Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter 2022 Conference Call. My name is Alex. 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 begin.

Thank you, Alex, and good morning. Welcome to Masco Corporation's 2022 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 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. Please turn to Slide 5. In the third quarter, sales matched prior year with significant pricing actions of 9%, offsetting volume declines of 6% and currency headwinds of 3%. Demand moderated more than expected in the third quarter with most categories experiencing declining volumes year-over-year. Our operating profit was impacted by these lower volumes, higher operational costs and unfavorable foreign currency. Partially offsetting these headwinds, SG&A as a percent of sales improved 110 basis points to 15.6%, as we continue to manage our SG&A and discretionary spending. Operating margin was 15.9% for the quarter and earnings per share was $0.98. Turning to our segments. Plumbing grew 5% in local currency against a 15% comp with 4% growth in North America and 5% growth in international. Our spa business and international plumbing delivered positive volumes for the quarter. International plumbing sales were led by strong growth in China as we continue to gain share. European markets in the quarter were flat in local currency against a double-digit comp in the third quarter of 2021. While incoming orders have moderated in Europe, we saw good demand in several markets such as China, India, and the Middle East, demonstrating the benefit of selling to over 100 countries. We were price/cost positive in the third quarter in plumbing, and we expect that relationship to continue to improve in the fourth quarter as our pricing actions are in place, and we continue to anniversary the higher costs from last year. In our Decorative Architectural segment, sales grew 1% led by PRO paint sales, which increased mid-teens against a more than 45% comp in Q3 of 2021, more than offsetting sales decline in DIY paint, lighting and hardware. PRO paint volumes increased low-single digits as we continue to see good demand from PRO paint contractors. We are retaining the significant share gains we have achieved over the past 12 months, and we continue to increase the rollout of additional capabilities and services along with our channel partner to strengthen our value proposition to the PRO painter. This strong performance is a testament to the satisfaction that PRO painters have with our high-quality products, competitive PRO offering and our partnership with the Home Depot. We are pleased with our performance in PRO paint and we'll continue to capitalize on the significant growth opportunity. Moving on to the overall demand picture. POS and incoming orders slowed more than expected late in the third quarter across most of our product categories, and we anticipate this slowdown to continue into the fourth quarter. In the third quarter, we also experienced higher operational costs, mostly in plumbing that will continue into the fourth quarter. These operational costs include higher than expected freight and material costs due to persistent inflation, as well as production and absorption inefficiencies associated with changing volume levels. Lastly, the U.S. dollar continues to strengthen, which will result in lower revenue and operating profit dollars than we'd previously forecasted. Because of these dynamics, we are lowering our earnings per share expectation for the year to $3.70 to $3.80, from our previous expectation of $4.15 to $4.25. We are enacting plans to address lower volumes and elevated operational costs. While market conditions are softening, we believe we are well-positioned to outperform in more challenging times and deliver long-term shareholder value. Our portfolio of lower ticket repair and remodel-oriented products serves both DIY and PRO customers, and we have product, channel, geographic, and price point diversification to provide stability and resilience through a cycle. We've taken significant pricing actions and will continue to recover cost inflation experienced in 2021 and 2022 as certain commodities and costs pulled back from their highs such as copper, zinc, and ocean freight. We continue to invest in our leading brands and innovation to capture share. We have experienced agile management teams that have successfully navigated uncertain economic environments before. And we have a strong balance sheet, cash flow, and liquidity that can be used to our advantage. This confidence in our business is exemplified by the new $2 billion share repurchase authorization approved by our Board of Directors. This authorization is a continuation of our capital allocation strategy. First and foremost, we invest in our business to drive profitable growth; second, maintain a strong investment grade balance sheet; third, pay a relevant dividend with a targeted 30% payout ratio; and fourth, deploy excess free cash flow to share repurchase or bolt-on acquisitions. We have consistently executed on this strategy to drive long-term shareholder value and will continue to do so. I'll now turn the call over to John for additional detail on our third quarter results and full-year outlook. John?

