Masco's Q3 2025: Contradictions on Tariff Mitigation, Pricing Strategies, and Inventory Reserves

Date of Call: October 29, 2025

Financials Results

• Revenue: Sales decreased 3% in local currency; down 2% excluding the Kichler divestiture; currency contributed ~+1%
• EPS: $0.97 per share (Q3 2025)
• Gross Margin: 34.6%, impacted by higher tariffs and commodity costs
• Operating Margin: 16.3%, impacted by lower volume and higher costs (tariffs, commodities, inventory-related reserves)

Guidance:

• 2025 adjusted EPS expected $3.90 to $3.95 per share.
• Full-year sales expected down low single digits (impact includes ~2% reduction from Kichler divestiture; currency ~+1%).
• Total company operating margin ~16.5% for 2025.
• Plumbing: full-year sales up low single digits; margin ~18% (was 18.5% prior guide).
• Decorative Architectural: sales down low double digits (or mid-single digits ex-divestiture); margin ~18%.
• Annualized incremental tariff impact ~ $270M ($140M China; $130M other); in-year 2025 impact ~ $150M before mitigation.
• Expect to deploy ~ $500M for share repurchases or acquisitions in 2025.

Business Commentary:

* Revenue and Margin Performance: - Masco's net sales decreased 3% in local currency for Q3, while excluding the Kichler divestiture, sales decreased 2%. - Operating profit was $312 million with an operating margin of 16.3%. - The decrease in sales and margins was attributed to the dynamic geopolitical and macroeconomic environment, rising tariffs, and lower market demand.

• Segment Performance and Challenges:
• Plumbing sales increased 1% in local currency, driven by favorable pricing.
• Decorative Architectural segment sales decreased 12%, excluding the Kichler divestiture, with operating margin increasing by 100 basis points to 19.1%.

• Challenges in the Decorative Architectural segment were due to lower demand in DIY paint and timing-related impacts on builders' hardware.

• Tariff Impact and Mitigation:

• Masco faced a $150 million in-year tariff impact before mitigation, up from $140 million in Q2.
• The company is actively mitigating tariffs through cost reductions, sourcing footprint changes, and pricing actions.

• The temporary elevation of China tariffs to 145% added approximately $15 million to the overall tariff impact in Q3.

• Capital Allocation and Cash Returns:

• Masco generated strong free cash flow and returned $188 million to shareholders through dividends and share repurchases in Q3.
• The company increased its expectation for cash available for share buybacks or M&A from $450 million to $500 million due to a favorable cash tax benefit.
• The capital deployment strategy focuses on maintaining financial strength and flexibility in a dynamic environment.

Sentiment Analysis:

Overall Tone: Neutral

• Management reiterated confidence in long-term fundamentals and market positions while lowering near-term guidance due to tariffs and softer demand: "we now estimate the total annualized cost impact... to be approximately $270 million" and "we now anticipate adjusted EPS for 2025 to be in the range of $3.90 to $3.95." (Paraphrased)

Q&A:

• Question from Stephen Kim (Evercore ISI): There was a competitor who announced a Jan 1 price increase; how might that influence your paint pricing next year given your relationship with Home Depot?
  Response: Don't expect significant paint price increases into next year; pricing is managed closely with Home Depot and remains essentially price-cost neutral over time.

• Question from Aatish Shah (Analyst): Longer-term impact of tariffs on Plumbing margins given pricing will mostly mitigate tariffs dollar-for-dollar?
  Response: Mitigation levers—sourcing footprint shifts (out of China), supplier concessions and selective pricing—are being deployed to offset tariffs and restore margins over time.

• Question from Matthew Bouley (Barclays): In Q3 plumbing margins, beyond the 145% tariff impact, was there any surprise cost or incremental tariff that affected results?
  Response: Q3 margin drivers were: elevated China tariffs (~$15M from 145%), softer industry volume, and higher commodity costs plus increased inventory-related reserves.

• Question from Matthew Bouley (Barclays): More color on builders' hardware weakness—was it inventory timing or pre-buys earlier?
  Response: It was a planned shipping/process change that curtailed shipments in Q3; viewed as a timing issue with limited full-year impact.

• Question from Michael Rehaut (JPMorgan): Was the Q3 plumbing margin delta vs expectations driven more by inventory-related reserves or other factors?
  Response: Primary unexpected items were inventory-related reserve adjustments and softer sales (notably China); elevated tariffs had been largely anticipated internally.

• Question from Michael Rehaut (JPMorgan): Are you now leaning to the lower end of the full-year sales down low-single-digit guide and which segments drive that?
  Response: Yes—industry softness is at the lower end of expectations affecting Plumbing (China), builders' hardware and DIY paint; underlying company performance remains relatively solid versus industry.

• Question from Michael Dahl (RBC): If China tariffs were reduced ~10%, is it fair to think of a ~$50M annualized change and can you break out the $130M 'other' bucket?
  Response: Directional math is correct; annualized exposure scales with tariff changes. $270M annualized = ~$140M China + ~$130M other (reciprocal tariffs, Section 232 steel/aluminum/copper, glass antidumping), but no further granular split provided.

