Masco - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 missed Street on revenue and EPS as tariffs and softer volumes pressured margins: net sales $1.917B (-3% YoY), adjusted EPS $0.97 (‑10% YoY); adjusted operating margin fell 190 bps to 16.3% as gross margin contracted 210 bps. Versus S&P Global consensus, revenue and EPS were below ($1.94B*, $1.03*), and EBITDA missed ($370M* vs $341M actual*) (see Estimates Context).
• Decorative Architectural margins improved despite volume declines; Plumbing grew sales but saw margin compression from tariffs, commodities, and inventory reserves. Plumbing +2% revenue; adjusted margin 16.4% (‑350 bps YoY). Decorative Architectural sales ‑12% (‑6% ex‑divestiture) with adjusted margin +100 bps to 19.1%.
• Guidance tightened and trimmed: FY25 adjusted EPS now $3.90–$3.95 (from $3.90–$4.10); total operating margin ~16.5% (from ~17%); Plumbing margin ~18% (from ~18.5%); MAS ex‑div/currency sales now seen down low‑single digits vs prior “roughly flat”.
• Tariff headwinds increased: annualized impact raised to ~$270M (from ~$210M) with ~$150M in‑year 2025 impact; a temporary 145% China tariff added ~$15M in Q3, primarily to Plumbing. Management expects mitigation (pricing, sourcing shifts, cost) to largely offset 2025 direct costs.
• Capital returns intact: $188M returned in Q3 (incl. $124M buybacks) and $0.31 dividend; liquidity $1.56B (cash + revolver) provides cushion for continued buybacks (~$500M 2025 plan) and bolt‑on M&A.

What Went Well and What Went Wrong

What Went Well

• Decorative Architectural margin expansion on cost discipline despite lower volumes: adjusted segment margin up 100 bps to 19.1% while sales fell 12% (‑6% ex‑divestiture).
• Plumbing topline resilience on pricing and channel execution: segment sales +2% (+1% LC) with Delta strong in e‑commerce and trade; CEO: “We delivered adjusted operating profit of $312 million and adjusted earnings per share of $0.97 during the quarter”.
• Robust cash generation and shareholder returns: $188M returned in Q3; dividend declared $0.31; CFO raised 2025 capital deployment to ~$500M due to a favorable cash tax benefit.

What Went Wrong

• Revenue and EPS compression with margin pressure: adjusted operating margin fell 190 bps to 16.3%; adjusted gross margin down 210 bps to 34.6% on tariffs, commodities (notably copper), and inventory‑related reserves.
• Plumbing margin hit: adjusted margin 16.4% (‑350 bps YoY), citing ~$15M Q3 impact from a temporary 145% China tariff, higher commodity costs, and elevated inventory reserves.
• China weakness and DIY softness: Hansgrohe saw China increasingly challenged; DIY paint down mid‑single digits industry‑wide on low existing home sales; builders’ hardware faced shipment timing headwinds.

Transcript

Speaker 7

Good morning, ladies and gentlemen. Welcome to Masco Corporation's third quarter 2025 conference call. My name is Sylvie, and I will be your conference operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. To ask a question, please press star then the number one on your telephone keypad. To withdraw your question, please press star followed by the number two. I will now turn the call over to Robin Zondervan, Vice President, Investor Relations and FP&A. You may begin.

Speaker 1

Thank you, Operator, and good morning, everyone. Welcome to Masco Corporation's 2025 third quarter conference call. With me today are Jon Nudi, President and CEO of Masco, and Rick Westenberg, 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've described 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 will now turn the call over to Jon.

Speaker 4

Thank you, Robin. Good morning, everyone, and thank you for joining us. I want to start today with a few reflections from my first 100 days as President and CEO of Masco. Over the last three months, I've had the privilege of meeting with our teams, customers, and shareholders. I've toured manufacturing sites, participated in strategy reviews, and listened to feedback related to both our strengths and opportunities. The work confirmed what I believed to be true when I took this role. We have a strong foundation, industry-leading brands, innovative products, and incredibly talented and dedicated people. Our product portfolio is focused on the right categories, and we have industry-leading capabilities. We've shown resilience in navigating dynamic environments while continuing to deliver value for our customers, consumers, and shareholders. I've been especially impressed by the market leadership across our business units.

Delta Faucet Company has demonstrated incredible agility in the face of a dynamic geopolitical and macroeconomic environment. Their strong partnership with our largest retail customer drives significant value for them and for us. Hansgrohe continues to be a global leader with customers in over 100 countries, and Watkins Wellness is winning with strong innovation, even amid broader category headwinds. There's real momentum here and also real opportunity. In the coming months, we will focus on unlocking those opportunities with continued strong execution, greater speed, and strategic investments in the capabilities that set us apart. I'm proud to be part of a team that delivers at a high level, and I'm incredibly excited for the opportunities ahead. Now let's turn to our third quarter performance and updated outlook for 2025. Please turn to slide six. We continue to navigate a dynamic geopolitical and macroeconomic environment during this quarter.

While the near-term market conditions remain a headwind to our business, our teams continue to focus on execution to grow market share and drive long-term shareholder value. For the quarter, our net sales decreased 3%. In local currency and excluding the Kichler divestiture, sales decreased 2%. Operating profit was $312 million, and operating profit margin was 16.3%. Earnings per share for the quarter was $0.97. Now turning to our segments, plumbing sales increased 1% in local currency. North American plumbing sales increased 1%, driven by favorable pricing. Delta Faucet delivered strong performance again this quarter, particularly in e-commerce and trade. We recently relaunched our iconic Newport Brass brand, showcasing the brand's timeless design and enduring quality. This relaunch helped shape and expand our luxury portfolio and represents an important growth initiative for our business with an addressable market of $1.8 billion.