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. Sales in the quarter matched prior year and excluding currency grew 3%. Net selling prices increased sales by 9%, partially offset by lower volumes, which decreased sales by 6%. In local currency, North American sales increased 3%. This performance was driven by strong growth in PRO paint as well as in spas. Higher net selling prices increased sales by 11%, partially offset by lower volumes, which decreased sales by 8%. In local currency, international sales increased 5%. Net selling prices increased sales by 4% and higher volumes increased sales by 3%, partially offset by a mixed impact of 1%. Our gross margin of 31.5% was impacted by higher year-over-year operational costs in the quarter. We anticipate that gross margin will continue to face pressure in the fourth quarter, but will improve year-over-year. Our SG&A as a percentage of sales improved 110 basis points to 15.6%. Operating profit in the third quarter was $351 million and operating margin was 15.9%. Operating profit was impacted by lower volumes, higher operational costs and currency partially offset by higher net selling prices. Lastly, our EPS in the quarter was $0.98. Turning to Slide 8. Plumbing sales were flat to prior year. Excluding the impact of currency, segment sales grew 5% against a healthy 15% comp in the third quarter of last year. Pricing contributed 7% to growth and volume decreased sales by 2%. North American sales increased 4% in local currency. This performance was driven by strong spa volumes and pricing actions across the segment, partially offset by lower volumes in other product categories. International plumbing sales increased 5% in local currency against an 18% comp from last year. Growth was led by strength in China with most European markets roughly flat versus prior year. Segment operating profit in the third quarter was $220 million, and operating margin was 16.6%. Operating profit was impacted by lower volumes, higher operational costs and currency, partially offset by higher net selling prices. Turning to Slide 9. Decorative Architectural sales increased 1% in the third quarter. Our PRO paint business continues to deliver outstanding performance, with sales up mid-teens against a robust count of over 45% in the third quarter of 2021. We continue to gain share and drive conversion as our PRO paint offering, strong brands and high-quality products resonate with PRO customers. Our DIY paint business declined low-single-digits versus prior year, largely as expected. Additionally, our lighting and builders' hardware businesses declined in aggregate mid-single-digits in the quarter. Operating profit was $151 million in the quarter, and operating margin was 17.2%. Operating profit was impacted by lower volumes and higher freight and material costs, partially offset by higher net selling prices. Turning to Slide 10. Our balance sheet is strong with net debt-to-EBITDA at 1.9x. We entered the quarter with approximately $1.5 billion of balance sheet liquidity. Working capital as a percent of sales was 18.5%. Working capital was impacted by higher inventory levels at many of our businesses, cost inflation and delays in receipt and delivery of material. We continue to balance our inventory levels with demand and expect working capital as a percent of sales to be approximately 16.5% at year-end. In the quarter, we also paid down $100 million of the $500 million term loan that we borrowed in the second quarter. Additionally, our Board authorized a new $2 billion share repurchase program effective October 20, 2022, replacing the existing authorization. This action underscores Masco's strong financial position and our Board's confidence in Masco's future. We do not expect further share repurchases this year as we will use our free cash flow to repay the balance of the $500 million term loan that we took out in the second quarter. Turning to Slide 11, let's review our outlook for 2022. Given moderating demand and additional foreign currency headwinds, we now expect our full-year sales growth for Masco to be in the range of 3% to 4% versus our prior guidance of 5% to 7%. We now anticipate full-year operating margins to be approximately 16% given lower volumes and higher operational costs. While we continue to expect year-over-year margin expansion in the fourth quarter, it will be lower than previously anticipated. In our Plumbing segment, we now expect 2022 sales growth to be in the range of 1% to 2%, including foreign currency, versus our previous guidance of 3% to 5%. Given current exchange rates, foreign currency is expected to unfavorably impact Plumbing revenue by approximately 4%. We now anticipate the full-year Plumbing margins will be approximately 16.50%. In our Decorative Architectural segment, we expect 2022 sales to grow in the range of 7% to 8% versus our previous guidance of 9% to 11%. 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 the full-year Decorative Architectural margin to be approximately 17.50%. This is lower than our previous guidance due to lower than anticipated volumes and higher advertising spend. Finally, as Keith mentioned earlier, our updated 2022 EPS estimate is $3.70 to $3.80. 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. Operator?

