Good morning, ladies and gentlemen. Welcome to Masco Corporation's Fourth Quarter and Full Year Conference Call. My name is Emily, and I'll 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, Emily, and good morning. Welcome to Masco Corporation's 2022 fourth quarter and full year 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 fourth 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. I'll start this morning with some brief comments on our fourth quarter, and I'll turn to our full year results and our view on 2023. Before I get started, however, I'm sure you saw our announcement that John Sznewajs has decided to retire from Masco, effective at the end of May, and we are working to identify his replacement. John has been a fixture at Masco and in the industry for over 25 years now, and has been an invaluable partner to me, our Board and the investment community during his 15-year tenure as CFO of our company. He will be sorely missed, and we wish John all the best in his future endeavors. Now please turn to Slide 5. In the fourth quarter, our top-line decreased 5%, as we saw lower volumes across most categories, partially offset by significant pricing actions of 9%. Our operating profit declined in the quarter due to the lower volumes, higher operational costs and currency. This was partially offset by pricing actions and expense control as SG&A declined $22 million to 17.4% of sales. Our earnings per share for the quarter were $0.65. Earnings per share benefited from a lower average diluted share count as well as effective tax rate of 24%, lower than our previously guided 25%. Turning to our segments. Plumbing grew 2% in local currency with a 1% decline in North American Plumbing, offset by 7% growth in International Plumbing. Hansgrohe drove market share gains in many key markets, including China, Germany and France. Our International business has continued to execute well, which speaks to the strength of the Hansgrohe team, its strong brands and its ability to gain market share. In North America, our spa business has now worked through its extended backlog and backlogs are now in the normal range of four to six weeks after a tremendous three-year run of more than 50% sales growth. Turning to our Decorative Architectural segment. Sales declined 8% against a strong 15% comp. DIY paint sales declined low double digits, while PRO paint continued its excellent performance with mid-single-digit growth against a tremendous comp of over 50%. Now let's review our full-year performance. Please turn to Slide 6. 2022 was a challenging year with strong growth in the first half followed by notable declines in demand in the second half. Despite these volatile conditions, Masco and our 19,000 employees across the globe responded well to deliver for our customers and our shareholders. For the full year, the company grew sales 4% for a two-year stacked comp of 21%. Strong pricing actions increased sales by 9%, offset by volume declines of 3% and currency impact of 2%. Volume growth in the first half of the year was more than offset by volume declines in the second half. Operating profit declined 7% with an operating margin of 15.6%, and earnings per share increased from $3.70 to $3.77. Total commodity and other inflation was low double digits for the full year. This inflation, together with supply chain challenges, resulted in lower margins for the year despite our significant pricing actions. We are focused on improving our margins by continuing to drive productivity as we apply our 80/20 mindset to return to our pre-pandemic levels. Turning to our segments. Our Plumbing segment grew 6% excluding currency, led by strong growth at both Hansgrohe and Watkins. In our Decorative Architectural segment, full-year growth was 6%. DIY paint grew low single digits for the year, while PRO paint grew over 25%. PRO paint has had a tremendous three-year run of approximately 70% growth and now accounts for one-third of our paint business or over $900 million. This strong performance earned Behr its second consecutive Partner of the Year Award for the Home Depot. We will continue to invest in our paint business to capture further share in both the DIY and PRO markets. Our recently launched adjacent paint categories such as aerosols, interior stains and caulks and sealants have performed well and are expanding the offering to additional stores and expect further share gains in 2023. We will be launching Behr Dynasty Exterior for the summer painting season, expanding the lineup of our number one rated Dynasty paint line. And we will continue to invest in people and capabilities to better serve the PRO painter and continue our strong PRO performance. Turning to capital allocation. Our strong balance sheet allowed us to deploy approximately $1.2 billion in capital during the year. We repurchased 16.6 million shares for $914 million, representing approximately 7% of our outstanding shares. We increased our quarterly dividend 19% and paid $258 million