typically observe in historical second quarters, which seems to reflect the unique circumstances of the current pandemic environment.

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, thank you. I would like to follow up on the professional demand question. Based on the trends you have observed in July and what you expect in the third quarter, do you believe we are seeing higher levels of professional demand? Alternatively, if not, do you think there will be a long-term shift in that category due to the renewed interest in DIY projects over the next several quarters and years?

We have observed a slight increase in pro demand throughout the quarter, particularly strong in exterior projects, as people seem more comfortable having workers outside their homes rather than inside. As we noted in our prepared remarks, there has been a noticeable lift this quarter. Regarding concerns about the pro segment's resurgence, we are not worried. We have a solid strategy and a proven track record for gaining market share in the pro segment, and we intend to maintain that. Fundamentally, we have the leading brand in the DIY space, which is our primary focus. We are particularly enthusiastic about our findings indicating that about 30% of painters who participated during the pandemic were first-time painters, with roughly half of those being millennials. We have discussed this trend before, highlighting millennials entering the market, establishing households, and potentially driving growth for our DIY business. We believe this represents a structural shift, and we are prepared to capitalize on it. With our strong DIY brand and a growing and reliable pro business, we are in a favorable position.

Thank you for that. I have a follow-up question: Are there any additional costs involved in shifting from five-gallon to one-gallon paint production? Also, how quickly can you switch between the two production types, and is there any sensitivity to that?

There is some inefficiency because the plant is not operating smoothly with one-gallon fill rates compared to five-gallon rates. We plan to invest in additional one-gallon capacity in the coming months to support this trend. Therefore, we are confident that we can enhance our efficiency and get back on track.

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 for the 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 continued to be very strong.

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

Hey, good morning, everyone. Appreciate 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 believe we are well-positioned on both sides of the Atlantic. We have a strong franchise with Behr and are effectively targeting both DIY and professional markets, where we have significantly improved our margins in the professional segment. We are focused on growing both aspects of our business. Delta continues to be a leading brand in the United States and recorded strong growth, achieving a record quarter in June. This momentum remains robust. In Europe, we have a fantastic brand in Hansgrohe, which allows us to operate profitably worldwide while still having significant room for growth and market share opportunities. Overall, we feel optimistic about our growth prospects and share gains, both in North America and internationally.

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 want to express my appreciation for our supply chain team, including everyone in our factories, inventory planners, and suppliers. We've heavily relied on this group, especially given the challenges of rapidly adjusting production levels. Our supply chain and manufacturing teams have performed exceptionally well. Our key suppliers have also been very supportive, and we truly value that. While we recognize that circumstances can change in this dynamic environment, we don’t expect any significant issues with our supply chain going forward.

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 in 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, 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. I have a quick question. Considering that Q2 has performed strongly and Q3 results are anticipated to be solid, you've mentioned that the conditions for single-family renovations and repairs are very positive. Despite the ongoing macro uncertainties, I would like to hear your thoughts on connecting 2020 to your initial guidance, which now excludes 2021. It seems achievable, but I'm curious if the current factors indicate that 2021 could be a strong year.

Yes, I believe so. We are assessing our original Investor Day targets, and we think it’s quite feasible to meet them. Specifically, I recall Plumbing margins at 18% to 18.5%, Deco at 17.5% to 18%, and overall Masco margins at 16.5%. I think that’s attainable. We have undoubtedly benefited from our portfolio reconfiguration, and while the pandemic influenced that, our resilience is evident. Low-ticket items and the DIY focus align perfectly with consumer spending preferences at this time, which bodes well for us in 2021. I should also mention that we are in a dynamic environment, and we are not providing guidance for the entire year of 2020, nor will we offer specific guidance for 2021. However, considering the small ticket, DIY trends, and the overall consumer health, our positioning looks promising.

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. Thus, in terms of the accounting, international, John?

Yeah. 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, as I mentioned in a previous response, the situation is more influenced by the characteristics of each country and their reopening timelines in the U.S. compared to international markets, rather than consumer behavior. Our demand for spas is quite strong; interestingly, our spa business is among the most global within Masco in terms of the percentage of volume coming from outside North America, and we also see robust demand in Europe.

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

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.