Good morning, ladies and gentlemen. Welcome to Masco Corporation First Quarter 2021 Conference Call. My name is Michelle, and I will be your operator for today's call. As a reminder, today's conference is being recorded for playback purposes. I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin.

Thank you, Michelle, and good morning. Welcome to Masco Corporation's 2021 first 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 first 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 and one follow-up. If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We describe these risks and uncertainties and our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I'll now turn the call over to Keith.

Thank you, Dave. Good morning everyone and thank you for joining us today. I hope everyone is staying safe and healthy. While we are well over a year into this pandemic, the effects are still being felt. We are encouraged by the rollout of vaccines, but many areas around the globe continue to experience a surge in cases. The safety of our employees remains our number one priority, and I would like to thank all our employees for keeping each other safe and for serving our customers. Through the efforts of our employees and the robust demand we continue to experience for our products, we delivered another outstanding quarter. Please turn to Slide 5. We had a strong start to 2021, and our ability to effectively navigate this highly dynamic environment resulted in exceptional top and bottom line growth. For the quarter, sales increased 25%, excluding acquisitions and currency sales increased 19%. Operating profit increased 61% to $366 million principally due to strong volume leverage and reduced spending in the form of lower travel, entertainment and marketing expenses across our segments. Earnings per share increased an outstanding 89%. Turning to our Plumbing segment, sales grew 27% excluding currency driven by strong volume growth at Hansgrohe, Delta and Watkins. Our two recent plumbing acquisitions performed well in the quarter and contributed 5% to plumbing's growth. North American plumbing grew 28% led by our wellness business, which continued to experience strong demand and began to compare with their March shutdown of 2020. Delta faucet delivered another quarter of double-digit growth with strength across all channels, particularly e-commerce which showed exceptional strength as consumers continue to shift their buying patterns online. International plumbing grew 37% in the quarter as many of our markets returned to strong growth with particular strength in Central Europe and China. In our Decorative Architectural segment, sales grew 15% against a healthy 9% comp from Q1 of 2020 – acquisitions contributed 2% to our decorative growth. Our lighting bath and cabinet hardware and paint businesses each posted double-digit growth during the quarter. DIY paint grew high teens in the quarter, which is impressive considering it was facing a strong double-digit comp in Q1 of 2020. While propane was down low single digits for the quarter, as it faced a tough comp in Q1 of 2020, we did see a return to positive growth in the back half of the quarter and we're encouraged by the momentum we are now seeing in this business as we move into Q2. Lastly, we actively continued our share repurchases during the quarter by repurchasing 5.5 million shares for $303 million. We anticipate deploying approximately $800 million towards share repurchases or acquisitions for the full year as we guided on our fourth quarter call. Additionally, we anticipate receiving approximately $160 million for our preferred stock in cabinet works resulting from their recently announced transaction assuming it closes as expected. We intend to deploy these funds towards share repurchases or acquisitions, which would be in addition to the $800 million that I just mentioned. Now let me discuss two issues that are top of mind right now, inflation and supply chain tightness. We have seen significant inflation in raw materials, namely copper, zinc and resin used in both our paint and plumbing businesses as well as increases in freight costs. All in, we expect our raw material and freight costs to be up in the mid single-digit range for the full year for both our plumbing and decorative segments with inflation likely reaching high single-digit levels in both segments in the third and fourth quarters. To mitigate these impacts, we have secured price increases across both segments to begin offsetting these costs. We have further actions planned including additional price increases and productivity improvements while continuing to work with our customers and suppliers to offset these rising costs. Timing again, we have demonstrated that our strong brands, innovation pipelines and channel relationships give us the ability to offset rising costs. We expect to continue this track record and achieve price cost neutrality by year end and we are maintaining our full year margin expectations in both segments that we provided on our fourth quarter call. With respect to supply chain tightness, in addition to the strain caused by robust demand, we have been impacted by significant disruption in the supply of resins and products in both our plumbing and paint businesses due to the severe weather that Texas experienced in February. Additionally, ocean container availability and timeliness continues to be constrained. This has temporarily reduced output of certain spot products during the month of April and limited our ability to build inventory of certain architectural coatings and other products. However, the availability of resins is improving and our teams have done an outstanding job utilizing Masco's size, scale and agility to countermeasure these issues by working with our key suppliers to increase availability of certain materials, leveraging our purchasing power to increase container availability for our products and by working around the clock to adjust production to meet the needs of our customers. This once again shows the competitive advantage that comes from being part of Masco's portfolio. With our stronger performance, the actions we have taken and will take to offset persistent inflation, the interest savings from our recent bond transaction and the continued strong demand for our innovative products and brands, we are increasing our full year expectations of earnings per share to be in the range of $3.50 to $3.70 per share. This is up from our previous expectations of $3.25 to $3.45. With that, I'll now turn it over to John for additional detail on our first 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 to Slide 7, we delivered a very strong start to the year as first quarter sales increased 25%. Currency increased sales by 2% in the quarter and the three recently completed acquisitions contributed an additional 4% to growth. In local currency, North American sales increased 21% or 17% excluding acquisitions. This outstanding performance