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

Thank you, operator, and good morning. Welcome to Masco Corporation's 2021 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 risks 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'm proud of the way our team continues to execute in these dynamic times. In the third quarter, sales increased 11%, our fifth consecutive quarter of double-digit, top-line growth. This was against a strong 16% comp from last year. This growth came as we continued to face significant supply chain challenges. Certain raw materials were hard to come by, such as resins, microchips, and even pallets. Freight congestion in ports and lack of trucking capacity contributed to increased delays in shipping and receiving goods. Labor shortages continue to be a challenge. I would like to thank both our employees and our tremendous supplier partners, who together have worked tirelessly to address these challenges. They have kept our plants running and our customers supplied, resulting in outstanding top-line performance. Operating margin for the quarter was 17.5%. As we executed our plan to transition to a more normalized level of SG&A expense to support our brands, innovation, and new products. Moving to our segment performance beginning with Plumbing, sales increased 15%, excluding currency, led by exceptional growth in North America and international faucets, showers, and our spa business. These results highlight the strength of our Plumbing platform diversity across geographies and channels. To support our continued international growth, Hansgrohe recently announced plans to invest in a new manufacturing facility in Serbia. This additional capacity will enable further growth and further strengthen Hansgrohe’s capabilities to serve our customers. We plan to invest approximately $100 million in this project over the next three years. In our Decorative Architectural segment, sales grew 4% against a robust 19% comp from the third quarter of 2020. PRO paint experienced exceptional growth of over 45% in the quarter, helping to offset moderating demand in DIY paint. DIY paint declined mid-single digits against a tremendous comp of over 25% in the third quarter of 2020. We continue to see indications of DIY paint demand stabilization as demand was fairly consistent throughout the quarter. When compared to our third quarter 2019 sales, our DIY paint sales were up over 20%, a clear indication of a re-engaged homeowner and strong home improvement fundamentals. Lastly, Behr paint was recently recognized as The Home Depot Partner of the Year in the paint department. This recognition was a result of successfully keeping The Home Depot in stock during the DIY surge last year, our continued investment, and our joint effort to grow the PRO paint category and our commitment to bringing in new and innovative products such as our recently launched Behr Dynasty to The Home Depot. Each of these has contributed to tremendous growth for both Behr paint and The Home Depot. This recognition is a testament to the strength of our partnership. Moving on to capital allocation, we continued our share buyback activity during the quarter by repurchasing 2.2 million shares for $128 million. In addition, we anticipate deploying approximately $150 million in the fourth quarter, bringing our total share repurchases to over $1 billion for the year. Now, let me give you an update on what we're experiencing with inflation. The second half of 2021 is largely unfolding as anticipated. We experienced low double-digit inflation in the third quarter, and we expect mid-teens inflation in the fourth quarter. We have taken pricing actions across both segments and expect to achieve price-cost neutrality by year-end. It has been an extremely dynamic year, and our supply chain and commercial teams have done an exceptional job managing through the many challenges. Because of this outstanding execution and continued strong demand for our products, we are maintaining the midpoint of our previous guidance and expect to achieve full-year earnings per share in the range of $3.67 to $3.73. Lastly, before I turn the call over to John, we are pleased to share that our comprehensive 2020 corporate sustainability report is now available on our website. This report demonstrates our commitment to environmental, social, and governance responsibility. During a year of unparalleled change, our team members remained committed to maintaining our strong reputation for ethical business practices, reducing our environmental impact, and enhancing our DE&I efforts. I'm proud of the hard work we are doing every day to ensure that our employees feel a sense of inclusion, belonging, and support. Our progress in ESG is a priority for our Board and our executive leadership team. I hope you will take the time to read more about how our long-term sustainability influences the way we run our business, operate our facilities, and contribute to the community. With that, I'll turn the call over to John for additional details on our third quarter results.

