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Text: Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow up.
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.
I hope everyone is staying safe and healthy.
We performed exceptionally well in the second quarter, and demand for our products was strong.
This resulted in our fourth consecutive quarter of double digit sales growth and sixth consecutive quarter of both margin expansion and double digit earnings-per-share growth.
I'm extremely proud of our entire team as we successfully navigated numerous supply chain challenges to enable this growth.
For the quarter, sales increased 24%.
Excluding acquisitions, divestitures and currency, sales increased 18%.
Operating profit increased 27% and margins expanded 60 basis points to 20.1%, principally due to strong volume leverage.
Earnings per share increased an outstanding 34%.
Our overall performance demonstrates the strength of our portfolio of lower ticket, repair and remodel products that are diversified across geographies and channels, serving both the consumer and the professional.
Turning to our plumbing segment, sales increased 48%, excluding currency, led by exceptional growth from our North American and international faucet and shower businesses and our spa business.
International plumbing grew 50% in the quarter, excluding currency, as Hansgrohe sales rebounded sharply in nearly all of its markets.
Strong operational execution and new products such as Hansgrohe's Rainfinity shower systems led to share gains in many of these markets.
New product introductions will continue as we launched the award-winning AXOR One collection in the second half of the year.
This collection was designed by Barber Osgerby, an award-winning internationally acclaimed London-based industrial design studio.
This continues Hansgrohe's legacy of combining leading contemporary design with innovative functionality.
North American plumbing posted strong growth of 47%, excluding currency, in the second quarter, led by approximately 75% growth at Watkins Wellness and robust double digit growth at Delta.
Delta faucet delivered another record quarter with growth across all channels, and particularly strength in the professionally oriented trade channel.
We continue to invest in new products in North American plumbing as well.
And two days ago, we introduced a Frank Lloyd Wright collection by Brizo that furthers the brand's commitment to distinctive design and innovative products.
Lastly, in plumbing, at the beginning of July, we acquired Steamist, another bolt-on acquisition for Delta.
Steamist is a leading manufacturer of residential steam bath products that will complement our strong trade and e-commerce product offering and is consistent with our bolt-on acquisition strategy.
In our decorative architectural segment, sales declined 5% against the healthy 8% comp for the second quarter of 2020.
While bath and cabinet hardware, lighting and propane grew in the quarter, demand moderated for DIY paint.
Material availability and other supply chain issues also impacted our overall coatings business, as nearly all of our resin suppliers were operating under a force majeure declaration during the second quarter.
Because of these issues, sell-through on our coatings products was better than sell-in and inventories in the channel were reduced during the quarter.
Due to lower than expected second quarter sales and our expectation that material availability issues will persist but slowly improve, we are lowering our DIY sales expectation from flat to down low-single digits for the full year.
However, with the acceleration we saw in our propane business in the quarter, we are incrementally more optimistic and are raising our expectations to low-double digit growth from high-single digit for the full year for our propane business.
For the decorative segment overall, we now expect growth to be in the range of 2% to 5% for the full year.
With respect to innovation in the decorative segment, we continue to invest in new products and are excited to launch a new high end line of paint in the third quarter at the Home Depot called Behr Dynasty for both DIY and pro painters.
Dynasty is our most durable, stain-resistant, scuff resistant, one-coat hide paint ever.
It's low VOC, Greenguard and LEED certified, fast drying and has an anti-microbial mildew-resistant paint finish.
This is yet another example of how our innovation teams continue to focus on the voice of the customer to deliver leading innovation and value for both the consumer and the professional.
Moving on to capital allocation.
We continued our aggressive share buyback during the quarter by repurchasing 6.6 million shares for $447 million.
As part of the accelerated share repurchase agreement that we executed during the quarter, we will additionally receive approximately 900,000 shares in July to complete that agreement, bringing our total shares repurchased year-to-date to 13.1 million shares for $750 million.
This is approximately 5% of our outstanding share account at the beginning of the year.
Underscoring our strong financial position and confidence in the future, we now anticipate deploying another $250 million in the second half of the year for share repurchases and acquisitions for a full year total of approximately $1 billion.
Finally, like I did last quarter, let me give you an update on what we are experiencing with inflation and supply chain tightness.
We continue to see escalating inflation across most of our cost basket, including freight, resins, TiO2 and packaging.