in dividends to shareholders. And we finished the year with net leverage of 1.8 times, providing us ample financial flexibility. Our balanced, disciplined approach to capital allocation and strong cash flow resulted in a return on invested capital of approximately 39%. Lastly, on the ESG front, we believe our business should be part of the solution to the world's climate crisis. Therefore, we have established a target to reduce our emissions by 50% by the year 2030, aligned with science-based targets. This is consistent with our commitment to doing business the right way and our purpose to provide better living possibilities for homes, our environment and our community. I want to thank all our employees for their outstanding efforts throughout 2022. It is a team effort to continue to deliver for our customers and shareholders. Now, turning to 2023. We expect the softening demand trends in the second half of 2022 to continue into 2023 as our markets adjust to increasing interest rates, persistent inflation and tighter consumer spending. Overall, we anticipate volumes to decline in the low double-digit range, offset, to a small extent, by pricing actions. Our current market assumptions for 2023 are as follows. For the North American repair and remodel market, we expect the market to be down approximately low double digits. This is after a very strong three-year run of approximately 20% growth. For the paint market, we expect the DIY paint market to be down high-single digits and the PRO market to decline by mid-single digits. And for our International markets, principally Europe, we expect markets to contract by high-single digits. As a result, we anticipate Masco sales in 2023 to decline approximately 10%. With this lower top-line assumption, we will drive to minimize our decremental margins to be in the low 20% range versus our typical 30% decremental margins. We are focused on recovering the significant cost inflation we experienced over the past two years through operational productivity, supply chain normalization and additional pricing actions. With this focus, we expect our operating margin to be approximately 15% in 2023. Turning to capital allocation. Our strategy remains unchanged. First and foremost, we will invest in our business to maintain and grow our leadership positions and win in the recovery. The second pillar of our capital allocation strategy is to maintain a strong balance sheet with gross debt to EBITDA levels of below 2.5 times. Third, we have a targeted dividend payout ratio of 30%. Our Board declared a 2% increase in our dividend for 2023, which will bring our annual dividend to $1.14 per share and marks the tenth consecutive annual increase. We expect our cash flow conversion to be over 100% in 2023, as we manage our working capital. We will deploy that free cash flow after dividends to share repurchases or acquisitions. Based on our projected free cash flow, we expect to deploy approximately $500 million to share repurchases or acquisitions in 2023, in addition to paying the remaining $200 million of our term loan. Lastly, there is no change to our M&A strategy. We continue to review and selectively pursue opportunities that have the right strategic fit and the right return for Masco. With the actions we are taking to address this more challenging environment, coupled with our continued strong capital deployment, we anticipate earnings per share for 2023 to be in the range of $3.10 to $3.40 per share. While we expect the near-term environment will remain challenging as our markets and the economy adjust to higher interest rates and prices, we believe the long-term fundamentals of our repair and remodel markets are strong. Cyclical factors such as home price appreciation and existing turnover will remain challenged and likely a headwind for 2023. However, structural factors, such as consumers staying in their homes longer, the age of housing stock and high home equity levels will drive increased repair and remodel activity in several ways. Many homeowners have taken advantage of low mortgage rates and are likely to remain in their homes longer. 1.5 million more homes will reach the prime remodeling ages of 20 to 39 years old over the next three years. And home equity levels remain high and can withstand significant pullbacks in home prices and still be above 2019 levels. All of these structural forces provide tailwinds for our business and increase our confidence for a strong repair and remodel market after the economy stabilizes in 2023. We will continue to invest in our brands, capabilities and people to outperform the competition in both the near and long term. With favorable fundamentals and our continued focus on executing our growth strategy, together with our strong free cash flow and capital deployment, we are positioned to continue to drive shareholder value creation for the long term. Now, I'll turn the call over to John to go over our fourth quarter, full year and '23 outlook in more detail.