was driven by strong volume growth in North American faucets, showers and spas, as well as DIY paint. In local currency, international sales increased 27% or 23% excluding acquisitions. Gross margin was 35.6% in the quarter, up 80 basis points as we leveraged the increased volume. Our SG&A as a percentage of sales improved 340 basis points, to 17% in the quarter. This was primarily due to operating leverage, decreases in certain costs such as travel and entertainment, trade shows, and the deferral of certain marketing and other spend. We expect SG&A as a percent of sales to increase throughout the year to a more normalized 18%; as certain costs come back along with additional investments in our brands, service and innovation to fuel future growth. We delivered outstanding first quarter operating profit of $366 million, up $138 million or 61% from last year with operating margins expanding 420 basis points to 18.6%. Our EPS was $0.89 in the quarter and increased 89% compared to the first quarter of 2020. Turning to Slide 8, Plumbing grew 31% in the quarter. Currency contributed 4% to this growth and acquisitions contributed another 5%. North American sales increased 27% in local currency or 22% excluding acquisitions. This was led by DELTA's double-digit growth in the quarter, and they continue to drive strong consumer demand across all their product categories and channels. Walkins, our wellness business was also a significant contributor to growth in the quarter as both demand and our backlog remain strong. Walkins performance also benefited from a softer comp in the first quarter of last year, as government mandated COVID lockdowns resulted in two of their manufacturing plants being temporarily shut in 2020. International plumbing sales increased 27% in local currency or 23% excluding acquisitions. HANSGROHE delivered year-over-year increases across most of their markets with continued double-digit growth in both Germany and China. Demand remains strong in Central Europe despite continued COVID restrictions; we are starting to see improvement in the UK. Operating profit was $253 million in the quarter, up $94 million or 59% with operating margins expanding 370 basis points to 28.3%. This performance was driven by incremental volume, cost productivity initiatives and lower spend on items such as travel and entertainment, trade shows, and marketing. This favorability was partially offset by an unfavorable price cost relationship. We expect raw material inflation in this segment to peak in the third quarter. During the quarter, we entered into an agreement to divest our HUPPE business, a small shower enclosure business based in Germany, as we determined it did not align with our strategic direction. HUPPE's sales were approximately EUR 70 million in 2020. Net proceeds will not be material. Given our first quarter results and the current demand trends, we now expect plumbing segment sales growth for 2021 to be in the 15% to 18% range with 10% to 13% organic growth, another 3% net growth from the recent acquisitions, and then the divestiture of HUPPE. And given current exchange rates, we anticipate foreign currency to favorably benefit plumbing revenue by approximately 2% or $70 million. We continued to anticipate full year margins will be approximately 18%. Turning to Slide 9, Decorative Architectural grew 15% for the first quarter, a 13% excluding acquisitions. This exceptional performance was driven by low-teens growth in our paint business. Our DIY paint business grew high-teens against a strong double-digit comp in the first quarter of 2020. A pro-business also faced strong comps and declined low-single-digits in the quarter. Despite this decline in our pro paint business, we delivered positive year-over-year pro growth in the back half of the first quarter and anticipate high-single-digit growth for the pro paint business for the full year as consumers continue to become more comfortable with paint contractors in their homes. Our builders, hardware and lighting businesses each delivered double-digit growth as their new products and programs capitalized on increased consumer demand. Operating profit in the quarter was $142 million, up $46 million or 48%. This outstanding performance was driven by incremental volume, cost productivity initiatives and lower spend, partially offset by an unfavorable price/cost relationship. For 2021, we are raising our outlook and now expect architectural segment sales growth will be in the range of 4% to 9% with 3% to 7% organic growth and another 1.5% from acquisitions. We continue to expect segment operating margins of approximately 19%. Turning to Slide 10, our balance sheet remains strong with net debt-to-EBITDA at 1.3 times. And we ended the quarter with approximately $1.8 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Working capital as a percent of sales, including our recent acquisitions was 17.5%. During the first quarter, we continued to focus on shareholder value creation by deploying approximately $103 million to repurchase 5.5 million shares. In mid-February, we completed a significant bond refinancing. In this transaction we called our 2022, our 2025 and our 2026 debt maturities, which aggregated $1.3 billion refinance these with a combination of new seven-year, 10-year and 30-year notes totaling $1.5 billion. This refinancing accomplishes two things. First, it lowered our interest expense, and secondly, extended the duration of our maturities. From an interest perspective, the net effect is a $35 million annualized interest savings. Due to the timing of this transaction, interest expense will be approximately $110 million compared to our previous guidance of $135 million for 2021 and approximately $100 million in 2022. From a maturity perspective, this transaction also means we have taken out all our near-term maturities and our next debt maturity is not until 2027. And two reminders for everyone; first, we will be terminating and annuitizing our U.S. defined benefit plans in the second quarter. And we will have an approximately $140 million final cash contribution to these plans to complete this activity. And second, our board previously announced its intention to increase our annual dividend by 68% to $0.94 per share, starting in the second quarter of 2021. This will increase our targeted dividend payout ratio from 20% to 30%. We have summarized our updated expectations for 2021 on Slide 13 in the earnings deck. Based on Q1 performance and current robust demand for our products, we now anticipate overall sales growth of 10% to 14% up from 7% to 11% with operating margins of approximately 17%. Lastly, as Keith mentioned earlier, our updated 2021 EPS estimate of $3.50 to $3.70 represents 15% EPS growth at the midpoint of the range. This assumes a 254 million average diluted share count for the year. Additional modeling assumptions for 2021 can be found on Slide 14 of the earnings deck. With that, I'll turn the call back over to Keith.