Thank you, Keith. And good morning, everyone. As Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to Slide 7, demand for our industry-leading brands remains strong, and our teams executed exceptionally well in a dynamic environment. This resulted in another strong quarter of double-digit top-line growth. Sales increased 11% against an impressive 16% comp in the third quarter of last year. Net acquisitions contributed 2% to growth, and currency had a minimal impact. In local currency, North American sales increased 9% or 6% excluding acquisitions. The strong performance is driven by outstanding execution to achieve volume growth in propane faucets, showers, and spas, and by increased selling prices. In local currency, international sales increased a robust 15% or 18% excluding acquisitions and divestitures against the healthy 9% comp. Gross margin of 34.2% is impacted by higher commodity and logistics costs in the quarter. We expect this inflation will have peak impact on our P&L in the fourth quarter. We will offset these costs with additional pricing actions and productivity initiatives and expect to exit this year price-cost neutral. SG&A as a percentage of sales was 16.7%. As planned during the quarter, we increased certain expenses, such as headcount, advertising, and marketing to a more normalized level to support our brands. We expect this increase to continue into the fourth quarter as these costs continue to normalize. Operating profits in the third quarter were $385 million, with an operating margin of 17.5%, and our EPS was $0.99. Turning to Slide 8, plumbing growth continued to be strong with sales up 16% against the 13% comp in the third quarter of last year. Net acquisitions contributed 2% growth and currency contributed another 1%. North American sales increased 16% or 10% excluding acquisitions. Delta led this outstanding performance, delivering another quarter of robust double-digit growth driven by strength in their e-commerce and trade channels. With strong brand recognition and general relationships, Delta continues to drive consumer demand for its products. Watkins Wellness also contributed to growth in the quarter, and our backlog remains strong. International plumbing sales increased 15% in local currency or 18% excluding net acquisitions. Hansgrohe delivered strong growth as demand continued to improve across Europe and numerous other countries. Hansgrohe's key markets of Germany, China, and the U.K. all grew double digits in the quarter. Segment operating profits in the third quarter were $248 million, with an operating margin of 18.7%. Operating profit was impacted by the planned increases in SG&A that I mentioned earlier, as well as an unfavorable price-cost relationship. This was partially offset by strong incremental volume. We anticipate additional SG&A increases in commodity and inflation will most significantly impact this segment's operating margins in the fourth quarter. We will mitigate the commodity inflation with additional pricing and productivity actions and expect to be price-cost neutral as we enter 2022. For the full year 2021, we continue to expect Plumbing segment sales growth to be 22% to 24% with operating margins of approximately 18.5%. Turning to Slide 9, decorative architectural sales increased 4% for the third quarter or 3% excluding acquisitions. Our DIY paint business declined mid-single digits in the quarter against more than 25% comp in the third quarter of last year. Despite this decline, DIY paint demand appears to be stabilizing as we have seen relatively consistent demand since July. When comparing to Q3 2019, our third quarter DIY sales are up over 20%. Our PRO business delivered exceptional growth of more than 45% in the quarter as paint contractors are applying top-rated Behr paint to more commercial and residential projects. We expect demand in this channel to remain strong as paint contractors report growing demand for their services. When comparing to Q3 2019, our third quarter PRO sales are up over 35%. Segment operating margin in the third quarter was 19%, and operating profit was $166 million. Operating profit was impacted by lower volume, increased commodity costs, and higher marketing expenses to support the new BEHR DYNASTY product launch, partially offset by higher net selling prices. For the full year 2021, we continue to expect Decorative Architectural sales growth will be in the range of 2% to 5% and operating margin to be approximately 19%. Turning to Slide 10, our balance sheet is strong, with net debt-to-EBITDA at 1.3 times. We ended the quarter with approximately $1.9 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Working capital as a percent of sales including our recent acquisition was 17%. Finally, we repurchased more than 15.2 million shares in 2021 for $878 million. This is approximately 6% of our standing share count at the beginning of the year. We expect to deploy approximately $150 million for share repurchases or acquisitions in the fourth quarter as we continue to aggressively return capital to shareholders. And turning to our full-year guidance; if summarized our expectations for 2021 on Slide 11, we continue to anticipate overall sales growth of 14% to 16% and operating margins of approximately 17.5%. Lastly, we are maintaining our 2021 EPS estimate midpoint but narrowing the range to $3.67 to $3.73 representing approximately 19% EPS growth at the midpoint of the range. This assumes a $252 million average diluted share count for the year. Additional modeling assumptions for 2021 can be found on Slide 14 of our earnings deck. With that, I'll now turn the call back over to Keith.

Thank you, John. Demand for our products and home renovation remains strong at much higher levels than experienced in 2019. When you compare our third quarter performance to Q3 2019, revenue is 28% higher, operating profit is 29% higher, operating margin is 10 basis points higher, and adjusted earnings per share is an outstanding 62% higher. With our demonstrated supply chain excellence and our ability to offset inflation with price, we believe we are well positioned to carry this momentum into 2022 and deliver margin expansion and double-digit EPS growth consistent with our long-term outlook. We look forward to sharing our detailed 2022 outlook on our fourth quarter call in February. With that, I'll now open the call up for questions.

Your first question will come from Matthew Bouley with Barclays. Please proceed with your question.

Good morning, everyone. Thanks for taking the questions and congrats on the results in a pretty tough environment here. First question on the propane strength, recognizing some of the drivers of broader sort of do-it-for-me strength here and the project demand. John, you just mentioned; just given how strong it was. Was there – is there anything else for you where you think you may have had some sort of structural success in boosting awareness or market share of BEHR PRO, or conversely should we be aware of any more transitory benefits perhaps as customers are sort of hustling to find paints where they can and you guys have done a great job of keeping BEHR PRO in stock? How should we think about that balance? Thank you.

