Adam Baumgarten

Adam Baumgarten asked for the drivers behind the implied worsening year-over-year margin pressure in the fourth quarter guidance, including the impact of recent acquisitions, pricing, and price-cost dynamics.

Answer

Rob Kuhns (CFO) identified key drivers for Q4 margin pressure as a continued price-cost headwind (expected to be slightly worse than Q3), the initial negative impact on overall EBITDA from the SPI acquisition (due to its lower initial EBITDA margin before synergies), and ongoing volume headwinds exacerbated by seasonality.

Adam Baumgarten of Zelman & Associates inquired if the year-over-year price contribution is expected to moderate as 2025 progresses, given that the benefit is largely from carryover pricing from mid-2024.

Answer

CFO Rob Kuhns confirmed that this moderation is factored into the company's guidance. He specified that pricing on the installation side, tied to last year's fiberglass increases, is expected to ease, while pricing on certain commercial and industrial products in the Specialty Distribution segment should hold up better throughout the year.

Adam Baumgarten of Zelman & Associates asked for a quantification of the negative impact from spray foam price declines on overall pricing. He also sought to clarify if the tightened guidance was due solely to a weaker residential outlook or if the C&I outlook had also changed.

Answer

CFO Rob Kuhns quantified the headwind from spray foam price decreases at approximately 130 basis points on price. He clarified that the guidance reduction was primarily driven by the residential market, specifically delays in the multifamily backlog, and also noted a combined ~$18 million impact from hurricanes in Q3 and Q4. The C&I outlook remained consistent with the previous quarter's view.

Adam Baumgarten asked how the North America power and hand tools volumes performed relative to the overall market in the third quarter.

Answer

Chris Nelson, President and CEO, indicated that volumes were relatively in line with the market. He noted that the DEWALT brand continued to grow year-over-year, pacing the market, and other core brands were also showing progress in line with market levels, despite volatility from tariff policy, pricing, and promotional calendars.

Adam Baumgarten asked how North America power and hand tools volumes compared to the overall market in the third quarter of 2025.

Answer

President and CEO Chris Nelson believes their volumes were relatively in line with the market, noting that the DEWALT brand continued to grow year-over-year and was pacing the market. He added that other core brands are also showing progress in line with market levels, acknowledging market volatility due to tariff policy, pricing, and promotional calendar changes.

Adam Baumgarten asked about the promotional environment, questioning if the solid holiday promotional season had a negative impact on Q4 gross margin and what the outlook is for promotions in 2025.

Answer

CEO Donald Allan stated that while promotions were a slight marginal headwind, the company was satisfied with the execution and growth it delivered, noting 2024 was the first full year of a return to a traditional promotional cadence. COO Chris Nelson added that while there was a modest price impact, the promotional space captured was for accretive products, making the company feel good about its overall promotional positioning.

Adam Baumgarten asked about the expected quarterly path for gross margins, specifically if Q1 2025 would see a sequential step-down from Q4 2024 before moving higher, similar to the pattern observed in the current year.

Answer

EVP and CFO Pat Hallinan advised against getting too precise on the Q4 to Q1 sequential move, noting that variability is driven by the mix of the outdoor business and the state of the auto market correction. He suggested that broadly, the first half of 2025 would see gross margins in the 31% range, plus or minus, but declined to give specific quarter-over-quarter flow.

Adam Baumgarten asked for clarification on the timing-related issues in the builders' hardware business, specifically if the Q3 headwind implies a recovery in Q4 such that the full-year impact would be minimal. He also inquired about the situation on the ground in China, given that the plumbing market there seemed to be a bigger headwind in Q3 than in prior quarters.

Answer

Rick Westenberg, VP and CFO, confirmed that the Q3 adverse impact in builders' hardware was timing-related and not expected to be significant for the full year, implying a Q4 recovery. Jon Nudi, President and CEO, described the China plumbing market as challenged by the housing market and stronger local competitors, noting it was indeed a more significant headwind in Q3 compared to the first half of the year, though Masco believes it is performing at least as well as major global competitors.

