Good morning, everyone. Welcome to the Masco Third Quarter 2020 Earnings Call. My name is Maria, and I will be your operator for today's call. This call is being recorded for replay purposes. I will now hand it over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin.

Thank you, Maria, and good morning. Welcome to Masco Corporation's 2020 third quarter conference call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer. Our third quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. 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 risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I'll now turn the call over to Keith.

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I hope you and your families are staying healthy and safe in these difficult times. Please turn to slide four. During the third quarter, demand for our products was extremely strong as consumers continued to reevaluate how they use their homes in the face of ever-changing responses to the pandemic. With more time at home and more disposable income due to reduced discretionary spending on leisure travel, entertainment, and gas for commuting, to name a few, consumers are investing in their homes. I'm very proud of our strong execution as we met this increased demand and served our customers, while maintaining our top priority of employee safety. This resulted in tremendous performance on both our top and bottom lines. Sales for the quarter increased 15%, excluding the impact of currency. Operating profit increased $127 million or 43%, and operating margins expanded 400 basis points to 21.4%. We delivered strong incremental margins of 48%, as a result of our ability to profitably leverage the robust volume growth, and to pull the right cost reduction levers. Earnings per share grew 73% to $1.04 per share. Turning to our segments, excluding currency. Plumbing sales increased 12%. North American Plumbing sales grew 14%, led by extremely strong performance at Delta, which drove greater than 20% growth across each of its retail, e-commerce, and trade channels. Trade sales in North America were particularly strong in the second half of the quarter, with Delta achieving record trade sales in both August and September. Delta was recently recognized as The Home Depot marketing partner of the year. This is an annual award across all of Home Depot's suppliers, and speaks to our commitment to partner with our customers to drive growth through innovation, omnichannel expertise, and strategic thought partnership. Our Spa business also rebounded nicely in the third quarter and achieved growth, despite still dealing with government limitations on the number of employees in its factories. Record levels of demand and backlog for our Spas continued, as consumers look for ways to enhance their at-home living and backyard experience. Our International Plumbing business also posted strong growth of 9%, excluding currency, led by growth in Germany and China. While Europe, as a whole, rebounded in the third quarter, certain markets remain challenged, such as the UK and Spain. In our Decorative Architectural segment, sales grew an exceptional 19% as we drove growth in all product categories, including Paint, Bath & Cabinet Hardware, and Lighting. Our DIY paint sales remained very strong in the quarter with growth in the upper 20% range. PRO Paint declined mid-single digits, a significant improvement from last quarter. Paint demand has remained robust as it is a simple, economical project that homeowners can do themselves to improve the appearance of their home. Across all of our business units, it was an exceptional quarter. I would like to again thank all of our employees for their tremendous efforts in serving our customers and keeping each other safe. Now moving into our fourth quarter outlook. We anticipate demand to remain strong and expect fourth quarter sales growth, excluding currency, to be approximately 8% to 10% in both segments. Additionally, we expect fourth quarter operating margins for our Plumbing segment to be approximately 19% and operating margins for our Decorative segment to be approximately 17%. Together, this would put Masco's operating margin at over 17% for the quarter, a year-over-year expansion of approximately 150 basis points. As it relates to SG&A as a percent of sales, we anticipate further investment in our brands, innovation, and service to ensure we continue to deliver a long-term sustainable value creation. This outlook assumes no further shutdowns in facilities or points of distribution, which is obviously a concern as COVID cases spike in many parts of the United States and the world. Lastly, I'd like to update you on our capital allocation. While there remains uncertainty in the current environment, based on our strong balance sheet and liquidity, we do plan on resuming our share repurchase program in the fourth quarter. While the amount of repurchases will be subject to many variables, our initial plan is to deploy approximately $100 million towards repurchases in the quarter. And finally, 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 with the right strategic fit and return during these uncertain times. With that, I'll now turn it over to John for additional details on our fourth quarter - excuse me, on our third quarter results. John?