Thank you. To ensure everyone has an opportunity to participate, please limit yourselves to one question and one follow-up question during the Q&A session. Our first question comes from Michael Rehaut from JPMorgan. Michael, your line is now open.

Thanks. Good morning, everyone. Appreciate it. I want to focus for a moment on not just the changing demand backdrop but how you're looking at your own inventory levels as well as inventory levels in the channel. And how much to the extent that you're able to get a sense how much of the change in demand trend that you're expecting in the fourth quarter are being driven by any types of channel inventory, restocking, relative to consumer trend, end-market demand trends and how you think of that perhaps persisting into the first quarter of the year?

Thanks, Mike. This is Keith, I'll take that one. We did see moderating demand POS in the quarter a bit more than we expected. It was fairly broad-based I would say, across categories in terms of incoming orders in POS, which we think is most important. Most categories saw this decline across channel. So broadly speaking, we did see moderating POS demand on the consumer side across channels and categories. We do expect volumes to be down in both segments for Q4 understanding that Decorative had a 15% comp and Q4 PRO paint, I think, was like a 50% comp. So we do expect volumes to be down in the fourth quarter across both of those segments. In spite of this, we do have backlog in some of our business, wellness in particular and we did it as John and I both mentioned we had another solid quarter of PRO paint growth. In terms to your question with regards to inventory and inventories in the channels, I would say that inventories are in pretty decent shape. I wouldn't say that they're overstocks or excessive. Some destocking is occurring across categories and channels for sure. But there's always movement in inventory levels, particularly in changing macroeconomic environments and changing markets like we have, evens out usually around the end of the quarter. We do see some stock de-stocking that happens around quarter-end that we've talked about in the past. So we are not really expecting inventory destocking to be a material impact for us as we think about Q4. So the majority of it we would say is an end-market demand-driven.

Yes, Mike, to provide some additional clarity, I believe de-stocking will primarily occur in the non-paint categories. We manage paint inventories very closely with Home Depot. Regarding our overall inventories, as I mentioned in the third quarter, they were a bit higher than we would prefer. However, our teams are focused on aligning inventories with demand. As I noted in my prepared remarks, we anticipate that by year-end, our working capital as a percentage of sales will likely decrease to more normalized levels, around 16.5%.

Great. Thank you for that. I guess, secondly, maybe just shifting to raw materials. If you could just kind of give us a sense of where you were I think on a consolidated basis, if you have by segment, that's obviously also very helpful in terms of price/cost and what the raw material headwinds were during the quarter itself? And looking into 2023 given more recent movements in the various inputs, how should we think about raw materials in terms of where the prices stand today if you think that that could turn into a tailwind?

Okay, Mike, I'll attempt to address a few questions and break down the information for you. Regarding price and cost, we are generally favorable across the entire enterprise, including both segments. Looking ahead at raw materials, we've noticed some decreases in raw material prices, especially in the paint sector. Copper and zinc prices have fallen from their peak earlier this year, but I want to point out that it typically takes a couple of quarters for those benefits to be reflected in our profit and loss statement. Therefore, we might not see as much favorability in price and costs in the third quarter as we had originally expected, partly due to the moderating volumes Keith mentioned. Moving forward, although it's always challenging to predict, we anticipate more favorable price and cost conditions as we enter the fourth quarter. Additionally, with the pricing actions we've implemented—some of which took effect mid-year, and Hansgrohe's typical price adjustments at the start of the year—we expect to see some advantages in price and costs as we progress into 2023. I believe that covers most of your questions, Mike, but let me know if I overlooked anything.

Hey, John, this is Keith. If I could just add something here for a moment. You mentioned some commodities that have decreased in price; I think you meant plumbing when you talked about conferencing, which is related to our Plumbing segment.

Yes, I appreciate the clarification. My question was regarding whether, on a net basis for 2023, you expect raw materials to be a net tailwind given the current commodity prices.

Yes. We're not really getting in deep into 2023 here. We'll talk about that next quarter, Mike. But certainly, our expectation would be that we'd see some commodity relief and it's all flowing through our P&L a little slower than we had anticipated because of some of the volume pullback. I would say we expect that to be a tailwind in 2023.