Inbound freight container costs nearly tripled during the quarter.
We now expect our all-in cost inflation to be in the high-single digit range for the full year for both our plumbing and decorative segments, with low-double digit inflation in the second half of the year.
Inflation in coatings will likely be in the mid-teens later in the fourth quarter.
To mitigate this inflation, we have secured price increases across both segments, and are taking further pricing action across our business to address these continued cost escalations.
We're also working with our suppliers, customers and internal teams to implement further productivity measures to help offset these costs.
Despite the increased inflation, we still expect to achieve price/cost neutrality by year-end.
While cost inflation has clearly been an issue, material availability has also impacted our business.
Our teams have done a tremendous job of qualifying new suppliers, developing material substitutions, and shifting production to adapt to this dynamic environment and to serve our customers.
However, these raw material constraints have limited our ability to build inventory of many of our products and the channels that we serve.
We anticipate material availability to slowly improve in the second half of the year, and we expect to replenish inventory to the appropriate levels over time.
The demand for our products remains strong.
And with an improved outlook for plumbing based on the continued strength of both our North American and international operations, we are increasing our full year expectations of earnings per share to be in the range of $3.65 to $3.75 per share, up from our previous expectations of $3.50 to $3.70.
As Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items.
Turning to Slide 7.
We delivered another exceptional quarter as we capitalized on strong consumer demand, resulting in continued growth and increased backlogs.
As a result, sales increased 24% with currency and net acquisitions, each contributing 3% to growth.
In local currency, North American sales increased 15% or 12%, excluding acquisitions.
Strong volume growth in North American faucets, showers and spas led this outstanding performance.
In local currency, international sales increased a robust 50% or 49%, excluding acquisitions and divestitures.
Gross margin was 36.3% in the quarter, up 50 basis points as we leverage the strong volume growth.
Our SG&A as a percentage of sales improved 10 basis points to 16.2% due to our operating leverage.
During the quarter, certain expenses such as headcount, marketing, and travel and entertainment increased as planned.
We expect SG&A as a percent of sales to increase in the third and fourth quarters, as these costs normalize.
We delivered strong second quarter operating profit of $438 million, up $94 million or 27% from last year, with operating margins expanding 60 basis points to 20.1%.
Our earnings per share was $1.14 in the quarter, a 34% increase compared to the second quarter of 2020, due to volume leverage, lower interest expense and lower share count.
Turning to Slide 8.
Plumbing growth accelerated in the quarter with sales up 53%.
Currency contributed 5% to this growth and acquisitions, net of divestitures, contributed another 4%.
North American sales increased 47% in local currency or 41%, excluding acquisitions.
Delta led this outstanding performance, delivering another quarter of robust double digit growth.
With a strong brand recognition and market leadership, Delta continues to drive strong consumer demand across all its product categories and channels.
Watkins Wellness also significantly contributed to growth in the quarter with both demand and our backlog remained strong.
International plumbing sales increased 50% in local currency or 49%, excluding acquisitions and divestitures.
Hansgrohe delivered robust growth as demand continues to improve across Europe and numerous other countries.
Hansgrohe's key markets of Germany, China, UK and France, all grew strong double digits in the quarter.
Segment operating margins expanded 230 basis points to 20.6% in the quarter, with operating profit of $274 million, up $115 million or 72%.
The strong performance was driven by incremental volume, favorable mix and cost productivity initiatives, partially offset by an unfavorable price/cost relationship and higher spend on items such as travel and entertainment, marketing and growth initiatives.
During the quarter, we also completed the divestiture of HUPPE, a small shower enclosure business based in Germany.
HUPPE sales were approximately EUR70 million in 2020.
This transaction closed on May 31, and net proceeds were not material.
Given our second quarter results and current demand trends, we now expect plumbing segment's sales growth for 2021 to be in the 22% to 24% range, up from our previous guidance of 15% to 18%.
Finally, due to our improved sales outlook, we are increasing our full year margin expectations to approximately 18.5%, up from our previous guide of approximately 18%.
Turning to Slide 9.
Decorative architectural declined 5% for the second quarter and was 6%, excluding the benefit from acquisitions.
DIY paint business declined double digits in the quarter against the healthy high-teens comp due to moderating demand and raw material supply tightness as resin plants affected by storms in the Texas Gulf Coast region in the first quarter continued to face production challenges.