Thank you, Keith. And good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to slide six. We had an outstanding quarter, as sales increased a robust 15%, excluding currency. Foreign currency translation favorably impacted our third quarter revenue by approximately $13 million. In local currency, North American sales in the third quarter increased 16%. This exceptional performance was mainly driven by strong volume growth in our DIY Paint and North American Plumbing businesses. In local currency, international sales rebounded nicely from last quarter and increased 9% over prior year, driven by increased volume. Gross margin was 38% in the quarter, up 210 basis points, driven by increased volume and cost leverage. Our SG&A as a percent of sales decreased 200 basis points to 16.5% as a result of fixed cost leverage and our continued focus on cost containment. Operating income was $425 million, up $127 million or 43% from last year, with operating margins expanding 400 basis points to 21.4%. Our EPS was $1.04, an increase of 73% compared to the third quarter of 2019. Company-wide incremental margins for the quarter were a strong 48% due to operating leverage on the exceptional volume, our continued focus on cost control, and a relatively benign commodity environment. While this tremendous performance is a testament to Masco's operating leverage and commitment to cost control, we also recognize the need to invest in our brands, service, and innovation to fuel our growth and plan to fund such investments in future quarters. While uncertainty remains and precise forecasting is a challenge, we do anticipate continued solid consumer demand in the fourth quarter. We expect sales growth, excluding currency, of 8% to 10%, with approximately 150 basis points of margin expansion from Q4 of 2019. Uncertainties such as the effect of government stimulus programs and the impact of the virus on the overall health of the economy and consumer could impact demand in the market and our expected results. Additionally, it is important to note that our Q4 expectations assume no further closures of our manufacturing plants or points of distribution related to COVID-19. Turning to slide seven. Plumbing grew 12% excluding the impact of currency. Foreign currency translation favorably impacted this segment's sales by approximately $13 million in the quarter. North American sales increased 14% in local currency, led by Delta. The strong growth we experienced at the end of the second quarter in our trade, retail, and e-commerce channels, continued in the third quarter, driven by robust consumer demand and some inventory restocking. While manufacturing in our Spa business improved compared to the second quarter, walk-ins continue to operate at less than 100% capacity due to ongoing government-mandated employee limitations in our Mexican facilities. Despite these challenges, walk-ins grew in the third quarter, and they continue to experience very strong demand for their products, resulting in a record backlog. International Plumbing sales increased 9% in local currency. Hansgrohe drove low double-digit growth in both Germany and China, with lower growth in other European countries. This growth was partially offset by continued declines in other countries, including the UK and Spain, where the economies have been slower to recover. Operating profit was $271 million, up $83 million or 44% from prior year, with margins expanding 510 basis points to 23.8%. The strong incremental margin of 61% was driven by higher volume, cost productivity initiatives, and a favorable price cost relationship. Turning to the fourth quarter. We anticipate sales, excluding currency, to be up 8% to 10%, with margins of approximately 19%, up 150 basis points from prior year. Turning to slide eight. Decorative Architectural grew 19% for the third quarter. This outstanding performance was driven by high-teens growth in our Paint business with strong high 20% growth in our DIY Paint, partially offset by a mid-single-digit decline in pro paint. The continued resurgence in DIY paint and some inventory restocking drove this performance. We remain well-positioned with Behr's compelling quality and value proposition to capitalize on this shift in consumer behavior. While pro paint demand declined in the third quarter, we saw a nice improvement from Q2 and sequential improvement through the quarter. Our builder's hardware business also contributed to segment's results as they delivered exceptional growth across product categories and benefited from strong consumer demand and new program wins. Additionally, our Lighting business continued to improve, achieving growth over prior year. Operating profit increased in the quarter by 34%, driven by incremental volume and continued cost control, partially offset by an unfavorable price cost relationship. Turning to the fourth quarter, we expect a strong demand for paint to continue and anticipate segment sales growth of 8% to 10%, with operating margins of approximately 17%, up approximately 70 basis points from prior year. At the same time, we anticipate a price cost headwind in a more normalized level of investment in the fourth quarter. And turning to slide nine. We continue to strengthen our balance sheet with net debt-to-EBITDA at 1.1 times as we ended the quarter, with approximately $2.3 billion of balance sheet liquidity which includes full availability of our $1 billion revolver. Working capital as a percent of sales improved 70 basis points versus prior year to 16.4% due to lower inventory levels and an improvement in accounts payable, largely resulting from working capital improvements at Kichler. It is important to note that our GAAP reported net cash from operations of $573 million for the 9 months ended September 30 reflects the cash taxes paid on the sale of our Cabinetry business. Excluding the impact of approximately $192 million of cash taxes paid on the gain on the sale of our Cabinetry business, our year-to-date adjusted net cash from operations is approximately $765 million, with free cash flow of approximately $690 million. This is consistent with our expectation of a 100% free cash flow conversion this year. A reconciliation can be found in the appendix of this deck. During the third quarter, we also successfully refinanced our 2021 debt maturity at historically low rates, which will result in approximately $4 million of annualized interest expense savings. Lastly, as Keith mentioned, we plan to reinstate our share buyback activity in the fourth quarter. We currently intend to deploy approximately $100 million in share repurchases in the fourth quarter, subject to market conditions. And with that, I'll now turn the call back over to Keith.