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

Hey, thanks for taking my questions. Good morning. Just maybe on paint just given the weak DIY activity that you're seeing, are you seeing or expecting, I should say, an increase in promotional activity going forward?

When we think about promotional activity in general, I would say that it's been more muted than in the past. I think given that where the volumes were we have increased our advertising and planned to continue to do that. In terms of promotions overall in the industry, I suspect we'll see a little bit of an uptick in that, but it remains to be seen. Our preference obviously is to compete on brand service and innovation and continue to drive that, that's worked well for us. And I think if we do see increased promotions, it will be more spot promotions, if you will, rather than the - what was traditional pre-pandemic, say, where they were more ingrained into the market more consistent. That's what we're currently seeing.

Got it. Thanks. And then just on the cost actions you alluded to, any specific areas that you're targeting or maybe just some more color around what the plan is there and which areas of the business will be affected?

Yes. When there is a quick reduction in volume, several cost factors are affected, particularly in materials. We've noticed that costs, especially in plumbing, have started to decline from their peak, but it takes longer for those changes to reflect in our profit and loss statements due to the lower volumes. It's been a little slower than we anticipated, perhaps a quarter or two, for these adjustments to show up. This naturally creates some absorption issues and variable overhead challenges. As we monitor where these costs settle, we can optimize our shift patterns and enhance factory productivity. Rapid reductions in volume often lead to these situations, and we're addressing them. Inbound logistics, particularly in plumbing, have been facing challenges with timely deliveries, which impact productivity. While we expected a quicker turnaround, improvements are taking longer than expected, and we're actively working to resolve these issues. As for our operational costs, this provides insight into our approach. We anticipate resolving these matters by the end of Q1. If a longer recession occurs, as mentioned by John, our experienced management team will navigate through, aiming to emerge stronger than before, as we did in 2008 and 2009. We have various levers for managing variable costs, such as postponing spending or reducing marketing, travel, and entertainment expenses, as well as exploring fixed cost adjustments. Given our current capacity utilization and high-level demand, I don't expect a need to reconfigure our manufacturing setup due to anticipated growth. That summarizes both our short-term and mid-term strategies.

Our next question comes from John Lovallo from UBS. Please go ahead. Your line is now open.

Good morning, guys, and thank you for taking my questions. The first one is on the implied 4Q plumbing margin seems to be implied in sort of the low-to-mid teens versus I think expectations of closer to 20%. It doesn't seem like the sales decline explains this, so just curious if you can give us some more color on what's going on there.

Yes. So John, I'll start and then Keith can add to this. Regarding our fourth quarter plumbing profit guidance, I agree that it does suggest a decrease from our previous expectations for margins. There are two main factors at play. The first is the drop in volume that you mentioned, and the second is the operational costs we've noted in our prepared remarks. Some of these costs are due to freight and material expenses that remain higher than anticipated, along with production inefficiencies caused by changing volume levels that Keith talked about. Keith, I'll let you elaborate on that part.

The main issue we are facing is the volumes. We've discussed the impact of foreign exchange and the lower volumes, which present a few challenges concerning costs. First, there is a delay in the lower material costs that we anticipated affecting our profit and loss. Secondly, we've encountered absorption issues. Additionally, as John pointed out, we are still dealing with high freight and labor costs, and we had expected to see more relief entering Q4 than we currently are. Finally, there are operational inefficiencies, particularly in our plumbing sector, caused by inbound logistics and delivery reliability, which have not improved as much as we had hoped. While there are signs of improvement and we are taking steps to accelerate this process, our improvements will not be fully realized until Q1. Thus, although our margins are likely to improve, they won't reach the levels we had previously forecasted.

Okay. Thanks for that. And then the second question is the SG&A leverage was surprising given the sort of flattish top-line. What kind of costs do you guys taking out and how sustainable is that before it begins to impact the business?