Thank you, Keith, and good morning, everyone. Before I begin my comments, I want to take a moment to thank Keith, our Board and the entire Masco organization for the opportunity to serve as CFO for more than 15 years. I've had an amazing and fulfilling 27-year career with the company. As I look forward to my retirement, I wish everyone the best. With that, as Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to Slide 8. Sales in the quarter decreased 5% and, excluding currency, decreased 2%. Lower volumes decreased sales by 11%, partially offset by net selling prices, which increased sales by 9%. In local currency, North American sales decreased 5%. Lower volume decreased sales by 14%, partially offset by higher net selling prices, which increased sales by 10%. In local currency, International sales increased 7%, driven by increased selling prices. As it relates to inventory, we believe channel inventories have stabilized as we saw sell-through approximately equal to sell-in and destocking had minimal impact in the quarter. Our gross margin of 29.5% was impacted by lower volumes, and higher year-over-year operational costs in the quarter. Our SG&A as a percentage of sales improved 20 basis points to 17.4% through continued cost discipline. Our operating profit in the fourth quarter was $234 million and operating margin was 12.2%. 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 $0.65. I would like to note that this performance was based on a tax rate of 24% versus the previously guided 25% tax rate due to the implementation of our tax planning strategies. Because of this assumption, we have provided restated adjusted EPS numbers for the first three quarters of 2022 in the appendix on Slide 28. Turning to the full year 2022. Sales increased 4% over the prior year against a healthy comp of 17% for full year 2021. Excluding currency, sales increased 6%. Higher net selling prices increased sales by 9%, partially offset by lower volumes, which decreased sales by 3%. In local currency, North American sales increased 6% and the International sales increased 8%. Our SG&A as a percent of sales decreased 90 basis points to 16%. Operating profit for the full year was $1.4 billion and operating margin was 15.6%. Lastly, our EPS increased 2% to $3.77. This amount also assumes a tax rate of 24% versus a previously guided 25%, which favorably impacted full year EPS by $0.05. Our adjusted EPS calculation for 2023 will continue to assume a 24% tax rate. I want to thank our employees across the globe for their hard work and dedication to achieve these solid results during a challenging year. Turning to Slide 9. Plumbing sales in the quarter decreased 3%. Excluding the impact of currency, sales grew 2%. Pricing contributed 9% to growth and volume decreased sales by 7%. North American Plumbing sales decreased 1% in local currency. This was driven by lower demand we started to experience in the third quarter. Lower demand was fairly broad-based across product categories and channels. International Plumbing sales increased 7% in local currency. Hansgrohe grew sales in many of their key markets, most notably China, Germany and France. Segment operating profit in the fourth quarter was $148 million and operating margin was 12.4%. Operating profit was impacted by lower volumes, higher operational costs and currency, partially offset by higher net selling prices. Turning to the full year 2022, Plumbing sales increased 2%. Excluding currency, sales increased 6% with net selling prices contributing 7% to growth, partially offset by lower volume mix, which decreased sales by 1%. In local currency, North American Plumbing sales grew 5% and International Plumbing sales increased 8%. Full year operating profit was $834 million, with an operating margin of 15.9%. Turning to Slide 10. Decorative Architectural sales decreased 8% for the fourth quarter against a 15% comp. Our PRO paint sales increased mid-single digits against a robust comp of over 50% in the fourth quarter 2021, as we continue to see solid demand for our PRO paint offering, strong brands and high-quality products. Our DIY paint sales declined low double digits versus prior year. Additionally, our lighting and builders' hardware businesses, in aggregate, declined mid-teens in the quarter against a solid mid-single-digit comp. Operating profit was $101 million in the quarter and operating margin was 13.9%. Operating profit was impacted by lower volumes and higher material costs, partially offset by higher net selling prices. Turning to the full year 2022, sales increased 6%, driven by low single-digit growth in our DIY paint business and outstanding PRO paint growth of over 25%. Full year operating income was $608 million and operating margin was 17.7%. Turning to Slide 11. Our year-end balance sheet is strong with net debt to EBITDA at 1.8 times. We ended the quarter with approximately $1.5 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Working capital as a percent of sales was 17.4% at year-end. In 2023, with expected lower volumes and less supply chain disruptions, we anticipate working capital as a percent of sales to improve and be approximately 16.5% at year-end. In 2022, we also paid down $300 million of the $500 million term loan that we borrowed in the second quarter of the year. Finally, during 2022, we repurchased 16.6 million shares for $914 million and returned $258 million to shareholders through dividends. Now, let's turn to Slide 12 and review our outlook for 2023. I'd like to preface our guidance by reminding everyone that these are uncertain times, which makes forecasting extremely challenging. For Masco overall, we are planning for volumes to be down in the low double-digit range, partially offset by low single-digit pricing. Based on this assumption, we expect 2023 sales to decline approximately 10%, with operating margins of approximately 15%. Currency is projected to have minimal impact on our 2023 results. Our SG&A as a percentage of sales trended below our normal levels during the pandemic. However, as we continue to invest in our businesses for future growth while maintaining cost discipline, we expect this percentage to increase back to a more normalized pre-pandemic level to be around 17.5% for 2023. As always, we will take appropriate actions to address our costs as the year develops based on market conditions. Operating margins will be impacted more in the first half of the year due to lower volumes and strong year-over-year sales comps, particularly in the Decorative Architectural segment. As we previously discussed, operating profit in the first quarter will also be impacted by the higher operational costs we experienced starting in Q2 last year, particularly in the Plumbing segment. As we think about the cadence for the year, we expect our Q1 sales and margin profile to look similar to Q4 2022, with our year-over-year operating margins expected to improve each quarter thereafter. In our Plumbing segment, we expect 2023 sales to decline in the range of 10% to 14%. We anticipate the full-year Plumbing margins will be roughly flat with 2022 segment margins at approximately 16%. Lower volumes and, in the first quarter, higher operational costs will impact margins, with favorable selling price increases partially offsetting these headwinds. In our Decorative Architectural segment, we expect 2023 sales to decline in the range of 5% to 10%. Looking specifically at paint for 2023, we currently anticipate our DIY business to decrease high-single digits and our PRO business to decrease mid-single digits, as we cycle over 25% PRO paint growth in 2022. We anticipate the full-year Decorative Architectural margin to be approximately 16%. This margin is largely due to our significant pricing actions in this segment that typically only recover the dollar amount of the inflation. As a result, all else equal, operating profit dollars remain neutral from cost recovery pricing actions, but results in margin compression. We are also planning an increased investment in people and capabilities in 2023 to drive future growth in our PRO paint business. As it relates to share repurchases, we have begun modest share repurchases and expect to spend approximately $500 million on share repurchases, with this activity being weighted more towards the second half of the year. Finally, as Keith mentioned earlier, our 2023 EPS estimate is $3.10 to $3.40. This assumes a 226 million average diluted share count for the year and a 24% effective tax rate. Additional modeling assumptions for 2023 can be found on Slide 15 in our earnings deck. With that, I'd like to open up the call for Q&A.