Adam Baumgarten asked if the timing-related issues in builders' hardware in Q3 would imply minimal full-year impact due to Q4 shipments, and sought details on the increased headwind observed in the China plumbing market in Q3.

Answer

VP and CFO Rick Westenberg confirmed that the Q3 adverse impact on builders' hardware is not expected to be significant for the full year, implying Q4 shipments would normalize. President and CEO Jon Nudi described the China market as challenged due to housing market issues and stronger local competitors, noting it was a bigger headwind in Q3 than in the first half, but Masco is performing relatively well against global competitors.

Adam Baumgarten asked if Masco has noticed any competitive changes at The Home Depot since the PPG architectural divestiture. He also sought clarification on whether the 2025 guidance embeds a net negative impact from the incremental China tariffs.

Answer

President and CEO Keith Allman responded that they have not observed any notable changes in the competitive dynamic. CFO Rick Westenberg confirmed that while mitigation actions are underway, the 2025 guidance range does factor in the net impact of tariffs, which the company is working to minimize.

Adam Baumgarten asked about the impact of home center mix on Mineral Fiber's AUV in Q3, inquiring if this mix headwind would abate in Q4 and if an August price increase would lead to AUV improvement. He also questioned the growth outlook for Architectural Specialties in 2026, considering strong backlog and order commentary.

Answer

CEO Vic Grizzle explained that increased retail channel strength, with its lower AUV products, impacted Q3 mix but is not expected to continue into Q4, though retail dynamics are unpredictable. CFO Chris Calzaretta reiterated expectations for strong Q4 AUV and ~6% for the full year. Vic Grizzle added that Architectural Specialties' backlog indicates continued growth in 2026, driven by market penetration.

Adam Baumgarten asked about the impact of home center mix on Average Unit Value (AUV) in Q3 2025 and whether this mix headwind is expected to abate in Q4, especially with the August price increase. He also inquired about Architectural Specialties' growth expectations for 2026, given the strong backlog and order commentary, and any specific end markets driving this excitement.

Answer

CEO Vic Grizzle explained that increased retail (home center) volume, while profitable, has a lower AUV and can temper overall mix, as observed in Q3. He does not expect this specific trend to continue into Q4, though retail volume can be unpredictable. CFO Chris Calzaretta reiterated expectations for strong Q4 AUV and approximately 6% for the full year. Mr. Grizzle anticipates continued growth for Architectural Specialties in 2026, driven by market penetration and a robust backlog, encompassing both organic and inorganic contributions.

Adam Baumgarten from Zelman & Associates asked for confirmation on the timing and potential magnitude of the year's second price increase. He also inquired about current trends in the education market following the roll-off of ESSER funding.

Answer

CFO Christopher Calzaretta affirmed the company is planning on its normal twice-a-year pricing cadence, with the size of the next increase dependent on the evolving tariff and cost environment. CEO Victor Grizzle addressed the education market, stating that they have not seen a material falloff in activity and that the vertical remains active. He noted they will be watching the key summer season closely.

Adam Baumgarten questioned if Average Unit Value (AUV) would accelerate in Q4 following the August price increase and asked about the future trend for Mineral Fiber SG&A expenses.

Answer

CEO Vic Grizzle expects AUV to accelerate in Q4, driven by a normalization of the mix component, which was flat in Q3. CFO Chris Calzaretta added that SG&A should see some moderation in Q4 and that the company aims to lower SG&A as a percentage of sales below 20% in 2025 by leveraging past investments.

Adam Baumgarten asked if the industry is now more coordinated in implementing tariff-driven price increases compared to the more hectic period over the summer. He also inquired if there are any signs of slowing demand in the commercial channel, which has been an outperformer.

Answer

Chairman and CEO Jeff Lorberbaum noted that while the industry faces similar tariff impacts and has announced increases, coordination is not explicit, and it will take until early next year for the market to equalize due to varying inventories and strategies. President and COO Paul De Cock confirmed that the commercial channel continues to outperform residential, with stable backlogs, but acknowledged some slowing activity in certain markets and segments, which Mohawk is addressing by pushing higher-end products.

