Good morning, ladies and gentlemen. Welcome to Masco Corporation's Second Quarter 2022 Conference Call. My name is Bailey, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may now begin.

Thank you, Bailey, and good morning. Welcome to Masco Corporation's 2022 second quarter conference call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco’s Vice President and Chief Financial Officer. Our second quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. 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. Please turn to Slide 5. We continue to execute in this challenging environment, and I'm pleased with our performance in the first half of the year. In the second quarter, our top line increased 8%, with growth driven by pricing and to a lesser extent, volume in both segments. Our operating profit was impacted by higher supply chain costs, planned marketing expense increases, and unfavorable foreign currency. Commodity and other inflation was mid-teens in the quarter, but we expect this to be a peak level, as we anniversary inflation that began last year and we are beginning to see declines in certain input costs in the spot market. Importantly, with our continued pricing actions, we have begun to recover the price cost lag that we experienced in the back half of 2021. Additionally, we continue to leverage our SG&A as SG&A as a percent of sales improved 90 basis points to 15.3%. These actions contributed to sequential margin improvement of 140 basis points to 17.6% for the quarter. Our earnings per share for the quarter was $1.14, which matched prior year's earnings. Turning to our segments. Plumbing grew 7% in local currency against a 48% comp, with 7% growth in North American plumbing and 8% growth in international plumbing. North American growth was led by our spa business that continues to capitalize on strong demand for its products. International plumbing markets remained solid, with strong growth across Europe and in China during the quarter. In our Decorative Architectural segment, sales grew 15%, as Behr continued its strong performance, with low teens growth in DIY paint and approximately 40% growth in PRO paint. DIY paint growth was mostly due to price as we continue to see DIY paint volumes normalizing. We expect full year DIY paint volumes to be in the range of 2019 volumes. PRO paint volumes remained strong as we continue to gain market share in this market, demonstrating the compelling offering that we have developed along with Home Depot. I'm also very pleased that for the ninth year in a row, Behr was named the number one rated interior paint by a leading third-party testing agency. In addition to the top spot, Behr took all of the top four rankings. This is a testament to the quality and value proposition that Behr paint brings to both the DIY and PRO paint markets as paint quality including ease of application, durability, coverage and value are extremely important selling points for both the DIY and PRO customer. Turning to capital allocation. We repurchased $550 million of our stock during the quarter through open market repurchases and an accelerated stock repurchase transaction. This brought our total share repurchases to over $900 million for 2022 or nearly 7% of our shares outstanding at the beginning of the year. This likely completes our repurchases for the year as we will use our free cash flow to repay the $500 million term loan we used to fund the ASR. Now let me address what we are seeing in terms of demand in our markets. Largely as expected, demand or actual sellout for many of our products moderated during the second quarter. Across most of our categories, we expect volumes to be down modestly in the second half of the year, with growth driven by pricing. On the cost side, certain input costs, such as labor and freight, remain elevated. Additionally, labor and freight availability continue to be inconsistent, making it challenging to operate efficiently. Lastly, the U.S. dollar continues to strengthen, resulting in lower operating profit dollars than we forecasted. With these considerations in mind, we are narrowing our earnings per share expectations for the year to be between $4.15 to $4.25 per share from our previous expectations of $4.15 to $4.35. We are closely monitoring market dynamics and we'll take action if plan falls below our expectations. That said, we believe there are numerous positive structural factors related to housing that will be supportive of increased repair and remodel activity over the next few years, even if there is a short-term economic slowdown. We are on the edge of the large 75 million person millennial cohort forming households and entering the housing market. 2.7 million more homes will reach the prime remodeling age of 20 to 39 years old over the next three years. The COVID-19 pandemic has clearly increased the desire for more enjoyable living spaces, which has led to increased home demand and remodeling expenditures. Consumers and homeowners have strong balance sheets, with more than $2 trillion in savings and home equity values at all-time high. All of these structural forces provide tailwinds for our repair and remodel business. Now I'll turn the call over to John for additional detail on how our second quarter results and full year outlook.