Hey Matt, this is Keith, I'll take this, and John, you can add in if you have other comments. I think there are a few things that really contributed to that 45% growth that we saw in the quarter in PRO. First and foremost, we had really outstanding supply chain execution. I can't say enough about our supply chain teams, our research and development teams that were able to move formulations and our suppliers. We've been working with the supply base and have been pretty consistent in our supply register for like 20 years. So those relationships really paid off, and our hard work on supply chain and R&D really ensured good availability of product and supply chain execution in general. We continue to invest in our brands. We've talked about that last quarter, and we continue to invest in our brands, and having that leading brand with leading quality and leading service levels all contributes to this, especially in tough times like we've just gone through. And we continue to execute in terms of new product introductions and our innovation pipeline, such as BEHR DYNASTY, a new line of aerosol paint, interior stains, and other adjacencies. So our ability to not only have that supply chain execution but also continue with the basics of investing in the brands and executing new product introductions have all paid off. I think all those things are helping to drive demand. And we saw that in our performance, the 45% growth that we saw in PRO, and we believe that enabled us to get new customers. Now it's up to us to develop the loyalty, which we've demonstrated an ability to do. It was a challenging quarter for us across paint, both PRO and DIY, but I'm very happy with the execution.

Yes. The only thing that I would add to Keith's comments is that I think it's also a reflection of investment that we've made over many years in this program that feeds on the street, both calling on outside paint contractors and also the investment on people inside Home Depot stores. So it's been the joint partnership that we developed to go after the PRO, and I think that really helped drive the success that we experienced here in that third quarter.

That's great color there. Thank you both for that. Second one, just on the Asian supply chain, where you guys have a relatively robust footprint. So just, I guess, a two-parter: any quantification you can give, maybe on sort of the near-term cost impacts of everything going on with ocean shipping and transportation from Asia? And then just longer-term thoughts on any sort of supply chain repositioning that that's sorting come about as a result of all these recent challenges? Thank you.

Sure. Sure, Matthew. Like everyone else that's reported so far this earning season, we've faced supply chain challenges coming across the Pacific. You may have seen elevated costs to get the containers across to the United States. And we’ve seen it's also resulting in delays in getting products through the port systems here in the United States, whether it's on the west coast or any of the other ports that we bring product in. So the good news is, even though we've experienced some of that, we have also as a result pass through some of the price increases down because of the raw material inflation that has come because of some of the logistics inflation that we've experienced. And so, we feel good about our ability to get that price, and that's a portion of which allows us to feel good about being price-cost neutral as we exit here in 2021.

Yeah, just to add a little bit to John's comments, I think not strictly in the Asian supply chain, but overall, when you look at inflation, we're experiencing— or we experienced low double-digit inflation in the third quarter, and we're expecting in that mid-teens region in the fourth quarter. And as John mentioned, we have done good work on our commercial teams, and we will exit the year in price-cost neutral.

All right. Well, thank you both, and congrats on that hard work.

Thank you.

Your next question will come from the line of Susan Maklari from Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone. My first question is just following up on some of the exposure in terms of inflation and inputs there. Can you talk a bit to what you're seeing in terms of some of the core commodity exposure, things like maybe copper, brass, any of the sort of chemical inputs on the paint side? And I know you talked about seeing that mid-teens inflation in the fourth quarter, but just any more detail on how to think about where those trends are?

Sure. As I think we've all read and seen broadly across the industry, there's been broad-based inflation and we're experiencing that same thing. We're seeing it in metals, zinc and copper, as you mentioned. And that’s across both our categories—both our segments, particularly in the hardware and objective piece of architectural, as well as obviously in brass and plumbing. We’ve seen it in polymers, and again, that's across both our segments. Resins and paint, plastics in our plumbing valve train, for example, with our cross-linked polyethylene and our cartridges for the valves, we're saying it there, and then again, same sort of story across both segments and logistics. Container costs continued to escalate even things like pallets and of course, over-the-road trucking costs associated with some labor constraints that are broadly there in the trucking industry. So it's broad-based inflation, and we expect to continue to see that in the fourth quarter. As we mentioned, we have done some good work and we'll continue to work in the fourth quarter as it relates to achieving price-cost neutrality by the end of the year.

Yes, Susan, maybe to put a finer point on Keith's comments. I think for the fourth quarter, it will probably be the peak of inflation for the year. I suspect we'll feel mid-teens inflation in total across the company. They'll probably be low teens in the plumbing segment and probably high teens in our paint business. So pretty significant inflation. But as Keith mentioned, the team has done a terrific job of working to offset those costs here as we exit 2021.

Okay. That's very helpful color. And then as a follow-up, can you talk a little bit about what you're seeing across the various channels within plumbing? I know that you kind of highlighted some strength within the e-commerce as well as the trade channels there. Can you just give us some commentary on how the various channels are moving? And any implications as we think about the margin trajectory there as some of those maybe continue to strengthen?