Thank you, John. Our markets remain strong and housing fundamentals are supportive of continued long-term growth. Year-over-year home price appreciation increased to over 17% in March and existing home sales were up over 12%. Both of these metrics have a strong correlation with our sales on a lag basis. Furthermore, the U.S. consumer is healthy with estimated built-up savings of nearly $2 trillion even before the new stimulus money, and consumers continue to invest in their homes. We believe these factors along with the increased demand from the large millennial demographic will lead to continued growth in the repair and remodel markets. With our market-leading brands, history of innovation and strong management teams, we are well-positioned to capitalize on these growth drivers, serve our customers and deliver value to the shareholders. With that, I'll now open up the call for questions.

Okay. The first question will come from Matthew Bouley from Barclays. Your line is open.

Good morning. Congrats on the results. Thanks for taking the questions. I wanted to start out on the full year margin guide, which is unchanged at 17%. Would you say that I guess Q1 margins, did they come in better than planned or was it in line? I'm trying to understand if you tempered expectations for the balance of the year, reflecting all that cost inflation you mentioned. I heard you say peak cost headwind I guess for plumbing in Q3 specifically. Again, I'm just trying to understand how the cadence of 2Q to 4Q may have changed versus your prior expectations. Thank you.

Yes, Matthew, very good morning. It's John. I think there are a couple of things that we experienced through the year. So as you expect the first quarter probably came in a little bit better than we initially expected. But as we look out to the back half of the year and think about margins, I guide you to think about two things. One, I do think because we raised our top line guidance, we now are anticipating a little bit better volume than we anticipated. At the same time, what we are seeing is a little bit more inflation. And so what – I think the two kind of offset each other. And that's what's causing us to maintain our margin guidance at 17% as we called out on our Q4 call.

Okay, thank you for that John. And second one on the lifting, to your point, the organic growth guidance for the year, I guess it was a similar question with how much of that is driven by Q1 itself. But more broadly, you guys have talked about North American R&R, for example, up low single digits this year. You talked about tougher comps in the second half. And my question is, as we do get further into the year, late April now, is it becoming clear that the backlog of home improvement activity and what consumers are doing may not exactly shift overnight? And maybe that tough comps in the second half you guys had previously spoken to might have a little bit better outlook? Just a similar kind of question there on the organic side. Thank you.