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 onetime items. Turning to Slide 7. We delivered another strong quarter, with sales increasing 8% against a robust 24% comp. Net selling prices increased sales by 10% and the higher volumes increased sales by 1%. These were partially offset by an unfavorable currency impact of 3%. Sales grew 11%, excluding the impact of currency. In local currency, North American sales increased 11%. This performance was driven by strong growth in DIY and PRO paint as well as spas, faucets and showers. The main drivers of this growth were increased net selling prices, which increased sales by 10%, and higher sales volumes, which increased sales by 1%. In local currency, international sales increased 8%, or 11% excluding divestitures. Net selling prices increased sales by 7% and higher volumes increased sales by 4%. Our gross margin of 33% was impacted by higher year-over-year commodity and logistics costs in the quarter. We anticipate that gross margin will continue to face pressure in the third quarter, with year-over-year improvement expected in the fourth quarter. Our SG&A as a percentage of sales improved 90 basis points to 15.3% due to operating leverage and continued cost discipline across our businesses. Operating profit in the second quarter was $414 million. And operating margin was 17.6%, a sequential improvement of 140 basis points. Operating profit was impacted by higher supply chain costs, marketing and currency, partially offset by higher net selling prices and incremental volume. Our EPS of $1.14 in the quarter matched the second quarter of 2021. Turning to Slide 8. Plumbing growth was 7% in local currency against a robust 48% comp in the second quarter of last year. Segment sales grew 8%, excluding the net impacts of currency, acquisitions and divestitures. Pricing contributed 7% to growth and volume contributed 1%. North American sales increased 7% in local currency. This performance was led by Watkins Wellness as they continue to capitalize on the trends towards wellness and outdoor living. Delta also contributed to increased sales in the quarter as they delivered growth against a double-digit comp. International plumbing sales increased 8% in local currency or 11% excluding divestitures. Homes grew sales across almost all their markets, with the key markets of Germany, China, France, and the U.K. continuing to drive exceptional results. Segment operating profit in the second quarter was $238 million and operating margin was 17.3%. Operating profit was impacted by higher supply chain costs, marketing and currency, partially offset by higher net selling prices. Turning to Slide 9. Decorative Architectural sales increased 15% for the second quarter. Our PRO paint business delivered another outstanding quarter, with growth of approximately 40%, with our PRO paint offering in high-quality products continue to gain share with the PRO customer. With our strong operational execution and continued investment, we are demonstrating our ability to retain and grow our penetration with the PRO customer. Our DIY business sales grew low teens. However, DIY volumes normalized in the second quarter. And we now anticipate second half DIY paint sales to decline modestly. Operating profit was $198 million in the quarter, up $10 million or 5%, and operating margin was 20.2%. This performance was driven by higher net selling prices and incremental volume, partially offset by higher commodity and supply chain costs and marketing. Turning to Slide 10. Our balance sheet is strong, with net debt-to-EBITDA at 1.9 times, even with the additional $500 million we borrowed to fund the accelerated share repurchase transaction we executed during the quarter. We ended the quarter with approximately $1.4 billion of balance sheet liquidity. Working capital as a percent of sales was 18.9%. Working capital was impacted by higher inventory levels to meet demand from our customers, cost inflation, and delays in receipt and delivery of material. Through focused execution, we continue to balance our inventory levels with demand. We expect working capital as a percent of sales to be approximately 16.5% at year-end. We also continue our focus on shareholder value creation by deploying $550 million to share repurchases during the second quarter. Year-to-date, we have deployed approximately $914 million to share repurchases and returned approximately 16.6 million shares or almost 7% of our shares outstanding at the beginning of the year. We do not expect further share repurchases this year as we will use our free cash flow in the second half to repay the $500 million term loan. Finally, turning to Slide 11, let's review our outlook for 2022. Given moderating demand and additional foreign currency headwinds, we now expect full year sales growth for Masco to be in the range of 5% to 7% versus our previous guidance of 6% to 10%. Due to lower sales volume and higher supply chain costs, we now anticipate full year operating margins to be approximately 17%. While we do anticipate margin expansion in the second half of the year, this will be weighted to the fourth quarter. In our Plumbing segment, we now expect 2022 sales growth to be in the range of 3% to 5%, including foreign currency, versus our previous guidance of between 7%. Given current exchange rate, foreign currency is expected to unfavorably impact Plumbing revenue by approximately 3% or $165 million. We now anticipate full year Plumbing margins will be approximately 18%, lower from previous guidance due to higher supply chain inefficiencies and slightly lower volume assumptions. In our Decorative Architectural segment, we expect 2022 sales to grow in the range of 9% to 11% versus our previous guidance of 10% to 14%. Looking specifically at paint growth for 2022, we currently anticipate our DIY paint sales to increase mid-single digits and our PRO paint sales to increase strong double digits. We now expect full year Decorative Architectural margin to be approximately 18%. As we previously discussed, in this segment, pricing actions typically only recover the dollar amount of inflation. As a result, all else equal, operating profit dollars remain neutral from cost recovery pricing actions to result in margin compression. Finally, as Keith mentioned earlier, our updated 2022 EPS estimate is $4.15 to $4.25, which represents 14% EPS growth at the midpoint of the range. This assumes a $233 million average diluted share count for the year. Additional modeling assumptions for 2022 can be found on Slide 14 in our earnings deck. With that, I would like to open the call for Q&A.