Another important growth initiative for Delta is in the water filtration category, with a market of $1.2 billion for under-counter water filtration products. Delta's new product introductions in this category continue to outperform our initial expectations, and our tankless reverse osmosis water filtration system was recently named the winner of the Good Housekeeping 2026 Kitchen Award. International plumbing sales were in line with the prior year in local currency. We saw growth across many of our European markets, while the China market was increasingly challenged. Operating profit for the segment was $204 million. Operating margin was 16.4% and included higher costs such as tariffs, commodity costs, and inventory-related reserves. Turning to our Decorative Architectural segment, sales decreased 12% in the quarter, or 6% excluding our divestiture of Kichler. Operating profit for the segment was $128 million, and operating margin increased 100 basis points to 19.1%.

Within our paint category, overall paint sales decreased to low single digits. DIY paint sales decreased mid-single digits as demand for DIY paint remains soft across the industry, impacted by low existing home turnover. In pro-paint, sales increased to low single digits. This continues the trend of multi-year growth for our pro-paint business, remaining tightly aligned with The Home Depot as we both prioritize and invest in strategic initiatives that allow us to capitalize on the sizable growth opportunity in the pro-paint market. We also continue to develop new products at Behr that serve the needs of our customers. Most recently, we've launched Kilz Original water-based primer and Behr Premium Plus EcoMix, a plant-based interior paint. These launches demonstrate our commitment to introducing innovative and sustainable products with quality that our customers can trust.

Turning to capital allocation, we generated strong free cash flow during the quarter and maintained a solid balance sheet. We remain committed to our capital deployment strategy and returned $188 million to shareholders this quarter through dividends and share repurchases. I'm proud of how our teams continue to work diligently to implement various mitigation actions in response to the near-term macroeconomic uncertainty, the geopolitical environment, and rising costs. We are focused on remaining agile as we continue to execute effectively in this rapidly changing environment. Turning to our expectations for the full year, we now anticipate adjusted earnings per share for 2025 to be in the range of $3.90 to $3.95 per share, compared to our previous expectation of $3.90 to $4.10.

Our updated range includes the impacts from our third quarter results, as well as higher tariffs and our expectations for softer industry demand resulting from the ongoing macroeconomic and geopolitical uncertainty. While uncertainty remains for the near term, we are focused on positioning ourselves for growth over the mid to long term. The structural factors for repair and remodel activity are strong, including the age of the housing stock, consumers staying in their homes longer, and near record high home equity levels. We have the right portfolio mix, and our innovative new product introductions are outperforming our expectations. We continue to gain market share in key growth areas, including e-commerce, luxury faucets and showering, and pro-paint, and we are building strategies to further accelerate growth opportunities. Our high-performing teams have a history of leadership in navigating dynamic environments.

When that leadership is combined with the strength of our brands, innovative products, and unmatched customer service, we believe we are well-positioned to continue to deliver long-term value for our shareholders. With that, I'll turn the call over to Rick to go over third quarter results and our 2025 outlook in more detail. Rick?

Speaker 2

Thank you, Jon, and good morning, everyone. Thank you for joining. As Robin mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization charges and other one-time items. Turning to slide eight, sales in the third quarter decreased 3%, or 2% excluding the impacts of our divestiture of Kichler and favorable currency. Our divestiture of Kichler in the third quarter of 2024 resulted in a decrease in sales by 3% year over year in the third quarter of 2025, while currency represented a 1% increase in sales. In local currency, North American sales decreased 6%, or 2% excluding the divestiture impact. International sales were in line with the prior year in local currency. Gross margin of 34.6% in the quarter was impacted by higher tariffs and commodity costs. SG&A decreased $16 million, primarily due to our divestiture.

SG&A, as a percent of sales, improved 20 basis points to 18.4% in the quarter. Operating profit was $312 million in the quarter, and our margin was 16.3%. Operating profit was impacted by lower volume and higher costs, primarily related to tariffs, commodities, and inventory-related reserves. Note that the temporarily elevated tariffs of 145% on China imports added approximately $15 million to the overall tariff impact in the third quarter, primarily in the plumbing segment. These impacts were partially offset by pricing actions and cost savings initiatives. Our EPS was $0.97 per share in the quarter. Turning to slide nine, plumbing sales increased 2% in the third quarter, or 1% excluding the favorable impact of currency. This growth was largely driven by pricing, which increased sales by 3%, partially offset by lower volume. In local currency, North American plumbing sales increased 1% in the quarter.

This performance was primarily driven by Delta Faucet, which delivered growth in both the e-commerce and trade channels. In local currency, international plumbing sales were in line with the prior year. Hansgrohe continued to see growth in many of its European markets, including its key market of Germany. This growth was offset primarily due to an increasingly challenging market in China. Segment operating profit in the third quarter was $204 million, and operating margin was 16.4%. Operating profit was impacted by lower volume and higher costs such as tariffs, commodities, and inventory-related reserves, partially offset by pricing actions and cost savings initiatives. Turning to slide 10, decorative architectural sales decreased 12% in the third quarter, or 6% excluding the divestiture of Kichler.

Performance in the quarter was driven by lower volume in our paint business, as well as our builders' hardware business, which also was unfavorably impacted by timing of shipments. In the quarter, total paint sales decreased low single digits due to lower volume. Pro-paint sales were up low single digits, and DIY paint sales decreased mid-single digits. Given the persistent softness in the overall DIY paint market and the favorable inventory timing we experienced in the fourth quarter of last year, we continue to anticipate our total paint sales for the full year to decrease mid-single digits. Excluding the impact of the prior year inventory timing benefit, we would anticipate full-year DIY paint sales to decrease high single digits. In our pro-paint business, we continue to expect sales to increase mid-single digits for the full year.