Yes. We're really seeing, again, strong broad-based growth in plumbing. So if you look at it geographically as we spoke in the prepared remarks, international is strong. We were very, very good growth in China, the UK, and Germany, which are core markets for Hansgrohe, and then good growth here in North America. With regards to channel and slicing it up by channel, we saw very strong performance in e-commerce; we've invested our best and brightest talent there. We've invested capital in terms of acquisitions to build, and we’ve been working for a number of years in terms of our internal capabilities from logistics to pick-and-pack quantities of one, to handling returns, marketing, and generating a more efficient search and better purchase journey for the consumers, etc. So a lot of work has gone into that, but we saw real strong growth, particularly in plumbing and e-commerce and also in the trade channel. And then strong, as we mentioned, strong PRO growth in paint. So a really good performance across multiple channels and multiple geographies, and I think, Susan, that speaks to the work we've done in terms of the portfolio of driving affordable smaller-ticket items that are involved in quicker remodels, if you will, and smaller jobs, as well as obviously being part of bigger-ticket jobs that we executed. So that diversity across geographies, channels, price points has really delivered for us a nice robust portfolio, and I think that's a big part of it.

Susan, maybe I'll give you a little bit more color on one specific channel. I mean, let me talk a little bit about the e-commerce channel and the acquisition of Kraus, and how that's aided our e-commerce growth. So Kraus—we bought Kraus at the beginning, really the tail end of last year, and the integration is going well, and they continue to perform above our expectations. And we've made some good investments along with Kraus's complementary products and online presence. And they helped to actually strengthen Delta's market-leading offerings to drive future growth. One of the things we've specifically done is, with the help of Kraus, we've launched Delta branded sinks online, utilizing their offering, and this is really a good contributor to our growth here in the back half of 2021. So e-commerce, Delta was strong in e-commerce before we acquired Kraus, and the Kraus acquisition really complemented Delta's strength in the online channel to accelerate its growth.

Great. That's very helpful color. Thank you. And good luck with everything.

Thank you.

Your next question will come from the line of Mike Dahl from RBC Capital Markets. Please proceed with your question.

Good morning. Thanks for taking my questions. Really exceptional results across the segments, particularly in paint, in light of what some of your peers are saying. So I have a couple of follow-ups. Keith, I know you mentioned a couple of things around your supply chain partners and how you've kind of successfully managed there. But it is striking in terms of your ability to not just get product, but keep the inflation lower than what I think most of your public peers have talked about in that segment. So I'd love to hear just a little more detail or color on exactly how you've managed this, or what you think you've done differently than some of your peers over the last few months.

Well, at the risk of maybe being redundant to what I've already talked about, I can't overstate what our supply chain teams have been able to do. And it's a product of a great partnership with Home Depot and the simplification and focus that we have. We work hard to understand the Home Depot consumer, and we work hard to understand the Home Depot supply chain. Fundamentally, everything that we do is geared towards and focused on that customer and those consumers. And because of that, I think that makes us fleet of foot, it helps us be able to do the sorts of things that we need to do and react quickly when times get tough. It's mind-boggling when you think about the types of formulations that we had to go through in our R&D department in terms of changes and validations to be able to move from one supplier to the next, be it on colorant or resins, and really that's across our entire business, but specifically in paint. I think when you look at our formulations and what goes into our formulations and what was particularly tight in terms of capacity, I think that gave us a little bit of an advantage. It has not been easy. We have changes and challenges, and we continue to have challenges, but fundamentally, I do think it has to do with the extreme focus and dedication we have on a specific customer and the consumers and the ability to manage that versus say having a more complex lineup where we have different types of coatings and different types of customers and those sorts of things. So, it's an attribute of simplification, 80/20, a focus on our teams, and absolutely the highest quality workforce, particularly in supply chain and R&D.

That's great. Thank you. And then just as a follow-up, BEHR DYNASTY specifically, can you help us kind of size what the contribution was from a top-line perspective in the quarter? And you talked about some increased marketing costs around that just, how should we be thinking about that program in the fourth quarter and on a go-forward basis? And how's the adoption been or the sell-through?

Yes. Mike, it's John. So I think the impact on the quarter was relatively light. There was a small load-in of about $20 million in the quarter. It's obviously helped the top line growth number, but it wasn't a huge driver of the overall growth.

Yes. We're excited about DYNASTY. I'll tell you, it's going very well. It's our best paint ever. Best scuff resistant, most one-color high colors, fast drying, lead certified green guard. It's just extremely good paint. It's our highest price point yet, but when you match it with those attributes, it's a good value. I mean my father bought some of it. Let me tell you he's as excited as they get; while that’s only one point, it's indicative of what kind of value this can bring. And it's an example of how our deep and extended relationship with The Depot can really help. We consistently bring innovative new products and market-leading attributes. And we do that; I like to think of our teams fighting above their weight class. We are focused and to your earlier question on supply chain, it kind of shows itself here with DYNASTY. I'm very happy with DYNASTY and the launch.