Our first question today comes from the line of Stephen Kim from Evercore ISI. Please go ahead. Your line is now open.

I was wondering if you could provide some insight into the Decorative Architectural segment, specifically regarding paint. You mentioned that you expect volume to decline modestly in the second half. Can you clarify if this includes the PRO business? It would be helpful if you could outline your volume outlook for paint and differentiate between DIY and PRO segments for better understanding.

Sure, Steve. As you think about demand, like we said, we saw strong demand in the quarter. As we think about going forward, DIY versus PRO, you might expect we've had some strong comps in the PRO side of the business. And we're starting to face some pretty significant comps in Q3. I think our PRO comp against Q3 of last year is like 45% growth. So while we still anticipate growth in the PRO, in the back half of the year, obviously, we won't be posting the strong comps that we've posted in the last three or four quarters. As we think about our DIY business, we do think our DIY business will be up in the back half of the year. That said, driven by price, with volumes declining in the back half of the year. Will be down, yes, down probably low double digits, Steve.

What would be down double digits? Sorry, I spoke over you.

Yes. DIY paint volumes will be down low double digits in the second half of the year.

And then when you look at the Plumbing business, can you give us a sense, just housekeeping wise, what was the FX and the acquisition divestiture impact on sales in the quarter? And when you're looking forward in that business, do you anticipate that you will be able to more than cover your cost inflation in that business? Or should we simply be looking for just recovering the cost dollar for dollar in the back half of the Plumbing business? And as we look into 2023, I know we're not giving guidance on that. However, would it be reasonable to think that with the movements we're seeing in commodities and perhaps a little stickiness in price, that we might actually see some positive carryover effect in 2023?

Stephen, this is Keith. Typically, we do recover what's priced in this segment. We do recover margin as well. And you're exactly right. If there is a pullback in commodities, we would expect that to be a tailwind for us.

Yes, Stephen. I think the first part of your question related to revenue and the impact of acquisitions and foreign exchange. Roughly speaking, foreign exchange is about 2% and acquisitions contribute around 1%.

The next question today comes from the line of Matthew Bouley from Barclays. Please go ahead. Your line is now open.

I believe you mentioned earlier that sellout moderated during the quarter. Could you discuss the comparison between sell-in and sell-through for the quarter? Additionally, as we consider the guidance for the second half, is that your overall perspective on sellout, or do you foresee any additional inventory destocking?

We did catch up on our channel inventory a little bit here year-to-date through the second quarter. And I think that was planned. And we did that to help improve our service to the customer and to the consumer. In terms of the forward look, as it relates to our guide, we're really not anticipating inventory fluctuations to have much impact on that.

Second one, it sounded like on the international business in Hansgrohe, strong trends there, ex divestitures and currency. I guess looking forward, clearly, a lot of concern around energy costs in Europe and Germany specifically. I guess could you sort of speak to your assumptions around the second half in the international business, both on the energy side and sort of the knock-on effects to the European consumer there?

We are not in a position to predict the overall economic situation in Europe. However, we are experiencing strong demand, especially in key markets for Hansgrohe, such as Central Germany and China, which continue to perform well, along with France and the U.K. We expect solid growth from Europe and our performance remains strong. Regarding energy, our team has done an excellent job securing most of our energy needs from renewable sources for this year and into next year. We are also working diligently to convert most of our equipment from natural gas to alternative energy sources. However, if there were to be a significant shutdown or restriction of energy supply, it would present a challenge for us to manage. Despite that, I am confident in the proactive steps we are taking and the work the team has accomplished.