Thank you. Our first question comes from Michael Rehaut with J.P. Morgan. Please go ahead, Michael.

Thank you very much. John, I wish you all the best. It has truly been a pleasure working with you over the past 15 years. You've been a true professional throughout. Now, regarding the 2023 guidance, I appreciate the volume assumptions, which seem more conservative than those of your peers and are fitting for this earnings season. I want to focus on the Decorative margins and your comments about the cost inflation recovery not incorporating margin, leading to a margin decline. Historically, Decorative has maintained margins above 18% over the last 10 to 15 years, so this would be somewhat lower. I was hoping to understand your outlook for the business in 2024 and 2025, especially regarding whether cost deflation could potentially reverse some of the margin contraction this year. Additionally, are there any structural changes in the business, such as PRO having slightly lower margins or other factors that might impact the long-term average?

Hey, Mike, this is Keith. As you mentioned, the last two years have truly been unusual, especially with the inflation rates and supply chain issues affecting our margins. We are committed to reducing operational costs and making necessary price adjustments. When examining the significant impact of this inflation, especially in our paint business, we have seen strong dollar performance, but there has been considerable margin erosion due to the dollar-only coverage at these levels. Therefore, we will implement additional pricing adjustments in certain areas of our business as the year progresses. We believe that the current levels we are experiencing in 2023 will serve as a foundation for future growth. Considering our 30% incremental leverage on increased volume, this will help enhance our margins. We expect to achieve notable margin expansion as we advance through 2023. We also believe this downturn will be relatively short-lived. While I hesitate to specify a target, I do believe the margins we experienced historically before the pandemic are where our business is headed.

Mike, in addition to Keith's comments, I can provide more details specifically about the Decorative Architectural segment and its margins. To address your point, we are recovering our dollar costs and managing inflation. To illustrate, a 10% price increase in this segment would lead to approximately 180 basis points of margin compression. Despite maintaining our operating dollars at flat levels, what we are observing now and what we anticipate for 2023 is that a significant part of our guidance compared to historical performance is due to the cost recovery related to inflation. In both Keith's and my prepared remarks, we mentioned plans for incremental investments in the Decorative Architectural segment, particularly in the PRO business, which also affects 2023 margins. Additionally, regarding your point about commodities, if there is a decrease in input costs, we could see margin expansion due to potential pricing concessions when commodities decline. This explains the difference between the current 16% margin and our historical margin levels.

Okay. No, that's a great answer. And before I ask my second question, perhaps you could fold it in. You highlighted the incremental investment in PRO. I'd be curious to know how much of a drag that might be in this current upcoming year. But secondly, I mentioned also that overall volume expectations for '23, I think, being much more conservative than some of your peers and we're certainly in that direction ourselves in terms of how we're thinking about things, would be helpful, and sorry if I missed that earlier, if you think about the low double-digit volume decline, you kind of broke it out between, I believe, how you're thinking or at least on a top-line basis the two segments. But from an end market perspective, I'd assume that repair/remodel end market demand, you're thinking about in a similar level, but correct me if I'm wrong. And also, how that other end markets that you play in such as Europe or new res, which is admittedly pretty small, how those different end markets play into the down low double digits? And if you're expecting that to kind of accelerate as the year progresses? Thanks.