I believe that this is not the level we will maintain going forward. We are beginning to reintegrate selling, general and administrative expenses. We have increased our advertising in the paint business and are dedicated to continuing our investment in brand service and innovation, which is essential for our strength coming out of these downturns or recessions, however one chooses to define them. We are being very cautious with our SG&A expenses, managing them carefully. We have the ability to adjust our spending, whether that means postponing some growth expenditures or reducing advertising, travel, entertainment, and participation in events. We are mindful of this and are focused on long-term success as we navigate through this downturn, aiming to emerge even stronger than when we entered it.

Yes. Yes. John, I really add to Keith's comments. That's right. I mean as we started looking forward to 2023, I think we're going to be very focused on SG&A just and trying to match that, our investment in SG&A up with what we're seeing from demand in the marketplace. And so to Keith's point it's a lever that we can pull, we're on top of it. We're watching this very closely, right? Yes, we did enjoy some better SG&A leverage here in Q3. And it's something that's got our complete focus as we move forward.

Thank you. Our next question comes from Matthew Bouley from Barclays. Please go ahead. Your line is now open.

Good morning, everyone. Thanks for taking the questions. Wanted to ask about the Decorative margins and the guide for Q4. Seems like there's an expectation there for relatively significant, I guess detrimental margin. And Keith, you're alluding to everything around the challenges with a rapid reduction in volumes and perhaps that's the big piece of it. But so just kind of looking at that detrimental volume assumption in Q4 what it just to number one, confirm if that's what it is, if that really is what's driving that Q4 guide, and then kind of what's the right way to think about the volume detrimentals longer-term on the assumption that we do continue to see kind of weakness in consumer demand. Thank you.

There are a few items I would like to highlight, and John, feel free to add anything. The moderation in volume is a significant factor, and there's no denying that. Additionally, when we discuss our typical performance related to prices and commodities, we usually maintain our margin dollars. However, doing so can lead to pressure on margin percentages. For instance, if we see a 10% increase meant to cover commodity costs, it could result in nearly a 200 basis point drop in margin. So, the interaction between price and commodities, along with the reduction in volume, are the main drivers.

Yes, yes, that's right. I think those are the two components. I think that the third principle component of the margin degradation in Q4 Matthew would be the investment that we referenced in marketing and advertising in the segment. It's perhaps more elevated than we would've had experienced a year ago. And so if you take the volume drop, the cost recovery nature of the inflation and the marketing spend, the advertising spend that we reference, those would be the three big components that, that would cause the margin degradation. But as Keith said, I expect that that that investment in marketing and advertising will be largely contained to Q4 and it wouldn't say that that's going to be something we'd bake in longer-term.

Got it. That's very helpful. Thanks for that guys. And then second just kind of shifting to the international business I guess with Hansgrohe, it sounds like I believe you said at the top that Europe is slowing, whereas you got some of the other geographies which are actually a bit more supportive. I'm just curious if you can expand on that a little bit kind of what are your expectations for how European demand evolves in that business and to what degree can those other geographies continue to offset that? Thanks, guys.

So we delivered a nice quarter internationally in local currency, up 5% as we mentioned. So very pleased with that. Largely driven by Hansgrohe's growth in China as well as several other markets. Hansgrohe has done an outstanding job of positioning that brand and driving it to market leadership in terms of a premium brand in China. We continue to grow there and expect that to continue. European markets are starting to moderate, modest slowdown in incoming orders. Sales overall in Q3 in Europe, I'd say were roughly flat. Again, the broad exposure that we have across many countries that have different economies in Europe is helpful. And that diversification of our risk there is very helpful. I'm glad to have it. So it's clearly seeing a pullback in Europe. But as I said, China and the Middle East are doing well for us. As I mentioned in my prepared remarks, we're seeing good growth in India. So I think that diversification as well, more broadly speaking our diversification across price points, our diversification across channels, and of course our geographic diversification both U.S. versus international and then within that international bucket are all helpful for us and why we feel that we are positioned very well to make it through these moderating times.

Certainly, Matthew. To give you a clearer picture, international sales account for about 20% of our total sales. Within that, Europe makes up roughly two-thirds of the international segment, while the rest of the world contributes around a third. As Keith mentioned, two-thirds of our business is relatively stable, while the one-third is experiencing nice growth. I want to emphasize the context here, as many people assume our international business is primarily focused on Europe; in reality, it's much more diversified. This is thanks to the excellent efforts of the Hansgrohe team in broadening their sales footprint globally.