Yes. So maybe just a couple of other comments in addition to Keith's comments. We are assuming higher energy input costs in the back half of the year just given what's taken place. So we feel we need to make sure that's baked into the guide.

The next question today comes from Mike Dahl from RBC Capital. Please go ahead. Your line is now open.

Just a couple of follow-ups here. In terms of the second half guide and the comments or the implied volumes for the second half, just relates a little to Matt's question, but can you talk about how those volume expectations compare to where you exited 2Q? I know you talked about moderation through the quarter. Are you assuming similar levels of declines as you have most recently seen? Or are you embedding greater declines in the back half of the year than what you've just experienced maybe over the past month or so?

Yes. I'd say, Mike, as we look at it, we think things have kind of stabilized herein. And we think the trends as we exited the quarter were going to be consistent with the back half of the year as best we can tell at this point.

And then my second question is around the inflation dynamics. I know you talked about kind of 15% high level, but this is the peak. Can you split that out between your segments? Because it seems fairly clear if we look at some of the plumbing inputs, to Steve's question, that there could be a relief on the horizon there. Maybe a little stickier on the paint side. But just if you could give us a little more color on the difference in inflation trends between the two segments and potential timeline for relief as you see it.

Certainly. We've noticed significant inflation throughout the year, starting around mid-2021, but we believe we've reached a peak. When evaluating our costs across different segments, some input prices have started to decrease from their earlier highs. For instance, copper and zinc used in our plumbing products are beginning to lower. However, it typically takes about six months for these changes to reflect in our financial results. Therefore, the impact of the current drop in commodity prices on our performance will likely be felt more in early 2023 rather than in 2022. This may provide some relief as we move into the new year. Additionally, other inflationary pressures are starting to ease, particularly in ocean freight, although high fuel costs from road trucking and other inputs, such as packaging and pallets, remain elevated. In the paint sector, we are experiencing persistent upward pressure on input costs, especially with TiO2 and other materials, and we're keeping a close eye on that. If necessary, we are prepared to implement further price increases to manage this inflation, as demonstrated by the 10% price hike we implemented in the second quarter. Overall, we believe we are positioned well. We maintained a slightly positive price-cost balance in the second quarter, and we will continue to monitor the situation and adjust our pricing strategy as needed.

The next question for today comes from the line of John Lovallo from UBS. Please go ahead. Your line is now open.

The first one is maybe just a point of clarification. Did you say that the DIY volumes in the quarter were actually flat, which would be a very good outcome versus your peers? And if so, what do you think were the biggest drivers of that on a relative basis?

Yes. DIY volumes for the quarter were relatively flat, yes.

I'm here.

John, did you have a second question?

Yes. I'm sorry.

You heard my answer.

You said that no. I missed it. They're relatively flat.

Sell in was greater than sell-out in the quarter. I hope that answers your question. I'm uncertain.

I was just curious because that is better than some of what your competitors are saying. And I was just curious if you thought what was kind of the differentiating factor there?

Yes. Part of it, John, is that when comparing our results to the second quarter of last year, we experienced a relatively weak performance in DIY due to the Texas freeze. So, in considering the year-over-year comparison, we are making up for that. This is why we have seen improvements in both sell-in and sell-out during the second quarter.

Revenue in Decorative Architectural and the growth in the second quarter was roughly 80% price and about 20% volume. And then we look at that volume, we're relatively flat in DIY.

And then in terms of just any inflationary pressures, are you seeing any trade down for consumers in either of your segments?

Not really. It's been pretty stable. We’ve worked hard to minimize the impact of movement along the assortment, whether from lower to higher prices or from professional to DIY. There is some impact from this mix, but we haven’t observed significant trade down across our large ticket items, like spas. Demand remains strong, with a backlog of about 25 weeks, which is more than we typically see in a normalized situation. In China, our focus on higher-end products continues to show good growth, despite the market slowdown. We’re also seeing solid demand at the lower end of our assortment. Overall, we haven't seen significant evidence of trade down, and we don't expect any as we progress through the year.

The next question today comes from the line of Susan Maklari from Goldman Sachs. Please go ahead. Your line is now open.

My first question is building off of John's question there. As you take a step back, can you talk a bit about the overall state of the consumer? How it changed during the quarter? What's their willingness to spend is on housing? And are you seeing any signs of elasticity as the pricing continues to come through across the product categories?