It might be useful for me to outline our main markets and share our projections regarding overall market performance. The most significant one is obviously the North American repair and remodeling market, where we anticipate a decline of low double digits. For international markets, which represent a considerable part of our business, we expect a decline in the high single digits. Regarding the paint market, we differentiate between the DIY and PRO segments. We estimate that the DIY market will decline in the high single digits, while the PRO market is expected to decrease in the mid-single digits. To arrive at these figures, we analyze trends and data from industry research and consider our performance in the latter half of 2022, combining that with our focus on repair and remodeling to formulate our estimates. We've encountered various perspectives from different stakeholders, but it ultimately comes down to our viewpoint. If views differ, it is evident that we have consistently achieved a 30% drop in incrementals. In light of the expected pullbacks in 2023, we believe we will experience decrementals that outperform that 30%. We are prepared to adjust our business as necessary, demonstrating effective cost control and managing challenges linked to variable productivity while optimizing our supply chains for the new volume levels. Moreover, we remain committed to investing in critical growth drivers for our business, particularly in the PRO and PRO paint sectors, as well as focusing on high-growth markets like China and Europe. Additionally, we will continue to support our core business in North America. I hope this provides insight into our perspective and the rationale behind our guidance, emphasizing our readiness to adapt in times of volatility.

Great.

Thank you very much, everyone. John, I'm sure you'll hear a lot of this. It's been a pleasure, and I wish you the best of luck. My first question is somewhat broad. I understand that there are uncertainties, and you might not want to overly commit to your outlook for the latter part of FY '23. However, you did mention some insights regarding quarterly performance, which I found very informative. I'm curious if you believe that by the end of the year, we might see some positive comparisons in sales and margins as you anticipate improvements on a quarter-by-quarter basis throughout 2023.

So, Stephen, yes, the guidance we provided indicates that Q1 will resemble Q4 of last year. From there, we expect operating margins to improve on a year-over-year basis each quarter. Regarding your question about the possibility of positive sales comparisons by year-end, considering the expected approximately 10% decline in sales for the year, it's difficult to predict how Q4 will unfold at this point. However, at this time, I wouldn't anticipate positive comparisons in Q4.

Thanks for that information. I have a broader question regarding your expectations. Clearly, the fourth quarter was a bit below what you anticipated. I'm particularly intrigued by the timing of your comments, which coincided with the peak of mortgage rates in the U.S. Since late October, there appears to be a growing sentiment in the U.S. housing market that we might have identified the bottom. January was unexpectedly strong. I understand you're likely to say that one month doesn't define a quarter, but could you provide some insights into what factors deteriorated compared to your expectations, especially considering that the housing market, which is often a leading indicator, seems to be improving?

Yes. I’ll start off and then maybe Keith can add some thoughts. I understand you’re linking this to the housing market, but I want to remind everyone that the new construction market only accounts for about 10% of our revenue. Our outlook for the fourth quarter is driven more by the demand we’re observing and consumer behavior. Additionally, as we look ahead to 2023, it's important to note, as Keith mentioned in his remarks, that our spa business, which experienced significant growth during the pandemic, has seen its backlogs return to more normal levels. Consequently, considering the high-cost nature of that product category, we anticipate it will have a greater impact on Plumbing growth in 2023. Overall, it reflects our current insights into consumer activity. Keith, would you like to add anything?

Certainly. Stephen, regarding the fundamental question of how improvements could impact our business, we've discussed this in relation to our dropdowns and how we handle fluctuations. It's important to emphasize that this is a volatile time and situations can shift. A month doesn’t define a quarter, nor does a quarter define the year, especially when considering our business and industry dynamics from June or July last year. We are focusing our organization on adaptability and monitoring signals. When it comes to industry improvements, interest rates are a significant factor. We primarily operate in repair and remodeling with some new construction, so factors like rising home prices and better-than-expected home equity could influence our assumptions. An increase in existing home sales would certainly be beneficial. In terms of our international performance, if we see better-than-anticipated GDP growth in the U.S., Europe, and China, that would positively impact us, as we are closely tied to consumer confidence. Additionally, our ability to gain more market share than expected could also drive performance. Overall, our business is designed for variability; we cater to both large and small projects effectively. We are a premium brand leader in different regions, including China and Europe, and maintain a strong foundation in North America. These attributes make us well-suited to navigate these changing conditions, and there are factors that could lead to better-than-expected overall performance in the macroeconomic environment.