Thank you, John. The COVID-19 pandemic continues to impact our business as consumers reevaluate their living environments. The house is no longer just a place for shelter. It has become the office, the restaurant, the classroom, the gym, and the entertainment center. And we are capitalizing on these changing needs with our leading products by providing an affordable way for homeowners to discover better living possibilities and to enhance how they interact with their homes. At our Investor Day a little more than a year ago, we committed to between $2.80 and $3 earnings per share in 2021. I'm very proud of the entire Masco team. I'm pleased to say that we will achieve and likely exceed this range a full year earlier than planned. And while it is a bit early to provide a definitive outlook for 2021, we believe that the strong consumer trend of increased investment in their homes will continue in 2021 and support growth for our 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 in this ever-changing market. With that, I'll now open up the call for questions. Maria?

Thank you. Our first question comes from Matthew Bouley of Barclays.

Good morning. Congrats on the results. And thank you for taking the questions. Wanted to start out with a question around the longer-term margin. Keith, you just mentioned the Investor Day and thinking about how to guide this year is kind of setting up. On the margin side, to come in above the ranges you had given in both segments. And I also hear you around some intentions around investing for growth. So, as we think about 2021, is the idea that you're going to sort of intentionally bring those margins back into the long-term range? Or is there a potential that you can remain above those long-term ranges for an extended period here? Thank you.

Matthew, when you think about our margin targets for 2021 that we set up at the Investor Day, we need to remember that, that was based on significantly lower volume expectations for 2021. I think we had Plumbing in that 18% to 18.5% range, Deco was 17.5% to 18%, and overall Masco, just shy of 17%. And as I said, this guidance was based on a low volume outlook. As we've talked along in this call and in other calls, we leverage volume very nicely. So there are lots of variables. We'll continue to invest in our brands, innovation, and service, like we talked about. That will certainly be somewhat of a headwind to margin expansion. But with strong R&R fundamentals and increased volume, I would think that we would be able to exceed those targets and margins that we talk about at our Investor Day in 2021.

Okay. Understood. Secondly, maybe zeroing in on the 4Q margin guide in Plumbing, just given where you kind of ended Q3, complying a bit of a step down sequentially that's larger than typical for Q4. So is there anything in that Q3 Plumbing margin that is, I don't know, I guess, unsustainable or one-time in nature that might drive that type of step down? Thank you.

There are a couple of things that are interacting, as we think about Plumbing in the fourth quarter. Recall that, once the pandemic hit, we very swiftly enacted significant cost-cutting measures, as we are in the throes of assessing what exactly the impact was going to be on liquidity, cash flow, etc., and on demand. We demonstrated, I believe, with our third quarter results, that our demand has remained robust. So, now as we move into the fourth quarter, we do expect to see some increased production costs. Certainly, overtime, higher bonuses, higher volume rebates, likely some additional air freight, as we continue to balance out inventories in our supply chain. Commodities will be less favorable, as we look forward. We do anticipate bringing back some additional investment spend to make sure that we are positioned to win in the recovery. We talked about investments in branding, advertising, and marketing, and continued increased investment in innovation. That's the dynamic that we're looking at as we consider margins. Q4 is really pretty similar for the other segment as well, but definitely for Plumbing.

Okay. Thanks, Keith.

Hey, guys. Thank you for taking my questions as well. Maybe starting off just with Kichler, just wondering if you can give us an update on how the performance was in the quarter with a very strong segment performance?

They did a great job, really impressed with the team down there. Continue to execute, I would say, better than planned, at or better than planned. So we achieved growth. That was very solid. And the team is doing a good job or on plan.

Okay. And then, maybe just going back to the Plumbing margins, the 23.8% in the quarter, it sounds like there's going to be some increased investment coming forward. Which makes a lot of sense. But how much of that was constrained investment in the quarter? Was that a factor? Or was it just the other factors that you talked about?

You say constrained investments, John, how much did we have a reduction of the investment in Q2? Is that what you're asking?