We have observed a decline in demand. We are noticing some indications of slowdowns as we monitor various leading indicators, such as website searches. Midway through the quarter, we experienced a decline, which has remained relatively stable since then. This trend is consistent across our categories and channels. Overall, demand has shown consistent moderation. However, some categories have performed well despite this trend, such as PRO paint sales and our strong spot sales. International sales continue to do well. On the other hand, we have noticed a decrease in demand for faucets, showers, hardware lighting, and DIY paint. This moderation started around mid-quarter and has remained steady throughout the rest of the quarter. We anticipate a modest decline in volumes for the second half, with possibly a slight decrease in Plumbing and a greater reduction in Decorative. It’s worth noting that Plumbing saw a 16% comp in Q3 while Decorative had a 15% comp, which should be considered when reviewing the segments quarterly.

Sue, I want to add to Keith's comments that the consumer outlook remains positive. We notice strong financial stability among consumers. Home equity appears healthy, and regarding your question about price elasticity, our portfolio includes low-ticket repair and remodeling products that consumers are still willing to purchase despite price increases. Many of our offerings are aimed at repairs and maintenance, so we aren't observing a decrease in consumer spending on our products due to rising prices in the market.

I guess as a follow-up, as we do think about the macro environment shifting, are there any early steps you're taking to prepare the business? Or what are the things that you're watching for to indicate that you may need to make some underlying changes in terms of perhaps cost structures or those kinds of things looking out?

At the end of the day, demand will ultimately trigger us to implement our contingency plans, which is part of our ongoing business planning process. We have experience in managing this, and it is integral to our operations. We can reduce variable and discretionary costs in SG&A, for instance, and be cautious with growth investments or hiring while we monitor these variable expenses. Depending on the situation, we can also address fixed costs, as we have demonstrated in the past. We have contingency plans in place and monitor leading indicators such as website traffic, leveraging our strong relationships in the channel concerning consumer tickets. However, we do not act on leading indicators alone; we wait to assess where demand is headed. This is a routine part of our process, and we regularly meet with business units to review their contingency plans. We are experienced in this field, and it's how we approach the situation. Furthermore, with the reconfigured portfolio, particularly the brake fix component, which offers high value and is low ticket, along with the significant shifts in consumer purchasing behavior regarding home products, we are optimistic about the long-term prospects of our portfolio.

The next question today comes from the line of Deepa Raghavan from Wells Fargo Securities. Please go ahead. Your line is now open.

First question is about price cost. You mentioned you are slightly price cost positive in the quarter. Is this the case across both segments? I am particularly interested in comments on Plumbing because it appears that price did not fully offset the inter-quarter challenges from higher costs.

Yes, Deepa. We were slightly price cost positive across both segments, both Plumbing and Decorative Architectural. I think the thing that you might focus on a little bit more is we did have some operational inefficiencies in the second quarter in Plumbing. And as Keith referenced in his prepared remarks, specifically, we had some shipping and some labor inefficiencies in the second quarter that probably would have created more of a headwind for the Plumbing segment.

Could you discuss some metrics from the quarter that may have caught you off guard, either positively or negatively? I'm interested in the extent of those surprises and whether you anticipate any changes in the second half of the year.

We continue to perform well in Europe, and while it's not a surprise, it has been encouraging to see our performance there develop. Our franchise has shown solid growth in both Europe and China. Over the past few quarters, we've focused on increasing demand for PRO paint, and our continued growth and market share gains in this area reflect the outstanding work of our team and channel partners. We've effectively leveraged our supply chain to capture new customers and demonstrate the benefits of Behr paint, leading to positive feedback. Therefore, our ongoing growth in Europe and our ability to maintain our business gains in the PRO segment are positive highlights for the quarter.

On the negative side, the operational inefficiencies in the Plumbing segment have been more persistent than we expected. It's been a dynamic environment over the last couple of quarters, and we anticipated some improvement that did not materialize in the second quarter. We expect some of these inefficiencies to carry over into the third quarter, continuing to pose a challenge for that segment. However, we believe conditions will improve as we move into the fourth quarter.

The next question today comes from the line of Keith Hughes from Truist. Please go ahead. Your line is now open.