Adam Baumgarten sought to clarify if the positive price/mix in Flooring North America and Global Ceramic was purely mix-driven or if pricing was also a factor. He also asked if lower oil prices would provide a cost benefit later in the year.

Answer

President and COO Paul De Cock confirmed that selective price increases were implemented for premium ceramic and laminate products to offset inflation. Executive James Brunk noted that while lower natural gas prices should provide a benefit later in the year, a significant impact from raw materials like petrochemicals has not been seen yet and would also be a second-half event if it materializes.

Adam Baumgarten asked if Mohawk saw a benefit from customer inventory stocking in September ahead of a potential port strike. He also inquired about which specific commercial verticals were showing the most weakness.

Answer

Chairman and CEO Jeff Lorberbaum acknowledged a belief that some customers took on extra inventory in anticipation of a strike but said it was hard to quantify. Regarding commercial verticals, he noted that hospitality, government, and education are outperforming, and the company is focusing its attention there. He also mentioned that commercial pricing is more resilient but that the channel has a longer tail in a downturn.

Adam Baumgarten from Zelman & Associates asked about the underlying assumptions for the R&R and new construction markets in the flat revenue guidance, the basis for confidence in a second-half recovery, and current pricing behavior in the homebuilder channel.

Answer

President & CEO Scott Culbreth stated the forecast assumes a similar pattern for both R&R and new construction: a challenged first half followed by a second-half recovery. Confidence is based on commentary from home center partners and expectations for an improved new construction market. He noted that while list pricing has held, the company is seeing negative mix shifts and lower cabinet counts per home from builders.

Adam Baumgarten requested a sales breakdown by the company's three main end channels for the quarter. He also asked whether the maintained guidance assumes a continuation of current trends or a potential pickup in demand beyond easier comparisons.

Answer

Executive M. Culbreth did not provide a specific channel breakdown but confirmed all channels were down. He uniquely noted that while new construction unit growth was positive, it was offset by negative price/mix. Culbreth clarified that the guidance assumes a 'steady as it goes' environment, with no major macro improvements or rate changes factored in.

Adam Baumgarten asked for more detail on the updated full-year outlook, specifically how revenue is expected to trend over the next three quarters. He also inquired about input cost pressures and the company's corresponding pricing strategy, including the potential size of increases needed.

Answer

Executive M. Culbreth stated that the company would not provide a quarterly forecast due to market uncertainty but remains confident in the full-year projection. Regarding costs, Culbreth confirmed that pricing actions are variable by channel and that an increase has already been announced in the dealer channel to mitigate inflationary pressures.

Adam Baumgarten asked for confirmation on whether the company's full-year guidance assumes that the sell-through rate will continue at a mid- to high single-digit pace for the remainder of the year.

Answer

CEO Bryan Fairbanks confirmed that the full-year sales guidance of 5% to 7% growth is based on that sell-through assumption. He emphasized that the most critical quarters for observing this sell-through are Q2 and Q3, which represent the peak season for the business.

Adam Baumgarten asked if the 2025 EBITDA margin outlook includes benefits from volume leverage and whether the current sell-through disconnect between premium and entry-level products is unprecedented.

Answer

CEO Bryan Fairbanks deferred commenting on specific 2025 growth assumptions. He explained that the current market bifurcation is more pronounced than in the past because Trex now has a well-developed entry-level product line (Enhance) specifically targeting wood conversion, making that segment's reaction to economic pressures more distinct.

Adam Baumgarten from Zelman & Associates questioned why material prices wouldn't decline given worsening volumes and increased supply, and also asked about opportunities for branch consolidation.

Answer

CEO Jeffrey Edwards stated that while a severe downturn would cause price declines, the current environment is seen as more normalized. He and CFO Michael Miller noted that manufacturers are rational and can curtail production to maintain a healthy market. On consolidation, Mr. Miller confirmed they continuously evaluate their footprint and are currently looking to combine 3-4 locations as part of their normal course of business.