Matthew, there is a couple of things going on. One is the real strong – continued strong demand that we've seen in Q1. So the Q1 demand is certainly a factor. When we look at how we exited the quarter and how things are starting this quarter, we continue to see strong demand, a little bit more than what we had initially planned. So nothing is going to move those tough comps in the back half. They're still there, and we have to face them. But when we look at how demand is shaping up both in the quarter and then what we expect going forward in terms of the fundamentals, that really was the rationale for us lifting our guide on the revenue side.

And your next question will come from Stephen Kim from Everscore. Your line is open.

Yes, thanks very much guys. Strong results. Just following up on Matt's question about the margins. I just want to throw in that you also had the refinancing of the debt, probably adds about $0.09 for the full year. I just wanted to get an idea whether that had previously been contemplated in your guide? And then if I heard your answer, John, it sounds like it's higher inputs, which is totally understandable. But you had said, I think, that you're expecting neutrality on input costs by year-end, which I think is pretty much what you thought before. So just to get a sense for the arc of margins through the quarter relative to your previous expectations, are we looking at kind of maybe lower margins in 2Q and 3Q than you had previously thought but then higher in 4Q as you get the neutrality back? And then, of course, you did better in 1Q as well. Is that the kind of the way we should be thinking about the trajectory of margins relative to your previous expectation?

Yes, so a couple of questions there, Steve. Let me try to address those. So first of all, with respect to the interest savings, I think for this year, given the timing of that transaction, it's probably about a $0.05, $0.06 benefit in 2021. Now that said, you may have heard in Keith's remarks, we talked about receiving some proceeds from the sale of cabinet works. That also then contemplates – we need to update our guidance to reflect the fact that we will not be getting interest income from that investment. So I think the net benefit there is, call it, $0.02, $0.03. So – well, I just want to make sure we're clear on that. So as you think about our rate, it's both the first quarter B+, the net impact of interest for the year. Now with respect to your second part of your question about price/cost neutrality, yes, you're correct. What we're committing to is exiting the year at being price/cost neutral. In terms of how that actually plays out through the course of the year, we're having pricing conversations with our customers. And so can't really give you a good clear signal as to when those are all going to flow through and hit the P&L. So I don't want to – I'm not going to give – we're not going to give clear guidance on Q2, Q3 or Q4, exactly how that flows through because those conversations are fluid.

Great, that's very helpful. Thanks, John. Second question just relates to the massive beat in plumbing sales. It sounds like it was very broad-based. It certainly came as a welcome surprise to us. And it sounds like it kind of came as a bit of a surprise to you. I just want to make sure that that's correct. Does that mean that things really intensified in February and March? And if you could just provide a little bit of color as you sort of look at it. It sounds like strength is continuing here in April. Exactly what would you attribute that to? Because I'm inclined to think that it's probably going to persist. So if you could just provide a little bit more context around that that would be great.

Yes, good morning, Stephen. This is Keith. We are seeing demand stronger than we expected in the quarter. And we're also feeling better about the back half of the year. When you look across the Plumbing segment, we have strong North American growth, as we talked about, and that really is across all channels. We continue to do very well in retail. Obviously, the DIY component is strong. Our trade plumbing business continues to be strong, and we believe we're maintaining our leadership and growing quite nicely in e-commerce, so strong across the board growth in North America. And then we're seeing a nice recovery in Europe, as we talked about, particularly in Central Europe. The UK is starting to get better, and China is really performing nicely. So it's been very broad-based, and it gives us confidence both now as we look at what we're seeing coming into the quarter, but also into the second half.

And your next question will come from John Lovallo from Bank of America. Your line is open.

Good morning guys and thank you for taking my questions. And the first one is, I think that you had previously outlined about $40 million of delayed investments that kind of accumulated during COVID. I'm curious, what is sort of the cadence that you're expecting of the spend coming back in? And if, in fact, this is contemplated in that 18% SG&A that you're expecting through the remainder of the year?

Yes, John, that $40 million is still contemplated and it's probably more back half loaded. And again, it's all going to depend – the rate of that investment will depend on what we're seeing out in the market. If all of a sudden the market starts to contract, we'll be – we'll temper that investment to ensure that it aligns with the growth that we're – that we expect to see.

Understood, okay. And then maybe just on the raw materials freight headwind. I think you guys talked about a mid-single-digit range for the full year and high single digits in 3Q and 4Q. Can you just help kind of parse out the difference between the freight inflation versus the actual raw material inflation?