Yes, great. Okay. Thank you.

Your next question comes from the line of Phil Ng from Jefferies. Please proceed with your question.

Hey, guys, congrats on a really impressive quarter in a challenging backdrop, and great to see demand being really strong here. Any color on how you're thinking about organic growth as we look out into 2022, since your comps will get a little tougher in the first half, and how much line of sight do you have?

Yes. Phil, it's John. You're right, the comps as we go into the first part of 2022 will be tough, obviously when we post 31% growth in Q1 and 53% growth in Q2 in plumbing, I should say, 25% overall, 24% in Q1, 24% in Q2. Those are tough comps to go up against. That said, as I mentioned in my prepared remarks, we've got continued good backlogs in a number of our businesses that we have visibility into. We mentioned the fact that Watkins, our wellness business, continues to have a very strong backlog of probably several hundred million dollars. Our plumbing businesses, both Hansgrohe and Delta, to the extent that we look at their backlogs, they are bigger than they would historically be at this time of the year, given the seasonality of things generally slowing down. So we do think that growth going into the first part of 2022 will be good, but obviously we're up against some pretty tough comps. Beyond that, Keith, I don't know, paint is got a little bit less visibility into the backlog of paint other than on the PRO business. We see some of the commercial projects coming through.

Yes. I'd add our international markets are also recovering nicely. And we'll have more detail on 2022 in our fourth-quarter call.

Phil, but I would say that if you think about the macro trends where we stand right now, the macro trends really set up for a good 2022. The two big ones that we watch because they really impact our low ticket repair model portfolio of products are existing home turnover and home price appreciation, and as you know, those two have been very good. And why are those two? The fact that consumer's balance sheet is very good; all statistics say that $2 trillion more in savings as a result of the pandemic that the consumers are sitting on now. And the fact that the home is—for a vast majority of consumers—it's their largest investment. We think this environment bodes well for continued investment in homes. We're hearing about backlogs of big ticket projects with contractors. So we think that the supply chain tightness that the consumers have experienced has contributed to that backlog of big ticket projects. And so going into 2022, we think the environment is set for good growth.

Now, that's really helpful. Any color on how you're thinking about when supply chain kind of normalizes? I appreciate some of these challenges. I think there was an expectation for maybe restocking inventory in the channel in the fourth quarter. Any color on how that has kind of progressed as that more of an opportunity when we think about 2022 as well? Thanks a lot, guys.

It's very difficult to predict the supply chain in this environment. I think some things will have a little bit more lasting impact. I think logistics will probably remain tight well into 2022. Our—if you will, the blood pressure metric that we look at is our fill rates coming from our supply base and our timeliness and accuracy of delivery dates versus promise. Those are starting to improve. Now, we have a long way to go. We're not back to where we need to be, but I would say in terms of our supply and incoming, we are starting to see some improvement and a little bit of stabilization as we look at those two key metrics. Umaria, I think we can go to the next question.

Your next question will come from the line of Adam Baumgarten from Zelman. Please proceed with your question.

Hey guys, thanks for taking the questions. Good morning. Just looking at decorative on the implied 4Q guidance, somewhat similar to revenue growth compared to 3Q; do you expect the similar PRO outperformance to continue through the end of the year?

Yes, we would, and yes, we expect PRO to remain strong as we go through the ounce of the year. Whether it’s going to be the same 45 plus percent growth we realized in Q3 is yet to be determined, but based on what we're hearing from PRO contractors and based on the projects that we're hearing in terms of contractor backlogs, we do think the PRO demand will continue to be quite good.

Okay, got it. Thanks. And then just on the SG&A spend kind of normalizing, when do you expect to reach that full normalized run rate? Is it by the end of this year, or will it drag into next year?

It'll probably drag into next year, Adam. If you think about our SG&A spend, we've talked since the beginning of the year about $40 million of spend that we pulled out of the system last year during the height of the pandemic. We'll slowly layer that back in over the course of the self recorders. Keith mentioned earlier, we're investing in our brands, we're investing in innovation, we're investing in headcount, and it's all reflecting in some of the top-line growth that you've witnessed today—that we reported today. So some of that investment, we'll be mindful of it. We are not going to just let it all flow back in. So, suffice to say that our businesses have their fingers on the dials and are actively managing that cost as it comes back in.

Thank you.

Your next question will come from the line of Garik Shmois from Loop Capital. Please proceed with your question.

Hi, thanks. Good morning. Just given the rising price points and inflation, just wondering if you could speak to any change in mix that you might be seeing in plumbing and paint, and if that's being impacted at all?