Adam Baumgarten asked for the revenue contribution from spray foam and the extent of its pricing headwind. He also questioned if the multifamily business is expected to turn negative in the coming quarters.

Answer

CEO Jeffrey Edwards stated that spray foam constitutes about 10% of revenue and its pricing weakness impacted gross margin by less than 100 basis points, a headwind expected to continue. He confirmed the multifamily segment will be a headwind in Q4 and into 2025, as the lag from stabilizing starts to installation will take time to positively impact results, though their specialized team is helping outperform the market.

Adam Baumgarten asked for insight into the Q2 margin progression, questioning if the typical seasonal step-up would be muted by new headwinds. He also sought to understand the key factors that would drive performance to the high or low end of the company's wide full-year EBITDA guidance range.

Answer

CEO R. Banyard confirmed that Q2 EBITDA and sales will improve from Q1, but year-over-year decremental margins will not meet company standards. He cited two main headwinds: inefficiently running factories due to choppy demand before realignment benefits materialize, and absorbing tariff costs before price increases are fully realized. Regarding the guidance, Banyard stated the wide range is primarily dictated by uncertainty in market demand, particularly the unknown consumer reaction to the broader economic impact of tariffs.

Adam Baumgarten of Zelman & Associates inquired about the expected revenue and margin progression for 2025, the status of previously announced price increases, and the relative performance of the recently acquired Supreme business during the recent market slowdown.

Answer

President and CEO R. Banyard explained that while late Q4 and January were slow, February's demand returned to a more normal pace, suggesting a typical seasonal pattern for 2025 with a stronger second half. He clarified that price increases are mostly delayed, not lost, due to volume pressure in the dealer channel and competition in opening price point products. He expects the price/cost dynamic to improve after Q1. Banyard also noted that the Supreme acquisition was more resilient during the slowdown, performing in line with expectations.

Adam Baumgarten from Zelman & Associates inquired if the Average Selling Price (ASP) could approach a flat year-over-year comparison in Q4, whether the promotional environment had accelerated, and for more specifics on the recent homebuilder wins.

Answer

CEO Dave Banyard responded that the company's plan anticipates the ASP to be 'somewhere around' flat in the fourth quarter. He characterized the promotional environment as 'pretty normal' and not accelerating, with the main variable being the volume generated from specific promotions. Banyard clarified that the new homebuilder wins were predominantly with top-25 national builders, noting that revenue recognition is tied to project completion schedules, which can be choppy.

Adam Baumgarten from Zelman & Associates asked about the performance trends in the installation business. He also inquired about the timeline for rolling out the digital platform to larger homebuilders and its importance for reaching the long-term sales target.

Answer

CEO Peter Jackson said the core installation business is performing well and remains attractive to builders, though the overall segment faces headwinds from the multifamily downturn. Regarding the digital platform, he noted that while they are considering working with larger builders, the current focus is on perfecting the tool for smaller builders. He clarified that engaging larger builders is not necessary to achieve the previously stated $1 billion sales target.

Adam Baumgarten inquired about current pricing trends in the value-added products arena and whether the install business represents a risk or an opportunity in a scenario with more pronounced construction labor constraints.

Answer

CFO Pete Beckmann stated that value-added products continue to command a 1,000-1,200 basis point margin premium over commodities. CEO Peter Jackson described a labor constraint scenario as both an opportunity to win share with their install services and a risk to the overall industry, as it would hurt housing affordability and starts.

Adam Baumgarten of Zelman & Associates questioned the visibility into the implied second-half step-up in revenue and margins required to meet the maintained full-year guidance, focusing on CWT organic growth and margins across both segments.

Answer

CFO Kevin Zdimal acknowledged that while the company is now tracking toward the lower end of its guidance ranges (mid-single-digit revenue growth, ~50 bps EBITDA margin expansion), they remain confident in the full-year outlook. He specified that CCM is expected to achieve its 50 bps margin improvement, contingent on second-half pricing, and that CWT's margins are anticipated to recover to the 22% range starting in Q2.