• Question from Michael Dahl (RBC): Why does Paint look to show a big margin step-down in Q4 versus the solid 2Q/3Q performance?
  Response: The Q4 year-over-year margin decline is primarily due to an unfavorable comparison from the favorable channel inventory timing in Q4 2024.

• Question from Richard Reid (Wells Fargo): The reported 3% plumbing price—how did that realize versus expectations and will pricing step up in Q4?
  Response: Plumbing pricing (~3%) executed per plan; team mitigated tariffs via footprint optimization, supplier concessions and selective pricing, and pricing traction should continue.

• Question from Richard Reid (Wells Fargo): How did Delta perform in the home center channel versus other channels?
  Response: Delta: very strong in e-commerce, wholesale up low-single-digits, and retail/home-center was flat to slightly down.

• Question from John Lovallo (UBS): You referenced lower employee-related costs that didn't repeat—what was the Q3 impact and expected Q4 impact?
  Response: Q2 had a one-time favorable employee-related benefit that did not repeat in Q3; the company continues disciplined cost control but no repeat benefit in Q3.

• Question from John Lovallo (UBS): Outside of tariff mitigation, what cost-savings initiatives are being taken and expected go-forward impact?
  Response: Using the Masco operating system: plant productivity, supply-chain/procurement savings, automation/VA/VE, and austerity on headcount and discretionary spend across segments.

• Question from Trevor Allinson (Wolfe Research): Can you quantify input cost inflation in Plumbing in Q3 and expectations for Q4?
  Response: Copper-driven input inflation was low-single-digit in Q3; expect similar low-single-digit inflation for the plumbing segment for the year.

• Question from Trevor Allinson (Wolfe Research): On DIY Paint, is the weakness pull-forward/deferral and can DIY return to growth in 2026?
  Response: DIY weakness tracks low existing-home sales; long-term fundamentals (housing age, home equity) support recovery, timing uncertain; PRO paint is a clear growth avenue.

• Question from Susan Maklari (Goldman Sachs): What's driving Delta's strength in e-commerce and wholesale and sustainability into tougher macro?
  Response: Delta's strength stems from innovation (25% vitality rate), strong brand building and advanced e-commerce capabilities; management expects momentum to continue into 2026.

• Question from Susan Maklari (Goldman Sachs): Timing of the increased $50M cash return—how will it be deployed and M&A appetite?
  Response: Increased cash available to ~$500M (tax benefit); ~$150M remains for Q4; priority is bolt-on M&A pipeline but unused cash will be used for share repurchases.

• Question from Margaret Grady (Jefferies): Why did Plumbing pricing remain ~3% sequentially despite mitigation—are you seeing competitive pressure or pricing fatigue?
  Response: Pricing is gaining traction and used selectively as part of balanced mitigation (sourcing, cost reductions, supplier concessions); realized pricing reflects market dynamics and mitigation needs.

• Question from Margaret Grady (Jefferies): Any channel nuances on price realization and thoughts on January price actions for 2026?
  Response: No channel-level pricing details provided; future pricing plans are under development and managed directly with customers.

• Question from Adam Baumgarten (Vertical Research): Will the Q3 timing issue in builders' hardware simply unwind in Q4 so FY isn't materially impacted?
  Response: Yes—Q3 was an adverse shipping timing impact tied to a process change; expect normalization in Q4 and limited full-year effect.

• Question from Adam Baumgarten (Vertical Research): What's happening on the ground in China for Plumbing?
  Response: China market is challenged by weak housing market and stronger local competitors; Masco is holding up relatively well but China was a Q3 headwind.

• Question from Keith Hughes (Truist): Were the inventory reserves write-offs for obsolete stock and how large was the hit?
  Response: Quarterly reserve adjustments were driven by slower market assumptions (not regular), larger than typical; represented roughly 25% of the YoY operating-profit impact and are noncash.

• Question from Eric Bosshard (Cleveland Research): Strategically, what can be done to stimulate DIY Paint growth?
  Response: Focus on stronger brand messaging around Behr's value/quality and continue product innovation (e.g., plant-based primer/paint) with retail partner to drive DIY demand.

• Question from Eric Bosshard (Cleveland Research): Your optimism for Delta retail in 2026—is that driven by market recovery or distribution/innovation plans?
  Response: Confidence is driven by concrete retailer distribution plans and product innovation pipelines—management has good sightlines into 2026 merchandising and expects strong retail performance.

• Question from Rafe Jadrosich (BofA): How does tariff timing hit P&L and what's the cadence of mitigation?
  Response: Most tariff impact hit in H2 (Q3/Q4); Q3 included ~$15M from elevated China tariffs; annualized tariff impact ~$270M with ~$150M in-year 2025 before mitigation; mitigation cadence varies by lever.