Our next question comes from Susan Maklari from Goldman Sachs. Please go ahead. Susan, your line is now open.

Thank you. Good morning, everyone. My first question is dialing in a bit on the consumer. Are you seeing any pushback on pricing from them? And is that in any way impacting some of the moderation in volumes that you're seeing? And how are you thinking about the consumer and their willingness to spend overall?

I believe that overall inflation is starting to impact consumers, not just regarding our products but across the board, including energy and food. That being said, we're still experiencing decent order rates, although slightly moderated in our spa business. We are beginning to reduce our backlog, which is now in the 10 to 12-week range. We're actively working to decrease it while still observing positive order patterns. We're not witnessing a significant downward shift, and typically during times like this in my career, I've noticed a tendency towards private label products, but that hasn't happened so far. I do anticipate that inflation will eventually affect consumer spending habits. However, as of now, the consumer seems to be managing well, supported by substantial home equity and low unemployment rates. The situation is mixed regarding inflation and consumer sentiment, but we aren't seeing a downward trend, and some areas of our business continue to show strong order rates.

Okay. And then turning to the balance sheet, can you talk a little bit about the ability to work down the working capital? How you're thinking about that is perhaps a source of funds in the upcoming quarters? And then, any thoughts in general around capital allocation? You talked about paying down that term loan in the fourth quarter, but how are you thinking about leverage and buybacks and all the different opportunities in general?

Yes, of course, Susan. Regarding our approach to working capital, considering the seasonality of our business, we typically find ourselves using cash during the first five to six months of the year due to the inventory buildup for the summer and spring selling seasons. However, around mid-year, we transition to generating more cash as our working capital cycles through, with our strongest cash generation usually seen in the fourth quarter when both inventories and receivables decrease due to the natural seasonal slowdown. Then, at the start of the new year, the cycle begins again. I do not anticipate any changes to this seasonal pattern in the coming months and quarters. As for our focus on working capital, the teams across our organization are indeed committed to improving it, and it is integrated into our variable compensation plan. From my extensive experience in the business, I’ve seen that working capital often becomes a source of cash generation, especially if volumes decrease. Depending on how the economy plays out in the upcoming quarters, I expect this could be beneficial for the company. Switching to your second question about capital allocation, our strategy hasn’t changed significantly. As Keith mentioned, our top priority is to reinvest in the business as this offers the best returns, whether through growth or maintenance capital, which typically amounts to about 2% to 2.5% of sales and does not heavily impact our cash flow. We also maintain a robust balance sheet, capitalizing on favorable conditions in the debt markets, as we did effectively in 2021. Earlier this year, we took out a $500 million term loan to accelerate our share repurchase efforts, and we remain committed to managing that loan responsibly, as we outlined back in May and June. We are committed to paying dividends, as we believe a company of our size and quality should, with a 30% payout ratio deemed appropriate for our industry. Given our strong cash flow generation, we can also redeploy excess funds toward share repurchases or acquisitions. We will continue to assess the best returns on our surplus cash and explore attractive acquisition opportunities in both our paint and plumbing divisions. We are interested in investments that would enhance growth, whether through acquiring product lines, gaining access to new channels, or entering new geographic markets. If suitable acquisitions aren't available, we will prioritize share repurchases. Overall, we have effectively managed our capital allocation over the years, and I expect that to continue. Keith, is there anything else you’d like to add?

All right. Maybe just some specific context on working capital. Businesses are focused on that as John mentioned its part of our variable compensation scheme. And I would estimate that we'd finish the year in that 16.5% range.

Great. Thank you for all the color and good luck with everything.

Thank you.

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

Hi, thanks for taking my questions. Keith, my first question is just around kind of the rate of change in what you're seeing in underlying market conditions, because at least our sense was that for a while the quarter things were probably okay, but then looking at where you ended up in the quarter and now with the guidance implies, it seems like things may have shifted pretty quickly late, like very late in the quarter. So maybe can you speak to just the cadence and how quickly conditions changed as you've kind of gone through the September and into October? And also what does that really mean in terms of your visibility even into year-end let alone beginning of next year?