So…

Maybe I will start John and you can get into some of the specifics. In terms of – while we don't normally see this kind of significant commodity changes occurring this quickly, we certainly are no strangers to commodity changes. And this is really part of our business. And we've consistently communicated, John, and more importantly, I think, demonstrated our ability to reach price/cost neutrality through cycles. And this includes garden-variety sort of changes in costs related to the relationship between supply and demand. It has included force majeure kind of spikes in cost as well as tariffs, which was quite a spike that we were able to cover. So our price/cost neutrality capability is really underpinned by this consistent investment that we've had in our brands and innovation and customer programs and the like, as well as our well-developed ability to drive total cost productivity and to ultimately deliver value to our customers and consumers that they recognize. So we're going to continue with this commitment, and we will reach price/cost neutrality as we exit this year. Now in terms of specifics, John, maybe you want to hit a little bit on some of the commodities and the relative spikes that we're seeing?

Yes, sure. So John, as you referenced, we're seeing both inflation in our raw material baskets, really across the enterprise as well as transportation and logistics. And if you think about how we're being impacted, obviously, copper, zinc and the resins that go into paint and packaging have been up pretty significantly. To get to your question specifically, as you break apart the impacts on the financial statements from either raw materials or transportation and logistics, the vast majority of impact comes from the raw material basket. If you think about distribution and logistics, it's a relatively small part of our overall cost structure. That said – and I guess I can repeat your statement. We do continue to expect inflation to be up kind of mid-single digits for the full year in both segments and up high single digits in the second half of the year. And as Keith alluded to, we've secured price increases across our product categories. We do have plans for further price increases to offset the persistent inflation that we've been experiencing. That said, we're not going to shy away. We're going to continue to implement cost productivity improvements across the enterprise as well and then work with both our customers and suppliers to continue to try to offset this inflation. So as we said earlier in response to Stephen's question, we do expect to be price/cost neutral as we exit 2021.

Okay, thank you guys.

Your next question will come from Michael Rehaut from J.P. Morgan. Your line is open.

Thanks. Good morning everyone. Thanks for taking my questions. I just wanted to make sure we're thinking about the – and I'm sorry to beat a dead horse here, but I think it's top of mind with investors. And just trying to appreciate the timing differences around price/cost and make sure we're thinking about it right. Are you basically saying – because earlier, you said, okay, the higher volume – from the margin side, you have higher volumes that are offset by higher inflation? Are we to take that as kind of net inflation, net of your incrementally expected cost increase – I'm sorry, price increases? In other words, it seems like in a perfect world, if you had higher inflation, but you're putting through price increases to offset that, that should be a wash. So are we going to take this that there's continued lag in price/cost that you're still – maybe chasing is the wrong word? And then potentially, to the extent that you get a fuller benefit of the price increases in 2022, that in and of itself, to the extent that the inflation backdrop remains stable, that could actually turn into an incremental tailwind as you fully catch up to the inflation? Is that a right way to think about it?

Yes, Mike, I think you're thinking about it the right way.

All right, perfect. And then just more on the overall top line environment. If you could kind of go into a little bit around point-of-sale and inventory levels, what we've heard so far is that from competitors or just broadly in the industry that the demand backdrop has been so robust or continue to be so robust that inventory levels have remained constrained. Has that been the case for your businesses in the first quarter that you haven't been able to necessarily restock at any point? And is this something that you would expect to perhaps happen in the coming quarters to the extent that you're able to increase – continue to increase production?

Yes, Michael, the POS is strong. And as I mentioned, it was strong through the quarter and exiting the quarter, and we feel really good about the POS. And that's across really, most, if not all of our categories. With regards to the inventory position, the supply chain has been tight. There's no question about it. We've had disruptions. Hats off, frankly, to our operation teams really across the world to be able to leverage our strengths and also our relationships to be – and work around the clock to move production around and to match production to specific demand and those sorts of things. So they've done a phenomenal job. Having said that, we're still working through some tightness. And I would say, probably, think about it from a Q3 sort of perspective that we will catch up and then start to replenish the inventories because our inventories in the channel aren't where we'd like them to be. So yes, I think upside to some inventory fill in the back half is the right way to think about it.

Okay. Thank you. And your next question will come from Ken Zener from KeyBanc. Your line is open.

Good morning everybody.

Good morning, Ken.

Good morning, Ken.

Wonder if we could talk about demand a little bit in the plumbing business relative to what you're seeing at retail versus wholesale versus the new construction. If you could kind of parse that out, trying to think about DIY plumbing as opposed to – and this is for the U.S. please. Trying to think about DIY plumbing and price points as opposed to the pro, which I think will benefit more as people are able professionals – able to get in the house and do larger renovation projects?