Yes, John, maybe I'll take this one. In terms of yes, if you think about our performance in the third quarter in plumbing, yeah, as we exited Q2, one of the things that Keith mentioned, we really clamped down on expenses at the start of the pandemic and we kept them constrained going into the third quarter. As you think about typical expenses that we might be running, particularly in the SG&A area, like a lot less travel and entertainment, since virtually we're not having our teams travel very much. Things like promotional expenses were down significantly in the quarter. Things like trade shows that we would typically attend were all down in the quarter. That led to probably a little better margin expansion on top of the benefits we enjoyed from operating leverage in Q3. And as Keith mentioned, as we roll from Q3 into Q4, we're watching, we're trying to contain our expenses as best we can, but we have to appropriately reinvest to grow the business.

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

Hi. Thanks for taking my question. Nice results. Keith, John, you mentioned in remarks and in response to one of the questions, some of the input costs potentially creeping up and also freight. I think, as we think about global recovery and also potential vaccine distribution next year, there's certainly some thought that we could see further acceleration in some of the freight pressures and also some reacceleration in inputs. I guess, can you give us any more color when you're thinking about that 4Q margin? How much of an impact are you already seeing? And what are your thoughts as we head into '21 around inputs and freight?

Yes, sure, Mike. It's John. In terms of commodity costs, yes - and certainly, in Q3, you have some benefit. All of the drivers of our margin expansion in Q3, I'd say volume and cost productivity were much bigger drivers of our Q3 performance and obviously, commodity inputs. Looking forward, as you think in our Plumbing and you think about the base metals, copper and zinc, they did help us and provided us a little bit of tailwind in the third quarter. Recall, we've seen copper and zinc start to increase particularly in the second quarter. As I've said before on other calls, I think it's about two quarters for raw material inflation to flow through, particularly the base metals before it hits our P&L. And so, that will be a little less of a tailwind, a little bit more of a headwind as we go into Q4. As it relates to the input costs for paint, our price commodity relationship was a bit of a headwind in the quarter. We expect that to increase a little bit as we go into the fourth quarter if present prices have started to rise up a little bit because oil has risen over the course of the year. So that's where we're looking. TiO2, I would say, has remained relatively stable, not a lot of up or down movements there. We expect that to continue to be stable as we go into the fourth quarter.

Great. Thanks for that. That's really helpful. My second question, it's clearly a great recovery in plumbing, both in North America and in international. Just wondering, I think with Europe, some of the rising cases have probably been at least a few weeks ahead of what we've seen in the US, and there have been some local restrictions that have probably gotten a little bit tighter there. Can you talk about whether you're seeing any of those impacts to your European plumbing business at this point in the fourth quarter relative to the recovery in the third quarter?

Well, I'll take this one, Mike. Germany, which, as you know, is Hansgrohe's largest market and China which is also a very large market for us, each drove low double-digit growth in the third quarter. So we did see good growth. We also saw growth but to a lesser extent in other European countries, Italy, the Netherlands, for example. As I said in my remarks, there were also other countries such as the UK and Spain that have been slower to recover. So when we think about Europe in the third quarter, it was good. It was robust for us. As it relates to the fourth quarter, we're watching very closely what happens. And yes, you're right, there has been some tightening, and they're doing it in a little bit different way than we are here. They tend to be more metropolitan area-focused, meaning they're being more pinpointed in the types of restrictions that they're employing, whether it's cutting the time in certain cities that restaurants can be open or closing certain types of venues like cinemas and movie theaters on a city-by-city basis. So they're being more surgical. Just like around the world, there's more experience on how to work through this. It remains to be seen what the ultimate impact will be. But I think what we've demonstrated is that we have the ability to be agile, if you will, and to monitor the situation closely and pull the cost levers appropriately if needed. Right now, we're really watching, particularly over in Europe.

Thank you. Good luck in the quarter.

Thank you.

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

Hey, guys. Good morning. Thanks for taking my questions. Can you give us a sense for how much customer restocking added to growth across both businesses? You did mention that in both segments.

Yes, Adam, as you might expect, as we exited this second quarter because of the strong demand that we were experiencing at the end of Q2, inventories were relatively low in the channels. And as you think about the growth drivers for the third quarter being volume and inventory restocking, I would tell you that volume was, by far, the much more significant driver of growth. Inventory restocking was a relatively light impact in the quarter.

Okay. Got it. Thanks. And then, just looking at 4Q Paint or Decorative guidance, what are you assuming for DIY and Pro growth in that guidance?

We think demand for Paint will continue to be strong as we go into the fourth quarter. We indicated we're forecasting 8% to 10% sales growth in Q4. I think we are going to see continued strong demand on the DIY side, and muted but improving demand on the Pro side of our business. I would remind everyone, we've got a bit of a tough comp going into Paint as we go into the fourth quarter. As you may recall, in the fourth quarter of last year, we experienced about $20 million of sales pulled forward in the fourth quarter of last year. And so that will be a bit of a comp headwind for us as we go into Q4.