Great. Thanks a lot, guys.

Good morning. Thank you for taking my questions. John, congratulations on your achievements; it's been quite a journey, and I look forward to discussing more with you later. I have a couple of follow-ups. Regarding costs, I found the earlier conversation with Mike about the paint sector informative. Could you provide insight into how you're assessing costs in the paint business, especially in light of what some competitors are saying about potential deflation in the coming quarters? Additionally, let's talk about the Plumbing segment. It seems there might be positive trends now that copper prices are up. Can you share more details on what you’re observing regarding Plumbing costs as we move through this year?

Thanks, Mike. This is Keith. I'll start with an overview of the paint raw material situation to share our insights on inflation. In our overall paint raw material costs, we've noticed some relief in resin feedstocks; however, titanium dioxide and other specialty chemicals remain high and have not decreased. Overall, we continue to see elevated costs in the material basket. Regarding indirect costs, which make up a substantial part of our raw materials and manufacturing process, we're still experiencing inflation, which poses a challenge. This includes costs for items like pallets, transportation, and labor, all of which remain high. While we've seen some slight moderation recently, raw material costs continue to stay relatively high. We are still dealing with significant cost increases that have accumulated over the last couple of years. Therefore, we currently don't have any significant expectations for raw material deflation built into our plans for 2023, based on what we are observing from our suppliers and the market.

Mike, I’ll address the Plumbing side. As you know, base metals like copper and zinc, which are used in our Plumbing products, saw significant inflation this past year, with increases in the low double digits. Prices peaked in the second quarter of 2022, but we observed some moderation in the third and fourth quarters. Since the beginning of this year, both copper and zinc prices have ticked up slightly. Although they remain elevated, they are below their peak levels. Ocean freight costs, another key input for us, have also moderated but remain above historical norms. Wage inflation continues to be a challenge for us. Additionally, energy costs in Europe are impacting the Plumbing segment, offsetting some of the benefits from the moderation in raw material inflation. Overall, we anticipate low single-digit deflation in our Plumbing input costs for 2023 as we work to recover from the cost increases we’ve faced over the past couple of years.

Okay. That's great. Thank you, both. That's very helpful. And then, on my follow-up question, I wanted to ask about the SG&A. So, the comment that it's going back to 17.5%, certainly, conceptually understand the idea of needing to invest in the business and some of the baskets qualitatively that you've talked about. But when I look at the numbers, I mean, what that really implies is you're guiding sales to be down, give or take, $900 million year-on-year with SG&A dollars down immaterial now maybe $20 million, $25 million. So that seems like an awful lot of reinvestment. Maybe you can help us understand a little bit more bucket out quantitatively some of the things that you've discussed in terms of what's impacting the sticky outlook on SG&A dollars.

Yes, Mike, I'll provide a few insights, and then Keith can add any additional points. You're correct that we're anticipating an increase in SG&A as a percentage of sales, primarily due to our projected sales decline of 10% for the year, which will affect our margins. I’d like to highlight a couple of factors. First, we are reinvesting in SG&A, which includes investments in PRO, such as hiring additional PRO sales representatives and expanding our delivery capabilities. Additionally, we are returning to some large trade shows that we had paused during the pandemic, which will incur expenses for us. Lastly, there were certain variable costs in 2022 that were unusually low, and we expect them to return to more typical levels in 2023. These are a few key elements that will influence our SG&A for the upcoming year. Keith, is there anything else you’d like to add?

Yes. Mike, considering the overall situation, the economy is recovering, and our approach to growth and market advocacy requires us to be present in those markets. You attended KBIS in Las Vegas, which is a major national Kitchen and Bath Show in the U.S. There's another show, ISH, that occurs every two years and is even larger. We have made substantial investments there as part of our business strategy, and this will be the first time in four years that it is happening again this year. We are also investing globally to establish advocacy for our brands and introduce new products in a more traditional manner. In Europe, at ISH, we have had a significant competitor who has chosen not to reinvest, while we believe continuing to invest is essential. We are introducing a new product range with Hansgrohe, including our showers and faucet launch, and expanding into adjacent products like bath furniture as we grow our brand. Our investments are focused on sustained growth and momentum. As John mentioned, we are targeting the PRO market, where our loyalty program has been developing over the past three years. We have gained significant market share and plan to continue outpacing that sector. We are adding personnel to attract new customers, particularly in painting. This has proven effective as customers who try our products tend to stick with them. We are dedicated to enhancing our share gains, which requires investment. Our operational strategies include online ordering with in-store pickup, broader delivery options, and expanding the PRO sales team, all of which are integral to our strategy. Ultimately, we are committed to managing our costs during downturns while investing wisely to emerge stronger from this recovery, which we believe is the right strategy for our business.