Operating profit in the third quarter was $128 million, primarily impacted by lower volume, partially offset by cost savings initiatives. Operating profit margin increased 100 basis points to 19.1%. Turning to slide 11, our balance sheet remains strong, with gross debt to EBITDA at two times at quarter end. We ended the quarter with $1.6 billion of liquidity, including cash and availability under a revolving credit facility. Working capital was 18.5% of sales at quarter end. Working capital continues to be impacted by tariff-related dynamics, including higher material costs and pricing, increasing our working capital balances. Given our strong cash generation, we returned $188 million to shareholders in the third quarter through dividends and share repurchases, including the repurchase of $124 million in stock.

As it relates to capital allocation, we now expect to deploy approximately $500 million towards share repurchases or acquisitions in 2025, slightly higher than our previous expectation of at least $450 million. This increase is driven by a cash tax benefit from the recently enacted tax legislation. Now let's turn to slide 12 and review our full-year outlook. The market environment remains volatile, and tariff uncertainty persists. The guidance that is being provided today includes the impact of currently enacted tariffs in effect in October, which now includes new tariffs on copper, anti-dumping duties on glass, and increases to global reciprocal tariffs, particularly on Vietnam, Thailand, and the European Union.

As a result of these additional tariffs, we now estimate that the total annualized cost impact of all incremental tariffs enacted this year to be approximately $270 million before mitigation, up from $210 million as of our second quarter earnings call. Of the $270 million annualized cost impact, approximately $140 million continues to be related to the incremental 30% China tariffs, and the remaining $130 million is driven by the global reciprocal tariffs, the 50% tariff on steel, aluminum, and copper, and the glass anti-dumping duties. Of this approximately $270 million total annual cost, we expect a 2025 in-year impact of approximately $150 million before mitigation, up from $140 million as of our second quarter call. Our teams continue to actively work to mitigate these additional costs through a combination of levers. These include cost reductions, continued efforts to change our sourcing footprint, and pricing where necessary.

We anticipate that these mitigation actions will mostly offset the direct cost impact of the currently enacted tariffs in 2025. It is important to note that our guidance does not attempt to estimate the impact of potential future tariffs or any changes in existing tariffs. Turning to the overall market, our expectation continues to be that the U.S. and international repair and remodel markets will decrease low single digits in 2025. For Masco, we expect our sales in 2025 to decrease low single digits impacted by the 2024 divestiture of Kichler, which will reduce sales by approximately 2% year over year. We anticipate currency will have a favorable impact of approximately 1%.

Excluding the impact of our divestiture and currency, we now anticipate Masco's overall sales to be down low single digits versus our prior guidance of roughly flat year over year, given continued industry softness with lower volumes partially offset with pricing. As a reminder, fourth quarter sales will face a challenging year-over-year comparison due to the favorable inventory timing impact we experienced in our paint business in the fourth quarter of last year. We now anticipate total company operating margin to be approximately 16.5% in 2025 versus our previous guide of 17%, driven by slightly lower volume, impacts of additional tariffs, and higher costs. In our plumbing segment, we continue to expect 2025 full-year sales to be up low single digits. We now anticipate the full-year plumbing margin will be approximately 18% versus our previous guide of 18.5%.

In our decorative architectural segment, we continue to expect 2025 sales to decrease low double digits or mid-single digits, excluding the impact of our divestiture. We also continue to anticipate the full-year decorative architectural margin to be approximately 18%. Finally, as Jon Nudi mentioned earlier, our 2025 EPS estimate is $3.90 to $3.95 per share. This continues to assume a $211 million average diluted share count for the year and a 24.5% effective tax rate. With that, I would like to open up the call for questions. Operator?

Speaker 7

Thank you, sir. Ladies and gentlemen, in order to ensure that everyone has a chance to participate, we would like to request that you please limit yourself to asking one question and one follow-up during the Q&A session. Thank you. To ask a question, please press star the number one on your telephone keypad. To withdraw from your question queue, please press star followed by two. Please go ahead, press star one now. Your first question will be coming from Stephen Kim at Evercore ISI. Please go ahead.

Hey, hey guys, it's Steve. Thanks very much for all the color. We do have a tariff question, but I wanted to start off actually on the paint side. There was a competitor who talked about a price increase going in January 1. I was wondering if you could sort of talk about how that might influence your outlook for pricing as we get into the new year on Deck Arc. Maybe you can talk just generally about how, given you know the relationship you have with The Home Depot, how you think about pricing relative to competitor actions.

Speaker 4

Yeah, hi, Steve. It's Jon. Thanks for the question. We certainly have a unique relationship with The Home Depot. It spans 40+ years, incredibly strong. As you mentioned, we do have a relationship. It's essentially price-cost neutrality over time. As we look at our deck, and particularly our paint input costs, we see some upward pressure, but not significant. At this point, we'll continue to have private conversations with our retail partner, but I wouldn't expect to see significant pricing on paint as we move into the coming year.

Okay, that's very helpful. Appreciate that. Yeah, Rick, want to jump in on the tariff?

Speaker 2

Yeah, I just want to clarify on the tariffs. You know, when all is said and done, kind of longer-term impact to plumbing margins from tariffs, like how do you see that given that price actions will mostly mitigate tariffs dollar for dollar? It's kind of a more of a longer-term question on plumbing.

Good morning. From a tariff perspective, as we've all realized here, it's a relatively volatile and dynamic environment. Based off of the current tariffs enacted as of October, we articulated it's about a $270 million annualized impact. We're tackling that on a number of fronts from a mitigation standpoint. First and foremost, from a sourcing footprint standpoint, particularly sourcing out of China, where our largest exposure exists to other markets. Also, reducing costs and sharing that tariff impact with our suppliers. Third is pricing, as you alluded to. Those are levers that we continue to pull. Our objective is to not only offset the dollar cost of the tariffs, but ultimately the margin implications over time. Obviously, we've got to track and monitor the situation closely. Based off of where we sit today, our expectation is that we'll continue to work towards mitigating.