Adam Baumgarten asked about the market's receptivity to the recent CCM price increases and the company's confidence that they will be implemented successfully. He also inquired about the financial impact of weather in Q4, the potential for sales recovery in Q1, and any notable weather effects in January.

Answer

CEO D. Koch expressed confidence in the price increases, citing supportive market surveys, competitor actions, and real cost pressures from tariffs. He expects traction in late Q2 as seasonal demand improves. Koch estimated a $10-15 million negative weather impact in Q4. VP of IR Mehul Patel explained that for the Henry business, the lack of rain on the West Coast suppressed demand that is unlikely to be recovered in Q1. CFO Kevin Zdimal added that Q1 2024 had a positive weather benefit, creating a difficult comparison for Q1 2025.

Adam Baumgarten from Zelman & Associates asked for an update on the full-year price-cost outlook, questioning if it was still expected to be flat. He also inquired about pricing trends within the CCM segment during Q3 and into Q4, including feedback from distribution partners.

Answer

CEO Chris Koch confirmed no change to the outlook for a flat price-cost dynamic for the full year in the CCM segment. He described the pricing environment as relatively stable, noting that competitors are also investing in their businesses and seeking returns. He reiterated that the full-year price decline would be close to the initial 2% forecast and that early feedback for 2025 suggests potential for some price upside.

Adam Baumgarten asked about the drivers behind the 2024 gross margin improvement and its sustainability, and also inquired about the company's intentions for the new $1 billion share repurchase authorization.

Answer

CFO David Barry attributed the sustainable gross margin gains to plant closures, supply chain efficiencies, and favorable product mix, and expects further expansion in 2025. Regarding buybacks, Barry stated the guide only includes shares to offset dilution, but the company intends to be aggressive in repurchasing shares during price dislocations, funded by strong projected free cash flow of $580M-$620M in 2025.

Adam Baumgarten requested an update on the digital products' growth contribution for the second half of 2024 and asked if consumer trade-down was occurring in other segments like Water and Outdoors.

Answer

CFO David Barry reiterated that while digital POS and the sales pipeline are exceeding expectations, actual revenue conversion is slightly behind, which the company is addressing with targeted investment. CEO Nicholas Fink clarified that trade-down is not an issue in Outdoors. In Water, the issue is not a typical trade-down but rather non-compliant mechanical products making false claims, similar to the situation in Security. He emphasized the issue is not with connected products.

Adam Baumgarten asked for more detail on the magnitude of gross margin expansion anticipated in 2025 and whether it would be evenly spread across the quarters.

Answer

SVP & CFO Allen Mistysyn indicated that the 2025 gross margin expansion would be less than what was achieved in 2024 and would be stronger in the second half, driven by expected volume improvements. He noted that about 75% of the price increase is aimed at offsetting cost inflation, with the remainder of the margin gain coming from self-help initiatives.

Adam Baumgarten sought to clarify if the company's initial outlook for a 'choppy' first half of 2025 implies a continuation of the trends seen in the second half of 2024.

Answer

Executive Allen Mistysyn confirmed directly, stating, 'Yes. That's exactly what we're seeing.' Executive Heidi Petz elaborated that the 'slower for longer' recovery scenario is playing out in real-time and the company is prepared to manage through it.

Asked for clarification on SG&A levels and leverage for fiscal 2025, and inquired about the company's specific strategy and opportunity in the railing market.

Answer

The company expects to achieve modest SG&A leverage in fiscal 2025. In railing, which is a core business, their strategy is to address the 'good' or value end of the market with new products to complement their existing portfolio, aiming to drive material conversion from wood and expand their channel presence.

Adam Baumgarten of Zelman & Associates asked about the earnings impact from the announced sale of the China and Korea building materials businesses and the expected timeline for the transaction to close.

Answer

Chief Financial Officer Todd Fister explained that the divested business, with approximately $130 million in revenue, has low EBITDA margins and high capital intensity. He noted the sale aligns with the strategy to focus on higher-value product lines. The transaction is expected to be completed in the second quarter of the following year.