Questions on international plumbing. Strong numbers in the quarter, you have highlighted it in the prepared statement. Spent a lot of fear around Europe. What could be coming? Are you getting any indications that this pace of business could fall off in the second half of the year given some of the energy pressure and various other things going on in the continent?

As I mentioned earlier, Keith, it's a dynamic environment, and we can't predict the future. We're focused on staying agile and ready to make adjustments if there are significant economic changes. Right now, we are not seeing any signs of a downturn, and there’s no evidence of a trade down. Demand remains strong across Europe. We are implementing contingency plans for conversion from natural gas to other energy sources. Most of our energy for 2023 has been procured from renewable sources. Our team is effectively preparing for and addressing current challenges while looking ahead. We are making sure we are ready for potential changes, but at this moment, we are not seeing any indications of a decline in Europe.

And I would also like to add to Keith's comments. A significant portion of Hansgrohe's revenue is generated from project sales, particularly in sectors such as hospitality or hotels, which are often located in countries outside of Europe, including Asia and the Middle East. This creates a solid fundamental demand. We also undertake projects in Europe, and even during downturns in the consumer market, these projects must be completed. This will provide a level of support for Hansgrohe moving forward.

The next question comes from the line of David MacGregor from Longbow Research. Please go ahead. Your line is now open.

You talked about the gross profit margins, and the fact that they're going to be under a little more pressure in 3Q, and that we'd expect to improve a little more than 4Q. I wonder if you could just unpack that a little for us and talk about some of the puts and takes that are behind those dynamics.

Yes, there are a few factors at play here, David. First, we have addressed the cost recovery aspect of our Decorative Architectural business where we recover the costs associated with inflation. Historically, we've mentioned that a 5% increase in inflation typically impacts our margins in that segment by around 100 basis points. Considering that we experienced mid-teens inflation in the second quarter, this has significantly contributed to the pressure on our gross margins. Additionally, we anticipate slightly lower volumes, which is another key factor affecting our gross margins in the second half.

And then just as a follow-up, I guess given the fact that the macro seems to be softening up here a little bit, I'm just wondering to what extent you've seen your channel partners tapping the brakes on replenishing inventories. And I'm just wondering if you can talk about what you're seeing right now in terms of channel inventory levels and what you're expecting in terms of fluctuations around that over the next two to three quarters.

It's really a mixed situation. In some instances, our channel inventories are not quite where we want them to be. However, we've made good progress overall, and the inventories are in pretty good shape as we work to enhance our inventory levels to better serve customers and meet their needs. It's normal to see a slight pullback, especially as some of our larger plumbing wholesale customers approach the end of their fiscal year and quarter, which typically leads to a decrease in inventory. Therefore, there is a modest reduction in the plumbing and wholesale sectors. Overall, I believe the situation is fairly stable.

Our next question today comes from the line of Adam Baumgarten from Zelman. Please go ahead. Your line is now open.

I guess maybe starting in paint. Just given the slower DIY outlook in the second half, do you expect promotional activity to pick up in any meaningful way?

That really is a decision of our channel partner. I mean, we obviously are together on that in the discussions and the strategy around it. In some cases, based on our partnership, we'll choose to participate in that and help fund some of that. But as we sit right now, I would not expect a material change in the promotion levels. But again, that's a choice of our customer.

I think we mentioned in our prepared remarks that we have made some limited promotional activity in the second quarter and we'll assess how that may change. But as we sit here, I think we believe we'll maintain a fairly moderate promotion level.

And just switching gears to Plumbing, just maybe if you could give us some color around the order patterns or showroom traffic that you're seeing in the spa business. Well, that continues to be robust. Really, our backlogs, as I mentioned, around 25 weeks and staying there. The orders have been pretty consistent, haven't seen a material movement up or down there. So I would say consistent through the quarter.

The next question today comes from Phil Ing from Jefferies. Please go ahead. Your line is now open.

I guess if demand does soften a bit, what are some of the levers that you guys are talking about in the contingency plan perhaps for next year? And then when we think about decremental margins in that softer demand environment, how should we think about that, John? And then do you anticipate pricing holding in that environment?