As we mentioned in our comments, we've mitigated a large part of the tariffs, not all, but a large part of the tariffs here in this calendar year. Certainly, our objective as we move into 2026 is to mitigate further as well as start working to build margins. We're continuing to focus on the mitigation and working to restore our margins over time.

Great, thank you.

Speaker 7

Next question will be from Matthew Bouley at Barclays. Please go ahead.

Morning, everyone. Thank you for taking the questions. I wanted to ask one, I guess kind of zooming into the plumbing margins, and I guess the 3Q result specifically. I think you guys had previously signaled that there would be some of that impact from the 145% tariffs. I mean, I guess that played out. The question is, was there anything else that was effectively a surprise versus your own expectations? Did any of those incremental tariffs that were coming in in the summer end up sneaking into the quarter there as an impact, or just any other cost that ended up surprising you? Thank you.

Speaker 2

Sure, Matt. Good morning. It's Rick. As it pertains to our Q3 results, I would say it was impacted really by three drivers. One is tariffs, as you articulated. You know, there were incremental tariffs since our Q2 call, as you articulated. Those took our in-year impact from $140 million to $150 million. That incremental $10 million of in-year impact is really going to be a Q4 event. Those were new tariffs since our Q2 call, and that factors into our updated guidance for the year. That's really a Q4 dynamic. As you also alluded to, within the tariff realm, we did experience that elevated tariff impact on the 145% on China imports. That was about a $15 million impact in Q3 specifically. That was, as we alluded to in Q2, something that we anticipated, but did manifest itself in Q3.

The second driver is with regards to overall softness in the industry. We do believe that the industry, both North American and international, is going to be down low single digits. We're really coming in from an industry perspective on the lower end of that range. That was a bit of an impact as we flow through Q3 as well as the calendar year outlook. Third was incremental costs, both with regards to commodity inputs, particularly on copper, that continues to be elevated, as well as the inventory-related reserves, which really was an update in our assumptions based off of market conditions. As we generally review our reserves on a quarterly basis, we just had a higher than typical adjustment in the quarter. That would be really the drivers behind our margin performance in the quarter.

Okay, got it. Thank you for that, Rick. I guess secondly, I wanted to touch on the builders' hardware business. Since I guess, you know, paint and coatings was only down low single digits overall. I think I heard you say there was some unfavorable inventory timing. I'm wondering if there was maybe a pre-buy there earlier in the year or just kind of more elasticity, you know, related to price increases in that category. Presumably, it would have been a fairly large move in that business to impact the segment as it did. Just any more color on exactly what's going on there. Thank you.

Sure, Matt. It's Rick. Yeah, as it pertains to the builders' hardware business, it was impacted by softness in sales, as we saw really across the industry. As we mentioned in our opening comments, there was a bit of a shipping timing dynamic. It was really due to a planned shipping process change in the quarter. We curtailed our shipments during the quarter in order to effectuate the change. It is something that we noted in our talking points, but we do not believe that it would be a significant impact for the calendar year overall.

All right, perfect. Thanks, guys. Good luck.

Thanks, guys. Thank you.

Speaker 7

Next question will be from Michael Rehaut at JP Morgan. Please go ahead.

Great. Thanks so much. First question, I just wanted to clarify on the margins, plumbing margins for the third quarter. Given that some of that was already anticipated, the 145%, was the delta, perhaps versus expectations a little more driven by the inventory-related reserves? Or were there other factors also at work? I think the overall more recent tariff changes, I think you said, was more of a 4Q event.

Speaker 2

Yeah, sure, Mike. You're right. As it pertains to our expectations coming into the quarter, we did have contemplated the elevated China tariff. That was part of our expectation. I'm not sure it was fully contemplated all on Q3 in terms of external expectations, but certainly, we had contemplated that internally. As it pertains to developments since our second quarter call, I would say there were two. One is the inventory-related adjustments that we alluded to. Second is just stocked-up sales, particularly in certain markets like China, that came in from an industry perspective lower than we had anticipated.

Okay, perfect. In terms of the overall full-year sales guidance, I believe last quarter you had consolidated sales still down low single digits, similar to what you have in this updated guide. It seems like, you know, perhaps you're now kind of talking towards the lower end of that guide or lower end of that down low to single digit range. Just wanted to make sure I'm also, you know, have that right. Again, just to kind of, and I apologize, I've kind of hit on this earlier, but just to be clear, you know, which segment that's really coming from, if part of that is the builder hardware or, you know, maybe a little bit softer trends in plumbing, as you just alluded to, international or North America, you know, just a little bit more granularity around that.

Sure, Mike. Yeah, your observation is directionally correct. Ultimately, we see the industry coming in a bit lower, kind of on the lower end of a range. You know, as expressed in EPS, we are coming in at the lower end of our range that we've publicized in our Q2 earnings call. Part of that is driven based off of lower industry expectations, and it's relatively across the board. I would say that it does impact the plumbing segment, as we mentioned, particularly China, but also impacts our builders' hardware as well as our DIY paint. Not dramatic changes, but the industry is a bit softer, really at the lower end of our expectations. As it pertains to our underlying performance, I would classify that as pretty solid, meaning that we're continuing to perform in line or in many categories better than the overall industry.

It's just the overall industry softness that continues to be relatively weak.

Great, thanks so much.

Speaker 7

The next question will be from Mike Dahl at RBC Capital Markets. Please go ahead.

Thanks for taking our questions. Just some clarifying questions on tariffs. I guess just to be clear on China, if it seems like, you know, you're still at, call it, $450 to $500 million of underlying cost of goods sold. There's been discussions in the last couple of days about the tariffs getting reduced by maybe 10%. Is it right to think about that as a $50 million annualized impact if that came to fruition in terms of that $140 million going to something more like $90 to $95 million? The second part of the question would be if you could just break out what's like within that other $130 million, can you just specify what the global reciprocal bucket is versus the steel, aluminum, copper, and anti-dumping?