Great. Thanks, guys.

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

Yeah. I'm sorry about that. That was my fault, sorry. My first question is just talking about you obviously mentioned you're restarting the share repurchase program, which I think is a good sign of your confidence in the outlook and what you're seeing. Can you talk a little bit about maybe any potential to exceed that $100 million? Or how we should think about this starting to layer back in and you getting back to the levels that you've seen in the past couple of years?

Sure, Susan. As we indicated, both Keith and I indicated in our prepared remarks, we're right now targeting around $100 million for share repurchases in the quarter. I think as we both indicated, there are a lot of variables that go into the decision on what drives our share repurchase activity. It's going to be subject to market conditions, and to the extent that we see a pullback in the shares, we'll probably be a little bit more opportunistic like we were earlier this year when we repurchased $600 million worth of our shares for less than $40 per share. So, to the extent we see greater share pullback, we'll probably be a little bit more aggressive. To the extent we see the share price run high, we'll probably continue to devote that $100 million, but probably not much more than that. Again, it's going to be a bit of a judgment call as we work our way through the quarter.

Okay. All right. That sounds good. And then, just following up there, can you give us a little color on Kichler and perhaps some of the trends that you're seeing there? And especially given some of those cost-cutting efforts, how we should expect that to start to come through as we look to 2021?

Lighting is a relatively less expensive purchase that you can create some pop and a new look in your house. So much like many of our products, which are in that sweet spot of the price point and bang for the buck, if you will, we also saw that in Lighting. So we saw good growth across our channels, and Kichler participated in that growth. As we said, Kichler grew. And as I mentioned before to an earlier question, we're on plan, maybe even a little bit ahead of plan, and I'm pleased with how the team is performing. Our objective was to position Kichler for growth next year, and we had growth this past quarter. So, I like what I'm seeing.

Okay, great. Thank you, both.

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

Hi. Good morning, everyone, and thanks for taking my question. First, among the two segments, could you just go through how demand trended throughout the quarter? And how it either ended in September or October or even in - just for clarity, the exit rate? It seems like all of your businesses were positive on a year-over-year basis in 3Q, but are they still trending that way?

As we spoke a little bit timing in the prepared remarks, Delta had a record last couple of months of the quarter. So nice acceleration to the quarter, and that's fairly consistent with the Plumbing segment. In general, plumbing had good solid, somewhat consistent growth over in Europe and in plumbing. In the DIY space in - excuse me, in Paint and in Decorative, in general, pretty consistent. It was strong going in and remains strong going through. So that gives you a little bit of color on the in-quarter kind of dynamics.

Okay. Thank you for that. And then, not necessarily in paint or faucets, but in other building product categories, we've heard of some supply chain issues or capacity issues in filling the robust demand. Are you all seeing that in paint and faucets specifically? Or do you have any capacity issues? And then on the flip side, it seems like there's a little bit of inventory build in your channels. Do you think that there's more to come that your retailers especially need to build additional inventory? And how are you thinking about your own inventory levels over the winter? Are you looking to build up a little bit more than you normally do?

Right now, Truman, we're managing through with our current capacity. Typically, we would use the slower months in the beginning of the year and early Q2 to build inventory. We didn't have that luxury due to restrictions and uncertainty and everything that was going on at that point. Now we do have plans to selectively add some capacity where we need it. We talked a little bit about the resurgence and the increase in demand for one gallon filling due to paint, due to the tremendous shift over to DIY, where they typically buy more one-gallon than five-gallon. So we had to buy and purchase some additional capacity in one-gallon filling lines, that sort of thing. So there's some spot capacity in certain types of machinery where we've had to add. But really, there's no significant capacity issues. At some point, we're likely going to increase capacity in certain areas, but not in the immediate horizon. In terms of the inventory position in the channels, I would say that inventory is probably a little bit light for where we would like to see it and where our channel partners would like to see it. So we may see a little bit of inventory fill as we move through the year.

Yeah. And one thing I'd add to Keith's comments is that I always like to take this time to acknowledge our supply chain teams. They have done just a fantastic job of reacting to the increased robust demand that we've been experiencing in the third quarter. Whether it's our supply chain teams internally, our folks and our plants across the portfolio, or whether it's our suppliers, everyone has acted in a coordinated fashion to really drive this growth. We're really pleased with how the team has responded this quarter.