Phil, when considering our contingency plans, we are approaching this in a few different ways. Depending on how much demand decreases, we might start by simply tightening our budgets. This could involve reducing open positions and cutting back on advertising, travel, and entertainment expenses. If the decline is more severe and lasts longer than we anticipate, we will need to examine the structural elements of the business, which may include reducing headcount and shifts. We're monitoring the situation closely. Our decremental margins should be fairly aligned with our incremental margins, which are around 25% to 30%, though there may not be perfect alignment. In the initial quarter of a decline, it can be challenging to reduce costs as quickly as volume decreases, but we will aim to manage this as effectively as possible. One potential silver lining in the case of a recession is that input costs generally fall, which might help offset some of these decremental margins. That's our perspective on the situation. Keith, do you have anything to add?

Yes. I talked about the fixed and variable component of the cost plans that we have in place, and it really depends on the depth of it. So I think we hit on that pretty good.

And then pricing in that environment?

Pricing in that environment depends on what we're observing in the marketplace. In a rare instance during a recession, if commodities remain flat, we must push through pricing. By segment, it varies, but we typically do not give back much pricing on the Plumbing side of our business. Of course, if there’s deflation in inputs, the cost recovery from inflationary pressures reverses itself in that context. That’s when we start to see margins expand in our Decorative Architectural segment.

And then on Plumbing, if I heard you correctly, it sounds like China was still quite strong. Certainly, that part of the world is seeing a lot of COVID lockdowns. I've been impressed that it's held up so well. Any color on how you kind of managing through that and how you're thinking about that business in the back half?

Yes. I think you know it. That was a real solid performance for us in China, particularly given the shutdown period that was there in the quarter. And I think it really gets back to a combination of three things: We're executing very well. The team there has been a real nice bright spot for us. And so good folks there that are focused on growth no matter what is thrown at them. And the shutdown was significant. Secondly, we are focused on higher-end segment, and we believe we're the share leader in that premium segment. That tends to have less volatility and I think more consistency. And then thirdly, when you look at where we're selling to in terms of end use, it's primarily, and as John mentioned, into project business or in hotels or in multifamily, et cetera, which has the ability to jump right back after that shutdown, more so than, say, if we were into the lower price point that depended more on retail traffic. So those three things combined have really come together to give us a very nice story in China.

The next question today comes from the line of Garik Shmois from Loop Capital. Please go ahead. Your line is now open.

Higher-level question for me. Just want to unpack the comment that DIY paint volumes are coming back down to 2019 levels. I'm just wondering if you're thinking at this point that 2019 is the baseline for that business, just given, on one hand, you've got strong demographic trends, but on the other hand, you had a big surge in DIY demand during the pandemic. So just a little bit higher level on just kind of what the right mode of baseline could be for that business.

Yes, that's exactly how we're approaching the situation. We experienced significant DIY demand when the pandemic began, as people focused more on their homes and had increased time to do so. Since the easing of pandemic restrictions, there's been a shift toward professional services, and we're pleased with how our professional business has adapted in terms of capacity and supply chain performance while also maintaining quality, service, and a strong value proposition for our professional customers. Looking ahead, with millennials starting to establish their homes and our research indicating that they are committed DIYers engaged in multiple projects rather than a one-time endeavor, we see a lasting impact from COVID on how these DIYers perceive their homes. They are investing in their properties and building savings, which we believe will give DIY volume a favorable boost for the next few years due to these ongoing structural factors. While we have returned to 2019 volume levels, we view this as a launching point for further growth in the DIY segment.

I wanted to follow up on capital allocation. I guess I'll take that question. You're focused on paying off the term loan in the second half of the year, so you'll pause on repurchases. But what does that mean for M&A moving forward? Does that take a pause as well just given me the debt payout that's coming due?

No, no. I mean we're continuing to look at M&A. We continue to have our teams cultivate potential acquisition candidates. Though you might expect in this environment where things get a little choppy, fewer candidates for sale. That said, our balance sheet is set up. I mean we are in a position to execute on strategic M&A if the right candidates were to emerge in this environment.

The next question today comes from the line of Kenneth Zener from KeyBanc. Please go ahead. Your line is now open.

I have two questions regarding paint. First, could you discuss the factors affecting your total paint volumes, specifically comparing DIY in 2021 to 2019? Also, could you provide a comparison of how you view the performance in the first half of this year versus the second half, particularly in relation to seasonality and the impacts of COVID? The bigger question I have is about your current position compared to 2019. It seems like there are many regional competitors gaining market share. Could you provide some context around your PRO initiative and how smaller regional companies are performing in comparison? It appears that your share has increased as raw material availability improved, but I'm looking for a broader perspective rather than just focusing on two specific data points.