Garik, mix really wasn't that big of an issue in the quarter. There may have been a little bit of slightly favorable mix in plumbing as we've seen a little bit greater strength in Europe, which can tend to be—I mean we get more projects, which means our AXOR brand does a little bit better. And maybe some of our spa business is trending to a little bit more of a favorable mix. But beyond that, it wasn't all that impactful in the quarter.

Okay, thanks. And then to the extent you can provide a little bit more color on your expectations for margin expansion in 2022, recognizing you provide more guidance after next quarter, but given you are going to be likely exiting this year at price-cost neutrality, would you anticipate margin expansion across your businesses to begin early in the year?

We've talked about this and we haven't changed our outlook. And that is that we have nice dropdown and incremental volume, we'll exit the year at price-cost neutrality. There still are questions about where commodities will move, if at all, in 2022, and can I remember that if they do, we will handle that as we have in the past with productivity and further price if needed. So, we throw all that all together, as we've talked in the past, we're looking at margin expansion, not in the hundreds of basis points, more in the tens of basis points, but our commitment and how we drive our leadership teams and how we structure our variable compensation for those teams is growth above market and margin expansion. That's fundamentally part of our culture and how we drive our businesses. And that's what we will achieve in 2022.

Great. Thank you.

Your next question will come from the line of Deepa Raghavan from Wells Fargo Securities. Please proceed with their questions.

Hi, good morning, all. Thanks for taking the question. Let me start with some October trends. Just curious how that has trended so far? Are you seeing any seasonality, rebounding, or anything that you are able to talk to on October so far, please?

Yes, I think we've really moved to talking about our quarter and how we've exited the quarter, and we're not going to get into slice and dice that up on a monthly basis. And the reason is that there is ebbs and flows; different parts of our businesses launch products, have fill, and different things happen. So it's more productive and a better indicator for how we're doing for our business if we stick to the core.

Okay, understood. How about the quarter then? Any surprises, either positive or negative during Q3? And anything that you would point us out as we look into 2022 to be aware of that we shouldn't probably carry forward?

In terms of surprises, it's playing out as we expected. As I said in our opening comments, I will say that while I have a high expectation of our supply chain team, I was pleasantly surprised and happy to see how well we really performed. We talked about it in paint. The same could be said in Plumbing, and that had a real impact on our business and how we fared competitively. So, that was, while maybe not a surprise, it certainly was nice to see, and I'm proud of the teams.

Great. It was a nice quarter though. Thanks so much.

Thank you.

Your next question will come from the line of Keith Hughes. Please proceed with your question.

Thank you. Questions in Plumbing, I guess looking at the growth both in North America and Europe, can you give us some sort of a feel for how much of that growth is in units and how much of that growth is price mix?

Keith, as we look at it, we did see good volume growth in Plumbing both domestically and internationally. And net acquisitions contributed to the growth as well. But if you factor out the acquisitions, I'd say if you had to weigh the two of volume versus price, I'd say in plumbing you're much more heavily weighted on volume than you would on price in the quarter.

Okay. Looking at the difference in growth rates, excluding acquisition between North America and international, international got that higher. Was there certain regions internationally that really pushed it higher than the U.S.?

So internationally, yes, the three that we mentioned that grew double digits were Germany, China, and the UK. And as you might expect, Germany and China had a relatively easy comps compared to the third quarter of last year. China was actually growing nicely in the third quarter of last year and continued to. So that was a bit of a positive surprise for us, just the strength of the Chinese market over there. Other than that, if you factor out those three large markets, but if you look broadly across the 140 markets that Hansgrohe sells into, nearly all experienced some form of growth. I mean, there were a couple of very small marks that we sell into that didn't grow. But boy, I'd say 135 of the 140 countries we sell into grew in the third quarter.

Okay. Thank you.

Your next question will come from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Yes, thanks a lot guys. Couple of questions on paint. Keith, I'm reminded about how Behr has this long-standing history of just excellent fulfillment. And it was good to see that; I guess that really was a standout again, this quarter. Into the DIY segment of the business if we look at things in terms of a kind of a two-year stack in your commentary; it kind of suggests that there might have been a modest volume acceleration in 3Q, but I'm assuming—I'm just wondering, was that all just price? Did you actually see any kind of volume acceleration in 3Q? And then on the PRO side of the business, builders scrambling around sending guys to Home Depot to go get paint to get homes closed. I'm wondering how much of a benefit do you think that was to the up 45%? And do you think that business can be sticky?