When you think about teasing out the market in terms of DIY and the pro of our two segments, that's hardest to do in plumbing because of the nature of the channels and the fact that plumbing wholesale does have some DIY component to it, and we just – it's not possible to get that kind of accurate data in terms of that. But we do know that we have a strong mix of DIY – excuse me, of, call it, retail and wholesale in plumbing. Over half of our business is in wholesale, and wholesale certainly skews more towards the pro than DIY. So we feel real good about the mix of that business in terms of being there to catch improvements in demand, be it on the pro side or on the DIY side. We all know about the strength of DIY. And we expect the pro to start to come back as people are more comfortable having pros in their homes as vaccinations roll out. Specifically to your question of demand, it really has been broad-based across all channels. Real good strength in e-commerce and continued strength in both plumbing wholesale as well as the retail, where we lead in terms of share of shelf position. So that's been really good for us. And international is a nice story. International, we talked about the strong growth rate there, our position in Central Europe. China is doing very well, understanding that there was a relatively easy comp there. But all in, it's been pretty broad-based, and that all feeds into why we've raised our confidence level in our guide.

Right. Yes, it's nice and it's – to me, you guys mentioned home prices, which is really homeowners equity. It seems as though your sales are tracking with a very high rate of appreciation of homes.

Real strong correlation between home price and existing home sales, no question about it.

Right. And it seems to me that – could you maybe give us a little context, Keith, for – demand is high because prices are up. Assuming your guidance holds, which is that you'll be cost-neutral by the end of the year, it certainly seems as some of these input costs related to the Texas storm might be abating next year. Yet prices are high, and we all know there's a lag on demand from prices. What happens usually when this type of context sets out because it seems like it could be bullish for you – I'm not asking for FY 2022. But if you're able to pass-through the cost, do you usually give back costs? Otherwise, it seems the higher volume growth perhaps lead to a margin adjustment as we look down the road higher.

Yes, when you look longer-term through cycles of commodity increases and commodity decreases – and it varies depending on the nature of the cost. And we have inventory that needs to flow through before we get any sort of price change up or down to hit the P&L. But fundamentally, we've maintained and demonstrated neutrality as it relates to those fluctuations in raw material cost inputs and that neutrality comes from solid total cost productivity improvements. It comes from us really watching our spend very closely. And, of course, price is part of that. Now, in terms of the impact of how this could play out, in future quarters or into next year, it's a real volatile environment. What we're focused on is delivering on what we say we're going to deliver on and ensuring that we continue to drive on the exit of this year rather to price cost neutrality and that's what we're committing to.

Thank you.

Ken, one thing I would point out is, given our international business, I'd say, over time, that we're probably slightly price favorable in plumbing, just because HANSGROHE does a good job of going out annually with price increases.

Thank you.

And your next question will come from Keith Hughes from Truist. Your line is open.

Thank you. Question is on propane. I know it was weak in the quarter. If you could talk about what you think was going on and what's caused something in the quarter acceleration? And then any kind of April view on that would be helpful as well?

Yes. So Keith, sorry about that, it's John. So yes, you're right propane was a little bit weak in the first part of the quarter. We did talk about the difficult comp we had faced – the fact that we saw some positive growth in the back half of the quarter – I'm getting a little feedback. So we do believe there there's a pent-up demand, and the fact that people are getting more comfortable with pro contracts, we do think there was probably a little bit of a weather impact as well in the quarter. As the storm moved through Texas and much of the country in mid-February, and so as soon as we saw that passed, we started to see better growth in that business. And so as we look at to the full, the back half of the year, we do continue to believe that we should see high single-digit growth as consumers are really getting more and more comfortable having these contractors coming to home and do larger paint jobs.

Okay. Thank you. And then final question. We talked a lot about cost. If we look at price/cost, you're talking about your cost peaking in the third quarter. If we look at price/cost, when do you think that negative will peak as you head towards parity in the years, second quarter, third quarter, fourth quarter? Any view would help.

My guess, Keith, and again, it all depends on some of the pricing conversations that we have, probably peaks in the third quarter, and we'll continue to update it that on our subsequent calls.

And your next question will come from Phil Ng from Jefferies. Your line is open.