That's great. Very comprehensive. Thank you both.

Good morning, everyone. Thanks for taking the questions. I also want to extend my best wishes to John. Apologies if I missed this. I had some call issues. But on the revenue guide for Plumbing, the down 10% to 14%, I think you had talked about Q1 sales results for the whole business perhaps looking similar to Q4. So, I'm assuming that you're saying something similar for Plumbing. And so therefore, the assumption would be a rather sharp deceleration in the Plumbing segment beyond Q1. I guess, number one, correct me if I'm wrong. But number two, can you sort of help us out with any additional cadence there? And any kind of specifics around whether it's the spa business that's moving the needle or some assumed destocking? Anything along those lines to help us on that Plumbing guide? Thank you.

Yes, Matthew. I'll provide some insights on that. You raised a good point in your question. A part of what we anticipate for the Plumbing segment this year is influenced by the spa business, as it represents a high-value product and, as Keith noted earlier, it's back to normalized backlog levels. That's one aspect to consider. Additionally, if we analyze the sales trend throughout 2022, Plumbing experienced significantly less decline compared to our paint business during that time. As we move into 2023, partially due to the spa business and also because of the robust comparisons they will encounter in the early part of the year, we might expect to see a bit more softness in the Plumbing segment due to those strong comparison figures.

Matthew, you mentioned destocking, and I know there's been talk out in the industry of that in various channels. We did see, I'll call it, moderate to very moderate destocking in Plumbing in Q4, a little bit in North American wholesale and less in retail. It really wasn't significantly material for us, and we're not expecting significant headwinds from destocking in 2023.

All right. Thank you for that. That's super helpful. And then, just second one, sticking with Plumbing on the margin side and the guide there. I mean it seems like the assumption on the decrementals, I guess, on the softer end of the low 20%-s you mentioned for the entire business for the year. And I heard you say earlier, you're not assuming much in terms of raw material tailwinds for the business. So, just kind of any help on kind of what you are assuming there? Is it ocean freight, et cetera? What are some of the areas where you feel like you can sort of manage that decremental in 2023? Thank you.

The biggest impact is the planned volume reduction. So, the way we impact that is to drive productivity and to reset our manufacturing and supply chain. So, as you might imagine, we're working hard to equalize shifts to make sure we're continuing to drive productivity in the variable overhead line. We always drive and focus on our direct labor and shifting that direct labor down. And we have had, as we talked about, really starting in the back half of last year's operational and supply chain challenges, and it really is on rhythm and getting our supply base to deliver us and delivered in a way that's synchronous with what we expect and how we have our build scheduled, so we can be very efficient. That's still a challenge. Now we're significantly better. That challenge will remain through Q1, but coming out of Q1, we're going to have that behind us and have our productivity where we expect it to be. So, lower volumes is the principal driver of the margin pressure, and then higher costs that we'll work through early in the year.

Got it. All right. Thanks, Keith. Thank, John. Good luck, guys.

Thank you, Matt.

Thanks, Matt.

Good morning, guys. Thank you for taking my questions. And John, best of luck with everything. The first question I guess is, are you guys anticipating implementing additional pricing actions in 2023, or is it really just largely carryover pricing at this point?

No, we'll have some additional actions. There are spots of our Plumbing business that we're looking at, and we'll be implementing price. And then, in our Decorative business, as I mentioned with our commodity basket, we're continuing to see elevation there, and we'll watch that.

Got it. Okay. And then, I think, the outlook for $500 million of either acquisitions or buybacks, I think you mentioned buybacks would be sort of back-half weighted. Just more curious on the acquisition front. I mean, what you're seeing in terms of pipeline there?

Yes, I'll take that, John. Our corporate development team is active, and we as a management team are engaged in the acquisition process. However, given the current environment, the conversations are not as productive due to some softening performance in businesses during the latter half of '22. That said, opportunities can arise unexpectedly, so we need to remain proactive. We have our team actively searching, but it's challenging to predict what may happen throughout '23, which is why we are advising everyone to focus more on share repurchases at this time. I don't know if there's...