Thank you all and good luck on the upcoming quarter.

Thank you.

Our next question comes from the line of Keith Hughes of Truist.

Thank you. A question on Watkins, it sounds like you're still having some production issues. Do you have any sort of feel for when that will get back to full production and alleviate some of the backlog you discussed earlier?

Keith, again, the Watkins team is working day and night to deliver and fulfill the demand. When the Mexican government releases the restrictions, it's tough to tell. I mean we don't have any good insight as to when that's going to take place. But the Watkins team is running hard and fulfilling as best they can. Like I said in my prepared remarks, they drove growth in the quarter despite some of these restrictions. We’re really pleased with how the Watkins team is delivering here in Q3 and Q4.

And second question on PRO paint. You talked about - it sounds like in the fourth quarter, you expected to get a little bit better on what we saw on third. Why is that? Is that something to do with your retail partner or is that something more in the market?

I think, Keith, it's just continued progress in the trends that we've been seeing. As you might expect, in Q2, we saw a lot of pullback on consumers not allowing paint contractors to come in their homes, and we've seen a steady improvement since Q2. In Q3, we saw sequential improvement each month through the quarter in our PRO paint sales. Based on what we're experiencing, we think that trend could continue here as we go into Q4.

Okay.

A lot of variabilities there, Keith. What happens to the virus and what happens to the consumer psyche as it relates to pros being allowed in the home, the fact that in late year, it moves more towards interior. So there are a lot of variables that we have to think about.

Okay. Thank you.

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

Thanks. Good morning, everyone, and congrats on the results.

Thank you.

First question, I just wanted to circle back a little bit to understanding some of the sequential trends that you're expecting in the businesses on the top line, on the sales side in Plumbing and Decorative. When you think about the expected, still very strong growth rates, but a little bit of a detail in Plumbing from roughly 13% to 8% to 9%. Just trying to get a sense of what's driving that if all of that is perhaps the absence of the inventory restocking that you referred to earlier or if there are other things at hand? And similarly, in Decorative, I believe you had said earlier that you observed relatively consistent trends during 3Q. So again, just trying to understand the deceleration into 4Q. I know, John, you had referred to somewhat of a tougher comp, but I'm also looking at 3Q 2019 growing at 5%, 6% in 4Q 2019, down 3%. So I just wanted to try and better understand what's driving that as well.

Yeah, Mike, as you think about the transition of the growth from Q3 to Q4, you feel that sequentially. First of all, we had extremely strong demand in Q3 which drove really good results. We expect demand to continue to be good as we go into Q4. But as you know, forecasting in this current environment is a challenge. It's hard to say what impact the virus might have on our Q4 results. There may be a little bit of a dose of conservatism in that guide as we're trying to dial things into the fourth quarter. So from our perspective, we had 12% growth in Plumbing in the third quarter. We're looking at 8% to 10% growth. I don't view that as significant deceleration as we go into the fourth quarter. That said, the third quarter had some inventory restocking in it. We're probably thinking that there's less inventory restocking as we go into Q4. We'll see how that plays out. On the Decorative Architectural side, to the point you made in your question, the pull forward definitely has an impact on our Q4 revenue growth rates because we're currently not expecting that type of activity to recur here in the fourth quarter of 2020. I'd also say that Liberty Hardware, which is a smaller - one of the smaller businesses in the segment, had a terrific quarter. They had a really, really strong quarter. They also had a load-in here in the third quarter due to a program win they had at one of their retail customers. We don't expect that activity to recur. Similarly, to the Plumbing segment, we talked about a little bit of inventory restocking in Q3. We don't expect that same level of inventory restocking to take place in Q4. So as we pull it all together, yes, the transition or the growth rates from Q3 to Q4 are a little bit more muted in Q4. That said, we think 8% to 10% growth in this environment is still quite strong and translates with 150 basis points of margin expansion that we think represents a very good quarter.

Absolutely, and appreciate that. Thank you. I guess, secondly, on the margin side, obviously, it's great to see the reinvestment in the business. When you're talking about the margins that you're generating, that strategy makes perfect sense in terms of trying to maintain those high margins and reinvest for the top line. Obviously, that's baked into your 4Q guidance. How should we think about 2021 in this regard? When Keith, you had talked about before perhaps being able to maintain a margin above your long-term targets, is that with reinvestment spending kind of kicking up? Or how do you see that factor impacting profitability? Is that something where it could be a 50 or 100 bps type of investment or the levels could still stay above those long-term targets with a higher reinvestment rate?