Speaker 2

Sure, Mike. Your math on the first question is directionally correct. As we've articulated in the past, our annual import exposure from China is $450 million. On a 30% tariff from China, that represented about $140 million of impact. Hypothetically speaking, if there were a change in tariffs, whether it's plus or minus, you can extrapolate from there. As it pertains to your second question, we're not going to provide a detailed breakdown in terms of the composition of our exposures in the quote-unquote "other bucket." It is really a composition of reciprocal tariffs, Section 232 tariffs on steel, aluminum, and copper, as well as the glass anti-dumping duties. Part of it is it's a dynamic environment.

As we continue to modify our sourcing footprint, as we move out of China into other markets, and we continue to manage and work aggressively to mitigate our tariff exposure, those underlying exposures will change and update over time. What we will do and we will continue to do is provide the investment community with an overview in terms of the financial implications, split between China and pretty much everything else, as we've done this quarter. From an annualized perspective, as we've articulated, we have a $270 million annualized impact. $140 million is China, $130 million is everything else. We'll continue to provide updates, if and as things change in our quarterly reviews.

Okay, understood. That's so helpful. My second question is just specifically on paint. Understood that you've got the, you know, the comp dynamic. The fourth quarter, it still implies like a pretty big step down in margins in the fourth quarter versus what's been really solid, you know, like 3Q performance despite the top-line challenges. I'm just wondering if there's anything else there in the fourth quarter aside from just comping against that load-in that would be driving that margin down so much.

Yeah, nothing particularly of note. What I would say is the biggest driver on a year-over-year basis in terms of top-line and margin, I know you're talking about the Q4 specifically, is the unfavorable comparison relative to the impact of the favorable channel inventory build that we experienced in Q4 of 2024. That is really the biggest driver from a year-over-year basis.

Okay, thank you.

Thank you.

Speaker 7

Next question will be from Sam Reid at Wells Fargo. Please go ahead.

Thanks, everyone. Wanted to touch on plumbing price in a little bit more detail. You know, the 3% you reported. Could you just characterize kind of where that landed relative to your expectations? I know you had obviously a larger price increase in the market. Just curious kind of what you got on a realization standpoint, versus what you were expecting to get. As you look to the fourth quarter, does the guidance contemplate any step up in plumbing price sequentially? Just want to maybe understand that Q4 dynamic as well on price in plumbing. Thanks.

Speaker 4

Yes, this is Jon. Maybe I'll start and then Rick can jump in as well. I would say that pricing in plumbing primarily played out as according to plan and what we expected. If you think big picture, obviously, you know, significant increases in tariffs versus what we thought at the beginning of the year. The team, particularly at Delta Faucet, which is the most impacted business, have done really a remarkable job of mitigating tariffs. It really starts with making sure that we optimize our footprint. We've been doing that over time. We have a four-year 45% reduction versus 2018. We'll continue there, working with our suppliers on concessions, looking at our own cost structure and making sure that we optimize that. Ultimately, as a last resort, we will take pricing. We did take pricing throughout this year. I would say it's executed according to plan.

We'll continue to look at what we need to do as we move into the coming year as well. In terms of Q4, I'll let Rick cover that.

Speaker 2

Yeah, Sam, in terms of sequentially, as you would expect, our mitigation actions take hold over time, really from a pricing, cost reduction, and sourcing standpoint. You'd expect that our pricing being one of the levers, to continue to get increased traction over time. I guess I'll leave it at that.

Yeah, that helps. One more plumbing-related question here. You called out strong Delta performance in two channels, e-commerce and trade. I might have missed, but how did Delta perform in home center? Perhaps can you talk through kind of how you trended in home center relative to the broader category? Thanks.

Speaker 4

Absolutely. Delta Faucet in particular had a very strong quarter driven by e-commerce, where we saw nice growth. Our wholesale channel grew kind of low single digits, and we saw relatively flat, maybe slightly down performance in retail. As we look to the coming year, we're excited about the plans we have coming, and we believe that we'll be driving even stronger results in retail as we hit 2026. No major bogeys from a plumbing standpoint. Again, strength in e-commerce, wholesale, and then relatively flat in retail.

Appreciate the color. Thanks, guys.

Thank you.

Speaker 7

Next question will be from John Lovallo at UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions. There's a couple of factors impacting the back half. One of them you talked about on the inventory side, but just wanted to get a little bit more clarity, if I could, on the lower employee-related costs that are not expected to repeat in the back half. Curious, you know, what was the third quarter impact of that and what's the expected fourth quarter impact?

Speaker 2

Yeah, Jon, you're referring to comments that we made in the Q2 call, correct?

Correct, yeah.

Yeah. From an employee-related, yeah, you're correct. We did have a favorable benefit in Q2. You know, we continue from a cost perspective to be very disciplined on costs, particularly given the current environment. Managing people costs as well as other costs continues to be a priority for us. We didn't have a repeat of the one-time item, so to speak, that we benefited from in Q2. Suffice it to say, we're continuing to drive efficiencies, cost reductions, etc., throughout the business just to drive operational efficiencies.

Okay. Maybe just to follow on to that, maybe outside of some of the tariff mitigation actions, what are some of the cost savings initiatives being taken in both segments to help kind of lower the cost basis? What do you expect for the impact of that on a go-forward basis?

Yeah. Jon, we continue, as I know you've heard us talk about before, to leverage our Masco operating system to continue to drive productivity and efficiency. That is productivity in our plants, supply chain efficiencies, procurement cost savings. I know we talk about tariff mitigation, but we also are working on driving cost efficiencies throughout our sourcing footprint. We talk about, you know, automation, BAVE. This year in particular, we're looking at more austerity measures as it pertains to headcount and discretionary spend. Really a combination of all those factors. It's not isolated to a particular segment. It's really across our businesses.

Got it. Thank you, guys.

Thank you.

Speaker 7

Next question will be from Trevor Allison at Wolfe Research. Please go ahead.