Hey, good morning everyone. Congrats on a very strong quarter. Given the supply chain dynamics you called out, great to see that it really didn't impact you much at all from a revenue perspective in 1Q. But, will that have more of an impact in the second quarter as you kind of worked down, so that inventory you have, I'm particularly curious on any of your exposure where you're importing products from Asia and any of that impact that you may be seeing on shortages from resin?

Putting comps aside and just talking about output and disruptions in terms of what we expect, we think it's getting better. It really feels like it's getting better. We're not through it all yet in terms of the hard work that we need to do in terms of matching inventory to demand matching production, to demand and those sorts of things. Still a little bit of tightness and timeliness and containers as we talked about, but it's getting better.

Okay. That's great. And then from a pricing standpoint, we all have an appreciation with the pricing power you have in your core plumbing and paint business. But curious if you're seeing price traction for your Kichler product and if your competitors have matched, just because in 2018, there was a little more challenge in that front. And do you anticipate price/cost neutrality as well as you kind of exit 2021 in Kichler?

Yes. Yes, we're driving that and that's something that we believe in across the board of Masco. Yes, that would be true with Kichler as well. Kichler is doing well. The team is – we committed to working that business and positioning it to return to growth to 2021. We're ahead of that plan, the team's doing well. We're seeing good continued solid demand. Our new products are doing well, and the structural cost alignments that we've talked about in past calls are bearing fruit and the team is doing a nice job.

Okay. Super that's really helpful.

And your next question will come from Susan Maklari from Goldman Sachs. Your line is open.

Thank you. Good morning. My first question is, you highlighted the strength that you saw in your e-commerce channels in plumbing in the quarter. Can you give us a little more color on what exactly you're seeing there? And how you're positioned there? And anything that you're taking to kind of increase your exposure to that channel and kind of drive those sales going forward?

Sure. We expect to continue to grow, obviously, as consumers become more and more comfortable with online purchases in our space. And we also continue to expect rather to continue to gain share. We believe that we're the leader in plumbing in the e-com market. And we've worked on a number of things to build and maintain that leadership, Susan. Product offering, obviously, is one. We have put our best and brightest talent on this. We are working very hard across our business units to leverage learnings quickly, to leverage platform like product data management and IT space, to leverage the sharing of ratings and reviews to really understand what it takes to be on that first page and to get that second and third click. We're working hard to understand how to drive digital content and 360-degree spends. We're doing a ton of stuff there. And also, we're investing capital. We made an acquisition of one of the leading digitally-native brands in Kraus. And Kraus is a company that makes, I would say, more modern design sinks and faucets and the like. And we're learning a lot from them, and we're helping them be all they can be as well. So a combination of capital deployment, talent, products, IT, leverage, et cetera. This is important for us, and it's paying off. And we've been working at this hard now for five years.

Okay. That’s helpful color. My next question is, when we think about the business, you're obviously operating at margins that are ahead of those targets that you gave us at the Investor Day. Can you talk to just the longer-term sustainability of some of these trends that you're seeing? And how you think about the longer-term margin potential of the business?

Yes. We're really not changing our margin outlook for the long term. There's a lot of variability in these dynamic times. We think that our normal SG&A spend of around 18% to 19% is where this business should be for maximizing value creation and continuing to invest in growth and our brands, et cetera. So no change to our margin outlook at this point. But certainly, we have demonstrated and will continue to demonstrate solid drop down on our incremental volume.

Yes, Susan, and I would remind you that, that our – the information that we gave out in our 2019 Investor Day had a lot of very different assumptions related to it. It was a very different environment. We assumed much lower growth for the period. So it was – I would not consider those as our current guide for the long-term of the business.

I'm sorry if I missed that too. I was talking about our margin guide this year.

Yes. We – I think the way we think about it now, Susan, again, we articulated this on our Q4 call is that, we continue to challenge our businesses to grow above market and continue to have our businesses expand margin every year. And again, it's not hundreds of basis points of margin expansion, but rather tens of basis points of margin expansion.

Hi. Good morning, everyone, and thanks for taking my questions. First, I just wanted to dig in on the Decorative Architectural side, especially the DIY demand. Could you give an April update? Are you seeing any deceleration or pretty much in line with what you'd expect seasonally? And if I'm kind of parsing out the guidance, it looks like you all are expecting DIY to be down the remainder of the year. But the commentary on the call so far has been – I'll just put it pretty optimistic, just trying to understand some of the moving parts there and whether or not there is maybe a little bit of conservatism built in?