So, a couple parts to your question. Firstly, yes, we did see some in terms of gallonage, when you look at DIY Q3 2021 versus Q3 2019. So, we did see some slight positive gallonage there in terms of overall volume. And obviously with the price, we saw some very nice revenue volume when you do that comparison stack over 2019. In terms of was our supply chain performance versus competition a factor in getting a look for some pros? I would say yes. And it's incumbent on us to make that as sticky as we can. I'll tell you, I feel good about it. This new DYNASTY brand is being applied and installed by some professionals, and we're obviously seeing our PRO line of paint that continues to be installed by professionals, and it's working well, and the brand has pull with consumers. So, you think about the PRO and the residential repaint, as well as some of the commercial and more multifamily looks that we're getting, I think we fare well. But it's incumbent on us to start to develop that kind of loyalty in those pros like we have in other pros. So, I think it was certainly a factor, and we'll work as hard as we can to make it sticky.

Yes, certainly you have the opportunity, so that's good. If you look at—I just wanted to clarify one thing about your many comments on cost inflation, were there any sub-segments worth calling out let's say lighting or hardware or Hansgrohe, whatever, where you actually were price-cost neutral already in 3Q, or where you expect to be price-cost neutral in 4Q? I don't just mean by year-end, but I mean actually in 4Q. And could you comment specifically on labor inflation in your outlook?

Yes, well, I'm not going to get into slicing and dicing it by individual commodities or products or segments, and that sort of thing as it relates to price-cost, but in terms of labor, that continues to be a challenge as we talked about. And that's one of the things that we’re working very hard to do as it relates to programs, whether white-collar or blue-collar. As it relates to safety in our factories and programs for different work engagements; if you will, or different work methodologies as it relates to work from home or hybrid or come into the office, sort of thing to appeal to as much of the labor as we can. And that includes, in some cases some wage increases and wage inflation. So, yes, labor is an issue, and I think that's globally across industry. But we're also seeing that.

Okay. Makes sense. Thanks guys.

Thanks, Steve.

Your next will come from the line of David MacGregor from Longbow Research. Please proceed with your question.

Yes, good morning, everyone. And Keith, congratulations on a great quarter. A lot of great execution. I wanted to just—you talked about trying to achieve price or you will achieve price-cost neutrality by the end of the year. And I guess I'm just wondering thinking about the extent to which would that push on pricing here in the second half, how much carryover pricing you would have into 2022? And also, if I could just get some clarification around that price-cost comment you noted that you'd be price-cost neutral in plumbing, but if you mentioned it for decorative architecture, I may have missed that. Are you expecting with the higher inflation in decorative architecture to be price-cost neutral by the end there as well?

Yes, we are across Masco.

Okay. And carryover pricing for 2022, what are your thoughts there?

Yes, David, there will be some carryover pricing into 2022. We'll get into more color on that on our fourth-quarter call in February.

Okay. All right. I guess second question, just obviously a very strong market share performance in PRO paint, but could you just talk about where else within your product makes you may have gained share in the quarter?

Well, we had a very solid performance in plumbing, plumbing trade in particular; e-commerce continues to be—we believe we're a leader in e-commerce, and we continue to—we believe gain share. I'll tell you that it's very difficult to accurately pin down overall market volume in a particular quarter. So that we'll see as we end the year and we go through our models that we use to estimate total market size; but I believe we're gaining share in trade plumbing and e-commerce certainly would think we're gaining share in our spa business and our wellness business, Watkins, that continues to perform quite well. And when I look at our growth in Europe versus what our competition is doing, I believe we're gaining share at Hansgrohe as well. But again, it's difficult; I like to speak with absolute numbers and run it through our market model, and it's very difficult to see the actual market size quarter-to-quarter. But we're doing well in Watkins, doing well in Europe with Hansgrohe, certainly in plumbing and the propane you talked about.

Great, thanks very much.

Your next question will come from the line of Ken Zener from Key. Please proceed with your question.

Good morning, everybody.

Good morning.

Hi, Ken.

Paint up 4% headline as noted the volumes were down, which contributed to that operating margin. Could you maybe discriminate if you look at the paint PPI index, it says PPI was up about 10% in the third quarter. Could you maybe give us a sense of that pricing magnitude and then for those three buckets that hit operating margins, the volume, commodity costs, marketing expenses, could you maybe give us a sense of the magnitude of those buckets? That's it. Thank you.

Yes, Ken. So, in terms of our paint inflation that we felt in the quarter, we were up mid-teens inflation in paint. So, and that was the inflation that we felt, and that obviously had an impact on the margin that we developed. In terms of I'm not familiar with the PPI index, but I think that addressed your question.

Right. And then the impact for the volume versus the other, the commodity cost for the margin impact.

So, if you think about—yes, obviously with volumes being down that had a pretty negative impact on the margins, as well as some of the investment that we put back into the business during the quarter, I think those are the two probably bigger impacts, with pricing being a small offset to those.

Thank you very much.

Your next question will come from the line of Steven Ramsey from Thompson Research Group. Please proceed with your question.