Hi, good morning. Thank you for taking my questions. You mentioned seeing some input cost inflation, more input cost inflation you expected in plumbing, called out metals. Can you just put some numbers around what inflation rates you're seeing in your plumbing business in the third quarter and what you're expecting for the fourth quarter?

Speaker 2

Sure, Trevor. It's Rick. Yes, we are seeing some upward pressure, particularly on the copper input. As you may recall, in Q2, I believe it was at a record high, at least on the COMEX. It continues to be a headwind for us from an overall input perspective. We continue to manage it from a cost standpoint. Ultimately, to answer your question, it was a low single-digit inflationary impact in Q3 in plumbing, and we expect a similar low single-digit inflation for the calendar year for the plumbing segment.

Okay, that's helpful. A question on DIY paint. Obviously, we've been weak for some time now after being very robust during the pandemic. Now we've had several years of DIY paint declines. Can you talk about where you think we are in terms of pull forward versus deferral? Do you think DIY paint is a category that can get back to growth in fiscal 2026? Thanks.

Speaker 4

Yeah, Trevor, this is Jon. We really like our DIY paint business. Obviously, the strength of Behr over time. DIY paint correlates heavily to existing home sales. As you know, existing home sales are at near three-decade lows right now. If you think about it, it's pretty simple. When you go to sell a house, you typically paint it. When you buy a house, you typically paint it again. Without existing home sales moving at the pace that they have historically, that's really put a dent in the market. We expect the long-term fundamentals to get better for sure as existing home sales free up and start selling at more historical rates. I think consumer confidence and interest rates will help with that. At the same time, we're excited about our pro business. When you think about the upside that we have there, we have a relatively low share.

We've grown nicely over time, and it's approaching nearly 50% of our business at Behr. Again, we think that we can continue to drive DIY. At the same time, we think there's a significant opportunity on pro as we work with our retail partner to really maximize that.

Thank you for all the color, and good luck moving forward.

Thank you.

Speaker 2

Great. Thank you, Trevor.

Speaker 7

Next question will be from Susan McClary at Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone.

Speaker 2

Morning.

Good morning. My first question is going back to Delta. You cited the strength that you're seeing in e-commerce and the wholesale channel there. Can you talk a bit about what is driving that strength, the outlook, the ability to sustain that, and what that could mean for volume and price mix in the plumbing segment next year if the macro does stay tougher?

Speaker 4

Yeah. This is Jon. Maybe just a little color on Delta. As I mentioned, really pleased with that team and the results that they're driving. I think it starts with they do a great job of building the Delta brand as well as the Brizo brand and all the different brands in our portfolio and really making them stand for something with end consumers. Innovation has been a big part of the Delta story, so our vitality rate, which is new products launched over the last three years, is at 25%, which we think is industry leading and will continue to drive that and drive even more innovation as we move forward. Really developing great capabilities from an e-commerce standpoint.

We believe that we're growing share in that channel at a pretty significant rate just due to the capabilities and really the customer insight that we have with different retailers and different e-commerce customers in that channel. That team is really firing on all cylinders. We would expect that momentum to continue as we move into fiscal 2026.

Okay. Turning to capital allocation, you mentioned that you are increasing the outlook for returning cash to shareholders by $50 million for the year. Can you talk a bit about the timing of that? Also, what you're seeing in terms of other uses of cash, such as the M&A environment and the potential there?

Speaker 2

Sure, Sue. It's Rick. Yeah, as you mentioned, we did increase our expectation for cash available for share buybacks or M&A activity from about $450 million to $500 million. A big component of that was the favorable cash tax benefit from the recently enacted tax bill. That was a favorable impact, and we are increasing our cash available for share buybacks and M&A accordingly. What I would say is, as it pertains to the terms of timing, through the first three quarters of the year, we've returned just over $350 million to shareholders, so you could envision that about $150 million remains for the fourth quarter. As it pertains to M&A activity, no change in terms of our overall capital allocation framework and our strategy in that regard. We continue to cultivate a pipeline of opportunities focused really on bolt-on opportunities.

There's nothing to report at this time, but it's certainly something that we look at as part of our overall growth algorithm. To the extent we do not have an opportunity this year, you would expect us to utilize that cash for ongoing share repurchases.

Okay, thank you for the color and good luck with the quarter.

Great. Thanks to you.

Speaker 7

Next question will be from Phil Ng at Jefferies. Please go ahead.

Hey, guys. This is Maggie on for Phil. I guess first, just maybe to ask the plumbing pricing question a little differently, it was kind of surprising to see a similar pace, you know, that 3% in 3Q, similar to 2Q, just given the tariff mitigation efforts and the magnitude of pricing you have out there. Are you seeing more pressure from competitive dynamics or just pricing fatigue from customers? Maybe just walk us through some of the puts and takes there.

Speaker 2

Sure, Maggie. It's Rick. I think Sam asked a similar question from a sequential standpoint. Our price, as you articulated, was about 3% favorable from a plumbing segment perspective, and that is as our pricing continues to gain traction in the market. I'm not going to get into specifics on Q4 at this point. Suffice it to say, we're gaining traction. As it pertains to the overall dynamics, it's something that we're monitoring very closely. As Jon articulated, there's a number of levers that we pull with regards to our tariff mitigation and to address our margin headwinds, which are sourcing footprint changes, cost reductions, and, as necessary, pricing. We will leverage the pricing component of that, but it's something that we do in a very targeted way, and we look for a balanced approach overall.

I guess the bottom line is, we continue to see pricing as a favorable impact on a year-over-year basis, but it's largely going to be driven based off of our need to mitigate the tariff impacts as well as our assessment of the overall market dynamics.

Got it. Are there any nuances to call out between channels in terms of realization or acceptance by channel? Thinking ahead, you have this January price increase announced out there. What have you seen this year that's kind of influencing how we should think about realization on that in 2026?