My comment - again, it's too early to call 2021, and we'll talk more about that next quarter. We do expect growth in 2021. We think that the fundamentals of the consumer when you look at what really drives our business, that is it's configured now, it significantly swings on home price appreciation and housing turnover. If you look at those numbers, we're looking at, let's call it, 5% home price appreciation and $6.5 million of existing home sales. Those are big numbers. Now those aren't sustainable numbers, but that certainly gives us a lot of confidence going into 2021. My comments about continuing to grow and driving margin expansion, we want to grow above market. We want to continue to expand margins. So our increased investments were factored into my thinking and my comments. When you think about the optimum spend for value creation, I'm not going to sit here and say that a 16.5% SG&A is the optimum. It's more than that. We're going to continue to drive long-term, mid- and long-term value creation. So there will be an increase in SG&A. It's not sustainable at 16.5% because that's not the right thing to do to drive value creation. We will continue to increase those investments. But we are carefully watching these cost reduction levers we have. How much we increase, we don't know, no one knows, what is going to happen with this virus over the coming months. But as we learn more, we'll maintain our commitment to the future.

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

Thanks very much, guys. I had two questions for you, both kind of related to the virus, because you're giving a lot of good information in other areas. Obviously, I'm not asking you to predict the future. But if we take it from a negative perspective, I'm curious as to what you think - what you're anticipating the effects might be on your business, if we were to go through another wave of shutdowns, kind of like we did earlier on? I would imagine it's going to be a little bit different this time. You talked about some differences between the US and Europe in terms of the way that we handled it the first time. What do you imagine - how do you imagine the effects may be a little different, in particular, as it relates to your business? I'm thinking - do you think inventories would hold more stable through a shutdown wave, for instance? And are there other impacts that are important for us to consider for your business, if we were to tighten up again?

That's a crystal ball kind of question. I wish I had one. The way we think about what could happen, either positive or negative, turns on a couple of things. One is the discretionary spend. So, is the discretionary spend of the consumer going to continue to be at a rather high level now, as it relates to reduction in spend in other areas, like entertainment and going out, etc.? What could potentially happen if there was a reduction or no stimulus if the virus got worse, those sorts of more downside scenarios. So where does the discretionary spend go? Is there more or less discretionary spend? Then second component is what share of wallet of the consumer is going to be spent on the home? Obviously, we've seen a significant spike in that share of wallet being spent on the home. Will that continue? I don't think it’s prudent to think that this will stay at these elevated levels in perpetuity; it will probably revert back to the mean. At the same time, we do believe there have been some structural changes to the DIY market. We talked about last quarter some of our own research, and I've certainly talked to other people in the industry and our channel partners in terms of some of their research, and you simply can't deny that millennials have entered big into DIY. That is earlier than we expected. We expected it, but it's earlier. That represents a structural expanding of the DIY pie, if you will. Don’t have a crystal ball answer for you, but those are three things that we're thinking about as we evaluate positive and potentially negative scenarios.

And Stephen, maybe my own color on that. I mean, I think, like Keith said, consumer demand will be there. As we saw what happened in the spring as we worked through the pandemic, the consumer was there, they were spending, and they were investing in their home. Given the trends that we're seeing and the research we've seen, we think consumer demand will be there. The thing that we've got to keep our eye on, like because we're still contending with our Watkins operation, is what happens to production, if shutdown affects any of our facilities. That's the one thing we've got to keep in the back of our mind as well.

Yeah. Thanks. Fair point. Next question relates - actually, it's kind of a flip scenario. Let's say sometime in the next foreseeable future, we actually get a vaccine, and we get a more rapid reopening or reopening that's on a more rapid side, let's say, a more positive like bullish outcome. One of the foreseeable things that a lot of folks are talking about now for your business, and of course, you've addressed it before, is that you might see a slowdown in DIY paint because you had a little bit of pull forward, maybe. In particular, I suppose, with Deco Arch, I’m curious if you could address what areas you think you might - are there areas where you're doing some contingency planning today ahead of a potential slowdown in the event of a vaccine? What are the operational challenges that you could foresee? And what would your action plan look like? I'm not asking for a lot of specifics here, but just generally, what are the areas of your business that you're anticipating you may need to pull a lever for? If you could give us some insight into how you're thinking about that.