Well, the DIY demand continues to be strong. Obviously, we've got tough comps coming up in the back half of the year. But in terms of the demand, the actual demand that we're seeing, it continues to be strong. There's no question about it. Certainly, the pandemic has increased the interest in people's homes. And we don't view the vaccine of the rollout as being necessarily a switch that is flipped as it relates from the work from home – relates to the work-from-home environment or the amount of time that people are spending in their homes. And clearly, the millennial demographic and cohort has shown interest as we look at first time DIYers, and we look at that cohort, and we expect that to continue. So yes, we have some tough comps coming up; no question about it, but the demand remains strong.

Okay. Okay. Thanks for that. And then also in the spa business, I believe you all said it was growing double digits, so nice improvement there. But could you just discuss how the backlog – the order backlog is looking? And you all have mentioned supply chain constraints throughout Mexico. Could you just give us a timeline when you somewhat expect that to be operating close to or at full capacity?

Yes. We're getting better, and we were starting to approach that capacity – that full capacity, if you will, as we were bringing in our Mexican labor force to a greater degree and getting more output from that. But then we had these issues around resin, and there's tightness there. And we've missed some production on some selected units that require certain type of blended resins. But the demand there continues to be extremely robust, and we have a very solid backlog. That has not changed. And as we get through this short-term blip here from the polar vortex in Texas and the resin tightness, this business will start to quickly approach stated production.

Hi. Good morning. One quick follow-up on the spa business. In the full year guide, do you have spas operating at full production and generating full margins for the year?

We're expecting strong double-digit growth for Watkins in 2021.

Okay. Great. And then thinking about price/cost and getting to neutral. I guess, are surcharges a part of that? Is that being contemplated for pricing such as resins? And then for price/cost by product, do you expect to be price/cost neutral on all products?

So we have a number of levers that we can and do pull to drive cost improvements and price/cost neutrality. We've used surcharges in the past, and we're certainly contemplating in using some of those here as we sit today. In terms of saying that every product will be price/cost neutral, there's just such variability in cost inputs, depending on the type of specific product, and I won't say that. But when you look across our business, we will exit this year in price/cost neutrality.

Excellent. Thank you.

And your final question for the day will be Mike Dahl, RBC Capital Markets. Your line is open.

Hi. Thanks for squeezing me in. One more question on price productivity. I appreciate the sensitivity around the pricing side, but anything around just qualitatively at a high level when you think about covering the cost. How much is price versus productivity? Is it a pretty balance? Is it steered more towards price? Just any color there. And the second part would be, you've already talked about some of the ways you've continued to generate cost productivity, but some costs are also eventually going through returns. So just – you've mentioned the levers that are left. Could you elaborate a little bit more on – you've obviously done a great job on productivity. Just where is the incremental productivity coming from?

Sure. So Mike, a couple of questions. As you think about the weighting of price versus productivity and offsetting inflation, just given the nature of – and the rapid increase in the amount of inflation that we're seeing, it's naturally going to be more price than productivity to offset that or to get to price/cost neutrality. In terms of our productivity measures, I'll start and maybe kick it over to Keith to clarify. But our teams have done a great job over multiple years of driving productivity within our operations. And it's not just on the plant floor. It's also in the administrative part of the operations. And we challenge our teams every year to get more efficient in a variety of ways. And so we do have TCP goals for every – total cost productivity goals for each of our businesses. Keith, do you want to give some examples?

Yes. I think from a dollars and cents perspective, the greatest productivity comes from volume leverage. And when you look at our consistent and steady and repeatable drop down, say it's 30%-ish in incremental volume for Plumbing and maybe closer to 25% in the Deco segment. That conversion efficiency is very helpful to us. Obviously, there's direct labor productivity. We have hired a lot of people. And as those people become more familiar with our systems and how to work, that naturally drives productivity. We're consistently and constantly looking for material substitution and value engineering where we can take a four-part assembly and make it a two-part machine or injection molding, that sort of thing. So it's really a combination of shop floor and labor productivity, working with our suppliers and making sure that we have the most cost-effective way to meet customer requirements, so we don't want to mess or miss any customer requirements. So it's really all part and parcel of the Masco operating system with a good dose of volume leverage.

That’s great. Very helpful. I’ll leave it there. Thanks.

That concludes today's call. We'd like to thank all you for joining us this morning and for your continued interest in Masco. As always, please feel free to contact me at (313) 792-5500 if you have any further questions. Thank you.

Thank you, everyone for joining us today. This will conclude today's conference call. You may now disconnect.