• Question from Rafe Jadrosich (BofA): Is the plan to fully mitigate by 2026 and timing of levers like sourcing and pricing?
  Response: Mitigation is underway across levers; sourcing-footprint changes are the largest and take time; goal is to offset much of the impact and more 2026 detail will be provided in the February call.

• Question from Collin Verron (Deutsche Bank): How long will the soft demand environment persist and what indicators would signal improvement?
  Response: Timing is uncertain; long-term R&R drivers remain strong (age of housing stock, home equity); key indicators to watch are lower interest rates and improved consumer confidence.

• Question from Anthony Pettinari (Citi): How are Brizo/Hansgrohe performing relative to Delta and how is Watkins Wellness trending?
  Response: Upper-premium/luxury brands (Brizo, Newport Brass, Axor) are outperforming with fastest growth; Hansgrohe strong in Europe but soft in China; Watkins (hot tubs/saunas) has large long-term upside due to very low household penetration.

Contradiction Point 1

Plumbing Tariff Impact and Mitigation Strategies

It involves differing perspectives on the impact and mitigation strategies related to tariffs on plumbing products, which could affect financial performance and strategic planning.

Can you clarify the long-term impact of tariffs on Plumbing margins, given that price adjustments will largely offset them? - Stephen Kim(Evercore ISI)

2025Q3: The tariffs are a volatile and dynamic environment. The current tariffs enacted as of October represent a $270 million annualized impact. We're working to mitigate this through sourcing footprint changes, reductions in costs, and pricing. Our goal is to offset the direct cost impact of tariffs over time. - [Richard Westenberg](CFO)

What are your early priorities for Masco, and are there any strategic considerations? - Matthew Bouley(Barclays)

2025Q2: Incremental tariffs increased the quarter's impact from $120 million to $140 million, mostly in Q4. The elevated tariff impact on 145% China imports added about $15 million in Q3. - [Richard Westenberg](CFO)

Contradiction Point 2

Pricing Strategy and Elasticity in Plumbing Segment

It reflects differing views on the pricing strategy and demand elasticity in the plumbing segment, which could influence revenue management and strategic decision-making.

How are pricing dynamics in the Plumbing segment compared to expectations, and what are channel-specific realizations? - Margaret Grady(Jefferies)

2025Q3: Our price performance is gaining traction as mitigation actions take hold over time. We're not providing channel-specific pricing details, but pricing is one of our levers to mitigate tariffs and other margin headwinds. - [Richard Westenberg](CFO)

How is demand elasticity affecting your business, especially in premium and luxury segments? - Susan Maklari(Goldman Sachs)

2025Q2: In the premium and luxury segments, pricing is still working well, and we think we're in a good spot with our price realization. - [Jonathon Nudi](CEO)

Contradiction Point 3

Market Conditions and Consumer Behavior in DIY Paint

It reflects differing views on the market conditions and consumer behavior in the DIY Paint segment, which could influence sales strategy and forecasting.

How might paint pricing affect your outlook, and how does this tie into your partnership with Home Depot? - Stephen Kim(Evercore ISI)

2025Q3: We have a unique relationship with Home Depot, which is essentially price cost neutrality over time. While we see some upward pressure on our paint input costs, it is not significant. We do not expect significant pricing on paint moving forward. - [Jonathon Nudi](CEO)

Can you discuss Q1 and April top-line trends and provide insights into Q2? Are there trends in paint and plumbing? - Michael Rehaut(JPMorgan)

2025Q1: The performance in DIY paint is consistent with long-term trends of flat to slight declines. - [Keith Allman](CEO)

Contradiction Point 4

Pricing and Tariff Mitigation in Plumbing

It involves differing perspectives on pricing strategies and tariff mitigation efforts in the Plumbing segment, which could impact profitability and competitive positioning.

How do pricing dynamics in the Plumbing segment compare to expectations, and what are channel-specific realizations? - Margaret Grady(Jefferies LLC)

2025Q3: Our price performance is gaining traction as mitigation actions take hold over time. - [Richard Westenberg](CFO)

Can you quantify the impact of tariff mitigation, especially price hikes, and how demand might respond? - Stephen Kim(Evercore ISI)

2025Q1: Our mitigation actions include pricing, cost reductions, and sourcing footprint changes. Most action in 2025 will be pricing. - [Richard Westenberg](CFO)

Contradiction Point 5

Inventory Management and Reserves

It involves differing statements on inventory management and reserves, which can impact financial reporting and operational efficiency.

Could you clarify the inventory reserves in Plumbing and their dollar impact? - Keith Hughes(Truist Securities)

2025Q3: Inventory reserves were adjusted quarterly based on market conditions and industry sales, affecting Plumbing margins by about 1/4 of the performance impact year-over-year. - [Richard Westenberg](CFO)

How do your sourcing footprint changes differ from prior tariff scenarios? Is there low-hanging fruit remaining? - Anthony Pettinari(Citi)

2025Q1: Inventory reserve builds were approximately 1% of sales. This temporary build reflects pressure on the DIY channel and was driven primarily by lower demand. - [Richard Westenberg](CFO)