I think it would probably be mainly on discretionary spending. I really wouldn't see significant structural cost reductions. When you think about where our brick-and-mortar capacity is and how it's lined up, we’re in pretty good shape there. We had good utilization going into the pandemic, and we have outstanding utilization now. So I think on the upside scenario, we could see a potential investment and some capacity down the road. We always work very hard to get more out of the assets that we have, do better with what we have, in terms of efficiency and how we use our assets. Then the downside, we would flex down on the discretionary. It’s kind of how I would see it.

Yeah, Stephen, maybe the way I would approach it is that we've got a great investment in our Pro franchise. If a vaccine, to your description, were to come true or come through faster, I think we could double down on our Pro investment and grow that business faster than we've been growing it in the last several years. We've experienced double-digit growth in our PRO paint business historically. If the consumer decides not to paint their homes anymore and they want PROs to do it, we’ll be right there with our channel partners to meet that demand. That’s the way I would position a business going forward if your scenario were to emerge.

Great. Thanks a lot, guys. Appreciate it.

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

Hi, thanks. I just wanted to follow-up on the comment you just made around capacity. With the step-up in demand, it sounds like there's a pretty solid outlook into 2021. How far away are you from having to perhaps add some capacity, whether it's in plumbing or paint?

We've been - I'll talk first; maybe Keith can add some color afterwards. Our teams have done a great job of driving efficiency within our facilities such that, Garik, we don't need to add any brick-and-mortar capacity in the near term. As Keith mentioned earlier, we are investing a little bit in one-gallon capacity in the paint side because that's where the demand has been the strongest over the course of the last couple of quarters. That said, if demand continues to go at the current pace it is, I would estimate that we might need to expand some of our facilities probably in the 2022 or 2023 timeframe. It's not going to definitely be a 2021 investment, but that might be the soonest that we have to do it. We’ll have to see how the demand plays out over the next couple of quarters.

Okay. And just had a quick question on Plumbing. You called out good growth across the board, retail, e-commerce. It sounded particularly bullish just on what you're seeing in trade in August and September. So I'm just kind of wondering what is driving the acceleration in the trade channel? And what the outlook is there? Thanks and congratulations.

I think consumers were becoming more comfortable and feeling safer to go into plumbing showrooms than to go into those areas of the trade channel that they really shut down for a while, literally shutdown, and then we shut down in the sense of not being comfortable going in them. I think the consumer engaging with that part of the channel as it relates to showrooms was a big plus. We're very strong in the showroom. That set right into our sweet spot. That was a big component of it all. The consumer is a little bit more comfortable with having plumbers in their home, and there's a component of repair where, when something like that breaks, it has to be fixed. Whether it's a washer or dryer or in our case, a faucet or shower system. Those are the dynamics that drove the trade.

Our next question comes from the line of Tim Wojs of Baird.

Hi, guys. Nice job. Thanks for squeezing me in. I just had one question really about promotions and just curious kind of what you're hearing as your customers think about 2021 around promotions at this point? Do you think things revert back to maybe a normal promotional type environment? Do you think there's some incremental kind of investment or catch-up investment that your customers might ask maybe next year?

Tim, it's a time of year where we're typically working through the promotional cadence for the subsequent year. As we think about it right now, the promotional cadence is driven by our retail partners. We don't necessarily set that. We work with them and how our participation will play out. Our guess at this point is they're going to be thoughtful about it just like they were this year to the extent that the virus is more muted. I would expect to see a more normal cadence of promotional activity. To the extent that there's a more aggressive virus out there and they want to limit consumers going into their stores, they may pull back on that. It’s hard to determine right now exactly how it’s going to play out for 2021. We're going to work very closely with our channel partners to figure out how we can best and most effectively participate in whatever promotions they decide to run.

Okay. Okay, great, good luck. See you guys. Thanks.

Okay. Operator, is there one more question?

And ladies and gentlemen, our final question will come from line of Phil Ng of Jefferies.

Hey guys. John thanks for squeezing me in here. Just one, really quick one, good to see propane recover. When we look out to 2021, you've got some pretty tough comps, on the DIY side. So I'm just curious, do you have enough momentum on the pro side in Kichler? Or maybe we have just stronger growth across the board in DIY, where you see Deco actually being up next year from a growth standpoint?

Phil, Keith here. It's too early to call 2021. As I said, we do expect growth in 2021. We have a strong consumer, a strong brand, and the best service. When you talk about our DIY paint, we have a great channel partner. We would, and we always do, invest and drive our teams for growth. That’s how we're thinking about it.

Thanks a lot, Keith.

Okay. Thank you, Phil. Thank you to everyone for participating in the call. I really appreciate it. Please stay safe. We will talk to you next quarter. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.