We expect these raw material headwinds to persist in the third quarter and now anticipate our DIY paint business to be down low-single digits for the full year.
To help mitigate these challenges, we are working with our existing suppliers and qualifying new sources for materials to meet the demand of our customers which remains strong.
Our PRO paint business delivered strong double digits growth in the quarter, as consumers are increasingly willing to allow professional paint contractors in their homes.
We expect demand in this channel to remain strong and now anticipate low-double digit growth for the PRO paint business for the full year, up from our previous expectation of high-single digits as PRO paint contractors' order books continue to grow.
Our builders' hardware and lighting businesses each delivered growth in the quarter, as they continue to capitalize on increased consumer demand.
Segment operating margins were 22.1% and operating profit in the quarter was $188 million due to lower volume, partially offset by cost productivity initiatives.
For full year 2021, we now expect decorative architectural segment's sales growth will be in the range of 2% to 5%, down from 4% to 9% due to lower than expected second quarter sales and persistent raw material constraints.
We continue to expect segment operating margins of approximately 19% as productivity initiatives in pricing help offset higher input costs.
Turning to Side 10.
Our balance sheet is strong with net debt to EBITDA at 1.3x.
We ended the quarter with approximately $1.8 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percent of sales, including our recent acquisitions, was 16.9%, an improvement of 120 basis points over prior year.
As we discussed last quarter, we terminated and annuitized our U.S. qualified defined benefit plans in the second quarter and had an approximate $100 million final cash contribution to the plans to complete this activity.
This removes approximately $140 million of pension liabilities from our balance sheet, and it will benefit our free cash flow by approximately $50 million through reduced cash contributions, starting in 2022.
Also, we received approximately $166 million from the redemption of our preferred stock related to the recent sale of our former cabinet business.
Finally, as Keith mentioned earlier, as of today, we repurchased 13.1 million shares in 2021 for $750 million.
We expect to deploy an additional $250 million for share repurchases or acquisitions for the remainder of this year.
Collectively, these actions demonstrate our confidence in our business and our commitment and ability to further strengthen our balance sheet, while aggressively returning capital to our shareholders.
Turning to our full year guidance, we have summarized our updated expectations for 2021 on Slide 11.
Based on our second quarter performance and continued robust demand, we now anticipate overall sales growth of 14% to 16%, up from 10% to 14% with operating margins of approximately 17.5%, up from 17%.
Lastly, as Keith mentioned earlier, our updated 2021 earnings per share estimate range of $3.65 to $3.75 represents 19% earnings per share growth at the midpoint of the range.
This assumes the 252 million average diluted share count for the full year.
Additional modeling assumptions for 2021 can be found on Slide 14 in earnings deck.
We had an outstanding second quarter driven by our strong brands, our innovation pipelines and most of all, our people, as demonstrated by outstanding execution by our supply chain teams.
Our strong performance demonstrates the strength of Masco's balanced and diversified business.
Masco is a broad portfolio of lower ticket, repair and remodel-oriented home improvement products.
Our products are broadly distributed across geographies and channels for both consumers and professionals.
Additionally, our markets remain strong, and we expect home remodeling expenditures to drive growth in 2022.
The fundamentals of our repair and remodel business are strong, with year-over-year home price appreciation of over 15% in May and existing home sales up over 23%.
Both metrics have a strong correlation with our sales on a lag basis.
And the consumer is strong, with nearly $2 trillion in savings and an increased desire to invest in their homes.
Lastly, we continue to invest in our business and are well positioned for long-term growth.
We are bringing new, innovative products to market, fueling our growth and expanding our leading market share.
And with our leading margins and strong free cash flow, we will continue to deploy capital to reinvesting in our business, acquiring complementary bolt-on companies and returning cash to shareholders in the form of dividends and share repurchases all to drive long-term shareholder value.
With that, I'll now open up the call to questions.

user
compname says q2 adjusted earnings per share $1.14 from continuing operations.
q2 adjusted earnings per share $1.14 from continuing operations.
anticipate 2021 adjusted earnings per share to be in the range of $3.65 to $3.75 per share, increased from our previous expectation of $3.50 to $3.70/share.
qtrly sales increased 24 percent to $2,179 million.

assistant