Yes. I think it remains to be seen, but the cost of capital and the leverage limitation that, that represents could make it a little bit more difficult for financial buyers and could help us. But we are seeing a little bit of a slower deal flow, but again, very active in the cultivation trying to make sure that we drive strategic fit and right return.

Hi, thanks. Just curious on the DIY paint side with down low double digits in 2023. This category has been slowly up against some tough comps, but it has been trending lower from a growth perspective. Just wondering, are we at pre-pandemic levels for DIY paint? And any perspective of how we are there relative to history would be great.

Yes. As we evaluate our DIY paint volumes, we are currently at approximately 2019 levels, or perhaps slightly below them. The market seems to have returned to those 2019 figures.

I would tell you that the fundamentals and how we look at that market are still supportive of long-term growth for DIY, particularly the millennials. That's a big cohort. They're clearly influxing into the housing market. And we've seen, based on our basic research that they're more than willing to pick up a paint brush and do their own painting. So, I think that's a position that will bode well for us as our brand gains more and more traction and really a leadership position with those millennials when they look at the data that we see.

And the other thing I would point out, Garik, and I should have mentioned this earlier, to the extent that the economy does soften, you do tend to see a shift more towards DIY consumers take on projects, more projects themselves as opposed to have the projects done for them. So that could be a tailwind for us as we go into 2023.

If you think about the pandemic and how that played out as it relates to a significant growth early in the pandemic with DIY, and then as that fear, if you will, of folks coming into your house abated as the pandemic was more under control, that shifted over to PRO growth. And I think the position that we have with our outstanding partnership with the Home Depot, in terms of being able to cover that variability in those shifts, our PRO business is very strong now. Different shifts in the market and potentially different shifts from one part of that market, say DIY to PRO. We like our brand, and we like what our brand represents to both the end consumer as well as the professional.

No, great. Thanks for the color. On the pricing side, you mentioned you're looking at some targeted price increases. I'm curious just given some of the softening in demand, are you seeing any pushback on pricing? Any impact on mix at all?

Again, where we're talking about our targeted price increases for 2023, it's mainly in Plumbing. We've got some international price increases planned in some spots. I think we have some on certain parts of our assortment in North America. So that gives you a little bit of color. In terms of pushback, to date, not really. I think it's all about the price value relationship and the service that we bring, and our customers and channels are well aware of the costs that we're experiencing, not only in the direct material front, but really, as I talked a little bit before referencing our paint basket, the way we ship our packaging, our freight costs, our labor costs, those sorts of things. So, I would say not any more pushback than you would normally see. On the mix front, a little bit of trade down. Slight trade down in our Plumbing business we've seen in spots, but really nothing that I would call significant at all in '22 and nor do we expect it in '23. And that's part of that similar to our coverage across DIY and PRO in paint as it relates to being able to address market swings. We also have broad assortments. And we cover price points, and we have styles and various technologies that fit for different people. So, we're prepared for those kinds of changes if they come, but we're really not anticipating very much mix shift at all.

And Garik, the one point that I would just add to Keith's good comment is, as you think about price for '23, the significant majority of price will be carryover price rather than newly implemented price in 2023. So, I just want to make sure that, that distinction is very clear to everyone.

Thank you. I would like to revisit the guidance in Plumbing. You've mentioned several areas performing well, especially the spa business, which is coming off strong figures. Can you provide any additional details? The decline you are predicting seems to be greater than what you are assuming for remodel. What other factors are influencing this situation?

I think John mentioned this earlier, Keith. If we consider our paint business, it adjusted volume-wise around midyear. The Plumbing business took a bit longer to adjust. This is likely due to larger backlogs and bigger projects that didn't change as much. So, I believe that carryover contributes to a slightly greater volume reduction forecast for Plumbing compared to paint.

And will it be all the same cadence you talked about earlier, or will the decline be more ratably during the year based on your forecast?

I believe, John, it will follow a similar pattern as we discussed earlier, with a greater impact in the first half of the year due to the stronger comparisons we are facing, and then moving into easier comparisons in the latter half of the year.

I'd like to thank all of you for joining us on the call this morning and for your interest in Masco. This concludes today's call.

Thank you, everyone, for joining us today. The call has now concluded, and you may disconnect your lines.