Good morning. Some of our recent channel checks point to some companies reducing SKUs to focus on better margin, better volume products given the supply chain issues. Are you doing this in any product categories? And if so, would it be on a near-term or long-term basis?

Part of our ability to perform as well as we did with respect to supply chain. This was in Plumbing was simplifying our assortment for a limited period of time. It was for a couple of months, I believe, in that range, to allow our suppliers to do less changeovers and have longer runs, ultimately do a better job of supplying our customers. So, there was a little bit of that, but it was short-lived; it helped us, as I said, with our supply base with longer runs. But that is over for the most part; those SKUs are back in line, and that's, again, part of what gives me confidence that we're starting to get some relief on some of these issues as it relates to supply chain, particularly from our great supplier partners.

Great. And then maybe taking that topic and thinking broader the supply chain and labor issues, are they forcing you to make changes to fill demand and support margins in the near term that will have to be kind of reversed or changed in a major way as the supply chain environment normalizes over the next one year plus?

No. No reversing of any kind of things. I was just indicating that we did take some of our lower volume complexity offline for a couple of months to give our suppliers a breather to lengthen their runs. That's all.

Great. Thank you.

We do have a question in queue from a participant that did not record their name or their firm name, but they are calling from a 216 area code. Caller, please state your name and firm and provide for your question.

Sounds like me. It's Eric Bosshard, Cleveland Research. Two things. First of all, the incremental pricing, you have to take incremental pricing now, or in 4Q to offset the incremental installation?

Yes, we will be implementing price in the fourth quarter, Eric, to help offset inflation, yes.

Is that in both businesses?

Across the company.

Okay. And then secondly, in terms of faucets or plumbing, I'm curious if you're seeing within the business any change in mix in terms of what consumers are buying as you've raised price or as you're managing the product offering if you've seen any notable change in behavior from consumers?

Not really, no. The mix change, as John talked about, was relatively small and more associated with different regions growing that tend to be higher mix, like Europe growing quite well. And that tended to be higher mix, and our spas continued to grow, which is a higher price point. But we're not seeing any mix shift as it relates to pricing changes.

Okay. Thank you.

And we do have time for one final question, which will come from the line of Truman Patterson with Wolfe Research; please proceed with your question.

Hey, good morning everyone just wanted to hop on for a couple items that I don't think have been touched on yet. Clearly very strong growth in the PRO paint business. Just wanted to understand in order to make this stickier, have you all started targeting, I don't know, local or regional builders for exclusive contracts or any other kind of sales strategies to make sure that this momentum continues moving forward?

We're not going to get into the competitive nature in terms of our salesforce execution and what we're going after. But fundamentally, it's about understanding the value that we bring and then targeting the customers that would appreciate that value the most. So, we're not going after all of our every pro that's out there, we definitely are segmenting. And that's part again, of our 80-20 simplification where we believe we have the best chance; that's where we'll put our sales efforts. So, we are targeting our sales and we are looking at different attributes for those specific customers. I won't go and say specific long-term contracts or anything of that sort. I won't get into specifics, but along those lines of targeting our offer to what the customer values the most is exactly what our culture is about.

Okay. And then on the M&A strategy, you're generating strong free cash flow, $850 million of cash on the balance sheet. Could you just give an update of your overall strategy there, the pipeline of deals, and valuations? We've been hearing that they are fairly elevated.

Yes, Truman, it's John. I think a good way to think about our M&A strategy is take a look at the four recent acquisitions we've done in the last year. So, we did four; of the four, each of them are very aligned with the strategy of one of our business units. So, in the case of Kraus, Delta is looking to grow their e-commerce strategy, and Kraus is a great complement to Delta's already strong presence in the e-commerce channel. And it's going enhance that. Similarly, we bought Steamist, one of the leading steam shower businesses. That focuses on Delta's strength with their trade business, with the steam shower businesses in demand, which fits hand in glove there. Obviously, the applicator business that we bought earlier in the year complements Behr’s paint offering, and then the high-style drain business we bought in Europe complements Hansgrohe's high-style showers and process. As you think about where we're focusing our efforts, it's on these smaller bolt-on, tuck-in type businesses that have an alignment with the strategy of one of our business units. And yes, that's really focusing on both paint and plumbing. Our team that we've got in place is doing a great job of the cultivation of new, smaller businesses. I would anticipate there will be future acquisitions; obviously, we can't foreshadow the timing of those. But the team is working hard. Part of the reason that we're focusing on these, Truman, also is to your point the valuations; as you move up in terms of the size, they are quite high, and so we see better value in the lower middle market. That's where we're focusing our efforts at this time, and then I think we'll continue to focus our efforts in that lower middle market over the coming months and quarters.

All right. Thank you all.

Thank you.

I would like to thank everyone for joining us today and for your interest in Masco. That concludes today's call.