Yes, I would say that the slowdown became noticeable in September, late in the quarter. Although it's early in October now, we've already incorporated what we're seeing this month into our guidance. Our best estimate for the year's outcome is reflected in that guidance. We have observed a decline in DIY paint demand, which provides some context. Overall, the slowdown has been quite widespread and not limited to any specific region, channel, or product type. However, we continue to perform well in the professional market, and there is still strong demand in our spa backlog. The slowdown emerged late in the quarter, and it has remained consistent since then, with October's trends included in our guidance.

I understand. Thank you. My follow-up question is specifically regarding the elevated spending in December. I'm curious whether this spending was pre-planned and if the impact is greater because the anticipated volumes did not materialize. Alternatively, is this a new initiative where the spending is intended to address even more significant declines compared to what you're currently experiencing? Any additional insight into the nature of this spending, its purpose, and its relationship to the falling volumes would be appreciated.

We are carefully monitoring SG&A, as John mentioned, and we make decisions based on the most effective use of that budget. I would say we are spending a bit faster than we initially planned. If you have seen our advertisements for Behr paint, particularly for DYNASTY, you can see that it's a strong product. We believe that the return from our advertising spend justifies the investment. We continuously adjust our strategy based on demand trends to ensure we get the best value for our advertising efforts. As John pointed out, I wouldn’t plan on maintaining the same levels of spending in Q4 and for the full year as we did in Q3. We will provide more insights on our brand spend for 2023 in the next quarter.

Yes. Mike, in addition to what Keith mentioned, I would like to point out that if you examine the spending year-over-year, it has increased. The fourth quarter of last year had relatively low spending. This year, however, it is higher, and I believe that the year-over-year comparison is a significant aspect of this change.

Our next question comes from Truman Patterson from Wolfe Research. Please go ahead. Your line is now open.

Hey, good morning, everyone, and thanks for taking my questions. First, I just wanted to touch on the plumbing and paint up margin guides in the fourth quarter. You all have gone through a variety of items already for both segments, but I was wondering if there was also a component of pricing that was previously announced that either wasn't as robust or realized as you all had previously expected in either segment?

No.

No.

No. It's really the aspects we've previously discussed, particularly across both segments, where the reduced volume is creating challenges in plumbing related to overhead absorption. Additionally, the drop in incremental revenue due to that volume is a factor, and foreign exchange has also played a role. We are addressing some operational issues in plumbing, which we expect to resolve by the end of Q1, but overall, our price realization has been quite strong.

Okay. And then just thinking your PRO paint segment, the share gains over the past year, two years, I'm trying to understand if this is a bit more of a kind of general jack of all trades type PRO that you've gained or whether a decent portion of the success has been drawing in converting what we'll call traditional paint dedicated PROs into Home Depot and then, finally embedded in the fourth quarter guidance. Does that actually assume that PRO paint volumes will decline year-over-year on that tough comp?

Yes, there will likely be a slight decline in volumes year-over-year due to this. However, it will be a modest decline. We experienced good volume growth in the most recent quarter, and our PRO paint segment is performing exceptionally well, showing growth in the mid-teens percentage-wise. Last year's Q3 comparison was around 45%. We continuously monitor our data, especially regarding the retention of our market share gains, which includes both new customers and smaller painters or those who focus primarily on painting. Recent data indicates that our net promoter score is quite strong. We are pleased with what the Behr team has accomplished regarding our commitment to maintaining market share. Feedback from our research highlights positive experiences with our products and programs for professionals, as well as the support we receive from Home Depot in serving this market segment. Our confidence is reflected in our outlook. While we anticipate a modest volume decline, we believe we are successfully maintaining our market share compared to last year’s gallons.

Yes, Truman, I would just like to add that we are currently facing some significant comparisons on the PRO side. We saw a 45% increase in Q3, 50% in Q4, and expect over 50% in Q1. The Behr team has done an excellent job executing and capturing this market share. However, when dealing with such substantial comparisons, it can be challenging to achieve even higher results.

Okay. Thank you all and good luck in the coming quarter.

Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.