Yeah. Maggie, we're not going to comment with regards to specific channel pricing performance. That's just something that we manage with our customers. As it pertains to anything that might be out there, as it pertains to future pricing, I'm not going to really comment on that either. That's something that would be in development. I would just take a step back and look at it from a standpoint of pricing continues to be one of the levers that we deploy in terms of mitigating our tariffs as well as other impacts such as commodity inflation, etc. That's something that we're going to continue to focus on and execute against.

All right. Thanks, guys.

Thanks, Maggie.

Speaker 7

Next question will be from Adam Baumgarten at Vertical Research Partners. Please go ahead.

Hey, good morning, everyone. Just on the timing-related issues in builders' hardware, which was obviously a headwind in the third quarter, I think you mentioned that maybe it wouldn't be much of an impact for the full year. Would that imply that 4Q, those shipments kind of go through and therefore the full year won't be as impacted?

Speaker 2

Yeah, Adam, directionally, that is correct. It was a Q3 adverse impact, but for the overall year, we don't expect it to be a significant impact. I guess that would be a fair conclusion.

Okay, got it. Thanks. In plumbing, just on China, you talked about there being a headwind. It seemed like maybe a bigger headwind than it's been in prior quarters. If you maybe kind of walk through what you're seeing on the ground over there.

Speaker 4

Yeah, Adam, for sure. The market itself has been challenged. I think obviously when you read about the housing market and what's happening in China. At the same time, I think local players have become much stronger as well. Between those two things, the market itself is challenging. I think the competitive situation is challenging as well. I'll tell you that we feel like we are holding up at least as well and probably better than our other major global competitors that are in that market. We still like that market. It's a significant market for us. We think over time we'll be able to get back to growth. It has been a bit more of a headwind, certainly in Q3 than what we had seen through the first half of the year.

Great. Thanks a lot. Best of luck.

Thank you.

Speaker 7

Next question will be from Keith Hughes at Truist. Please go ahead.

Thank you. Just a question on the inventory reserves you discussed in plumbing. Are you writing up obsolete inventory? What specifically is going on, and how much of a dollar hit is that?

Speaker 2

Yeah, Keith, it's Rick. As part of our normal process, we review our balance sheet reserves on a quarterly basis, as you anticipate. We make adjustments quarter to quarter based off of the assumptions in place at the time. It's really driven based off this quarter, based off of the overall market environment and really the slow pace of the industry sales, etc. We do have adjustments, as you would expect, kind of quarter to quarter. This quarter was bigger than typical. We've called it out, particularly given it hit our plumbing segment and one of the drivers in terms of our margins. Although we wouldn't expect this to occur kind of on a regular basis, it was something that we felt appropriate to call out for Q3.

As it pertains to overall magnitude, I'm not going to give you a specific dollar amount, Keith, but I could dimension it a little bit for you. I would say on a year-over-year basis, if we look at whether it's operating profit or operating profit margin, it represented about a quarter of the performance impact on a year-over-year basis. That helps.

Okay. Is there a cash offset to this that comes, or is this a non-cash element?

This would be non-cash.

Be non-cash. Okay. All right. Thank you.

Sure.

Thank you.

Speaker 7

Next question will be from Eric Bussard at Cleveland Research. Please go ahead.

Thanks. Good morning. Two follow-ups. On the DIY paint, I understand the softer sales, the down 7% to 9%, and the market overall R&R market that's not that bad, that you're linking that to housing turnover. I'm curious if strategically there's anything different to do in this business to drive better growth. Obviously, you're having success with the pro initiative at Depot. On the DIY side, is there anything strategically different to do to stimulate better performance?

Speaker 4

Yeah, this is Jon. I have a good question. I think at the end of the day, the biggest thing we can do to drive our business is continue to drive a builder brand. Behr Paint has amazing quality, and we offer great value as well. I think we can get even tighter in terms of our communication of why we have such a great proposition for our consumers. The other thing we can do is continue to innovate. As I mentioned in the prepared remarks, we're launching some innovation we're excited about, some plant-based paint that's obviously very much in trend with younger consumers and millennials. We think that'll be a positive for us as well. We are with the right partner that obviously continues to do well in the market, and we continue to work with them to make sure we maximize our sales.

For us, though, getting tighter on our messaging from a brand standpoint really around value and quality, because we think by far we've got the best proposition in the industry.

Okay. For Delta Faucet, your comments were optimistic about retail 2026 growth. I'm curious if there's anything in the business or from a market share perspective that informs that, or if this is more a function of lower rates and at some point consumers will spend money. Just trying to figure that out.

Yeah, great question. As you would likely imagine, we have a good sight line into 2026 in terms of our plans with our major retailers. Without going into the details, we feel really great about where we're going to be from a distribution standpoint. We feel really good about our innovation that we're launching as well. We would fully expect to have a very strong year at retail in 2026 as a result of those plans that are in place.

Thanks.

Thank you.

Speaker 7

Any further questions, Eric?

No, thank you. Thank you.

Thank you.

Next question will be from Rafe Jadrosic at Bank of America. Please go ahead, Rafe.

Hi. Good morning. Thanks for taking my questions. I wanted to just get a little bit of a better understanding about the timing of when tariffs hit your P&L and the cadence of the mitigation. Obviously, you have to work through some of the inventory that maybe came in pre-tariffs. How much of that impact is being in your P&L today? How do we think about that going forward? Sort of same question on the mitigation that you're planning. How do we think about the cadence of that?

Speaker 2

Yeah, Rafe, it's Rick. As it pertains to the cadence of the tariff impact, as we've articulated in prior calls, we fully expect most of that impact. We know that most of that impact is going to occur in the second half of the year. That's why, as you saw in Q3, the tariff impacts really get kind of traction in our P&L. We did see some in Q2, but the vast majority is in Q3 and Q4. As articulated, we did have incremental or additional tariff impacts in Q3, given the temporarily elevated China tariffs at 145%. That translated into a $15 million additional tariff impact in Q3. Now that is hopefully one-time in nature as it pertains to the tariff dynamics. As you think about on a prospective basis, that's why we give the annualized tariff impact. Our annualized tariff impact is $270 million.