We're focused on our business. And on the targeted customers that we have where our value proposition works the best as part of our partnership with the Home Depot. And it's challenging, as I've consistently talked about, in terms of quarter-to-quarter market size determination with any kind of accuracy. But when you look at our growth rates, particularly with PRO, there's no question that we're gaining share in PRO. And we've done it now for two, three quarters in a row and demonstrated, I think, some stickiness. And with regards to competition, we have very strong competition in that segment. I think it makes us better, very respectful of them. With regards to where our volume is coming from, I really don't have an answer for that. We know we're outgrowing the market. We're gaining share. You're exactly right. There's regional competitors throughout the country. But we're really focused on how we can best serve our customer. And while we understand market sizing is difficult on a quarter-to-quarter basis, I think it's pretty clear we're gaining share and feel good about the business now. And then moving forward, the structural aspects of DIY that we talked about, the fact that we are a relatively low share in PRO, and we're demonstrating the ability to grow together with our channel partner. So that's how we do it.

The next question today comes from the line of Rafe Jadrosich from Bank of America. Please go ahead. Your line is now open.

First, as you look at your CapEx investments for 2022, are you adjusting any of your reflect the moderating demand or changing macro environment?

No. When you look at the major projects we have and where they're focused, say, European plumbing business, our spa business, this is investments that will start to begin to ramp up in 2023 and won't reach full capacity till after that. So while we're certainly aware and are keenly watching what's happening in the short term here as it relates to a potential slowdown or a pullback, and we have contingency plans in place that we talked about, and we have an experienced base and our leadership team that has operated in this environment several times. So we’re confident in that. But we're also confident in the fundamentals of our low-ticket DIY, repair and remodel and the PRO aspect of our business for the long term. And it has strong fundamentals and strong correlations to what we think are positive tailwinds. So no, we're not going to pull back on these important capacity increases for us, because where they are, what business they're in, what geography they're in, and the confidence we have overall in the long term of our business. So no change in that.

I would add to Keith's comments that we are a strong cash flow generating company. The amount we invest in capital expenditures is relatively low compared to our free cash flow. This allows us to finance these initiatives without reducing other essential investments in our business.

In most cases, when we look at this capital, we can gradually begin to equip the new factory with various amounts of equipment and staffing. It’s not an all-or-nothing scenario regarding the total investment. However, we currently have no plans to reduce our capital expenditure.

The guidance suggests an improvement in Plumbing margins in the second half of the year compared to the first half. Can you help us understand the extent to which this is due to lower inflation on the metal side versus the additional price realization or price hikes announced in the first half of the year?

Yes, Rafe. If I consider the situation, the improvement in Plumbing during the second half of the year will likely see Q3 margins remaining similar to Q2, while Q4 is expected to improve significantly compared to Q4 of last year. The key difference lies in the enhanced performance in the fourth quarter compared to the same period last year. The improvement in our commodity position will not have a significant impact in the second half of the year, as it is more of a factor for 2023 due to the length of our supply chains and the time required for these benefits to reflect in our profit and loss statement.

Our final question today comes from the line of Doug Ward from JPMorgan. Please go ahead. Your line is now open.

Doug Ward on for Mike. I was just wondering if you guys could give more color on the supply chain currently. I know you guys have mentioned earlier that you believe inflation has peaked. So I'm just wondering, in terms of the supply chain moving forward and maybe comparing it to earlier in the year and parts of last year, where you guys see yourself in terms of that battle.

When we consider pricing, we're noticing a pullback in raw materials like brass, copper, and zinc, as John pointed out earlier. However, we're experiencing some pressure in other areas of our business, including TiO2, specialty chemicals, and our paint segment. We remain highly aware of the connection between incoming commodity prices and the pricing we set for our customers. Additionally, the supply chain has proven to be more challenging than we anticipated this quarter, particularly concerning labor and freight costs. Beyond just costs, availability of these resources is critical. Unpredictable freight has led to unreliable delivery times, affecting fill rates and lead times, which in turn disrupts our manufacturing rhythm and supply chain. We observed these challenges in our Plumbing sector last quarter, which I believe is a significant change to point out.

Thank you. This concludes today's Masco Corporation second quarter 202 conference call. Thank you all for your participation. You may now disconnect your lines.