You can think of that as a run-rate basis on a calendar-year basis. We saw, again, almost all that in the second half, thus the $150 million in the second half of the year, inclusive of the $15 million that I talked about. $270 million is how we think about it going forward. I would caution, of course, that obviously we continue to be in a dynamic environment from a geopolitical standpoint. That estimate of $270 million is based off of really a static picture of not only the tariff environment, but our footprint. We'll continue to provide updates in terms of our exposures as well as our tariff impacts as we move quarter to quarter.

Got it. Okay. Is the plan to fully mitigate in 2026? Of those, you listed a few things that you're shifting, supply chain, pricing. How do we think about the timing of that, of when you would be planning to fully mitigate?

Yeah. With regards to mitigation actions, those are all underway and we're pursuing them very aggressively and expeditiously. Each exposure has a different timeline. Ultimately, we would expect to, as we said before, offset a large part of the tariff impact this year, not all, but a large part. Our goal is to ultimately offset the tariff impact, not only from a dollar perspective, but also from a margin standpoint, based off of the tariff environment as we see it today. We would expect, and we'll provide more color on that in our February call in terms of our expectations for 2026 specifically. One of the largest levers of our tariff mitigation strategy is our sourcing footprint, and that takes some time. It continues to be an exercise that the team has done an excellent job in terms of reducing our exposure specifically to China.

As mentioned earlier in the Q&A section, our exposure to China is $450 million, but that's down 45% from levels of 2018. We continue to be on that glide path and accelerate that. We'll provide an update in terms of what that looks like in 2026 in our February call. Suffice it to say, we're continuing to really execute toward the tariff mitigations and offset the dollar amount as well as margins over time. We'll provide further updates in February.

Great. Thank you.

Sure, Rafe.

Speaker 7

Next question will be from Colin Varren at Deutsche Bank. Please go ahead.

Hey, good morning. Thank you for taking my questions. Only just one for me. I guess on the plumbing side of the business, can you just talk about how long you think this soft demand environment will really last here? If you're looking out over the next 6 to 12 months, what specific factors would you be looking for that would get you a little bit more excited about the demand environment?

Speaker 4

Oh, this is Jon. I'm relatively new to this industry, as you know, but it's been consistent as I go out and talk to our customers, channel partners, suppliers. I think everyone feels like the rebound will come. The crystal ball, we don't have a crystal ball. We can't tell you when that is. All the macro factors remain incredibly positive. If you think about what drives R&R activity, it's really about home equity levels. We know that they're at record highs right now. We know the age of the housing stock in the U.S. is ripe for renovations, remodels. In fact, over the next few years, something like 20 million more homes will become into that prime point to be remodeled. That's 20 to 40 years of age. I think it's about consumer confidence and interest rates.

I think if we see interest rates continue to tick down, consumer confidence in the economy increase, we'll see consumers tap into their home equity funds and start those remodels that they've been deferring. We're very confident about the long term. Obviously, we don't have a crystal ball. I can't predict exactly when that will happen. As we sit here, we're not going to talk too much about 2026 or certainly give guidance, but I think we would expect to see a gradual improvement in our markets as we move forward into the coming year.

Great. Thank you for the call and good luck.

Thank you.

Speaker 7

Our last question comes from Anthony Pettinari at Citi. Please go ahead.

Speaker 12

Oh, good morning. I just had two quick ones on plumbing. I guess first, you know, how would you characterize the performance of kind of your best brands? You know, you talked about the strength in Delta. I'm just wondering how Brizo and Hansgrohe, are they still kind of outperforming the good, better, or is there like any change in that dynamic? I guess just second question, you know, sauna, wellness, you know, a smart part of the business, but I'm just curious how that category is performing in, you know, what's obviously been kind of a tough market. Do you see the growth opportunity there, you know, organically or inorganically, you know, maybe different than you did 6 months ago, 12 months ago?

Speaker 4

Yeah, absolutely. In terms of plumbing, we really like the way our brands are performing. You know, when you look at upper premium and luxury, we've got brands like Brizo as well as Newport Brass, Axor, which is our global luxury brand. We see a bifurcation in terms of the market. We're seeing the upper-income consumers hold up relatively well. Actually, we're growing the fastest in upper premium and luxury. Really like the performance there. From Hansgrohe standpoint, really like the way that they're performing around the world. Germany, in particular, their home market, they're growing nicely, taking a tremendous amount of share. We believe growing share in most markets around the world. I mentioned China is definitely the soft spot for Hansgrohe, and that's something we'll continue to work on for sure. Really like the way they're performing around the world from a plumbing standpoint.

In terms of walk-ins, that's been a business that, again, we're really excited about the long-term opportunity for. When you look at wellness, very much being on trend from a consumer standpoint, the low household penetration of our categories. If you think about hot tubs, only has 5% or 6% household penetration in North America. Sauna has only 1% household penetration. If you listen to what's happening in culture and society, you see and hear a lot of buzz around both of these, and particularly saunas around fire rate. We think there's a tremendous opportunity for us. We're the market leader in hot tubs in North America, and we can continue to push our advantage there. We're a leader in sauna, and I think that's an area that we'll continue to drive as we move into the future.

We think there's a lot of tremendous upside for that business for the short to long and long term as well.

Speaker 12

Okay, that's very helpful. Thank you.

Speaker 7

Thank you. At this time, we have no other questions registered. I would like to turn the call back over to Robin Zondervan.

Speaker 1

We'd like to thank all of you for joining us on the call this morning and for your interest in Masco. That concludes today's call. Have a wonderful day.

Speaker 7

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines.