Masco Corporation

morning ladies and gentlemen welcome to masco corporation's fourth quarter and full year 2020 conference call my name is michelle and i will be your operator for today's call as a reminder today's conference call is being recorded for playback purposes to ask a question today please press star then the number one on your telephone keypad to withdraw your question please press the pound key i will now turn the call over to david chaikai vice president Treasurer of Investor Relations, you may begin.

Thank you, Michelle, and good morning. Welcome to Masco Corporation's 2020 fourth quarter and full-year conference call. With me today are Keith Allman, President and CEO of Masco, and John Snubice, Masco's Vice President and Chief Financial Officer. Our fourth quarter earnings release and the presentation slides that we will refer to today 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 risk and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We describe these risk 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 now turn the call over to Keith.

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I hope you and your families are safe and healthy. 2020 was a challenging year for all of us. As the virus started reshaping our lives, our economy, and our business, we established three priorities to guide us throughout the year. Number one, keep our employees safe. Two, meet the needs of our customers. And three, positioned Masco to outperform the recovery. Our employees across our business units did a tremendous job to deliver on all of these priorities. Our performance in 2020 was a testament to Masco's culture of solving problems, serving customers, and delivering better solutions. I want to thank all our 18,000 employees across the globe for their outstanding efforts throughout 2020. Now let me provide you some brief comments on our fourth quarter before I turn to our full year results and conclude with our thoughts on 2021. Turning to slide four, our top line increased 12%, excluding the impact of currency in the fourth quarter. We saw growth across our entire portfolio, led by strong growth in North American plumbing, international plumbing, and our paint business. Operating profit increased 20%, and our operating margin expanded 90 basis points to 16.6% in the quarter as we leveraged our strong volume growth. Our earnings per share for the quarter increased an outstanding 36%. Turning to our segments, plumbing grew 12% excluding currency, with 14% growth in North American plumbing and 8% growth in international plumbing. North American plumbing was led by Delta Faucet Company with 18% growth. Our spa business also achieved growth in the fourth quarter as we continued to effectively manage COVID-related restrictions. Hansgrohe drove strong growth in Germany and China as those markets have recovered nicely from earlier in the year. In our decorative architectural segment, Bayer continued its tremendous year with high-teens DIY paint growth and mid-single-digit propaint growth in the fourth quarter. Our lighting and our bath and cabinet hardware businesses also contributed nicely to growth in the quarter. In regards to capital allocation, we resumed our share repurchase program by repurchasing 2.3 million shares for $125 million during the quarter. And we executed three bolt-on acquisitions, which we expect to contribute approximately 3% top-line growth in 2021. The largest was the acquisition of Kraus, an online plumbing fixture company focused on modern, high-quality sinks, faucets, and related products. Kraus will operate as an affiliate of Delta Faucet Company. This leading digitally native brand will complement our online capabilities in the fast-growing e-commerce channel. Also in our plumbing segment, Hans Grohe, in January, acquired a 75% interest in Easy Sanitary Solutions, or ESS, a Netherlands-based developer and manufacturer of high-style linear drain solutions. ESS shares Hans Grohe's focus on innovation, design, and responsibility, and will further expand our strong presence in the shower space. In our decorative architectural segment, we acquired Work Tools International, a leading manufacturer of high-quality precision paint tools and accessories, including brushes, rollers, and mini-rollers for both DIY and professional painters under the Wiz and Elder & Jenks brand names. These acquisitions are consistent with our M&A criteria in that they are leaders in their respective categories, have a strong fit with our existing strategy, increase our market share in complementary or adjacent product categories, and meet our bolt-on acquisition return criteria, which is to exceed our risk-adjusted cost of capital within a three-year timeframe. Now let's review our full-year performance. Please turn to slide five. For the full year, sales grew 7%, led by double-digit growth from Delta Faucet, Bear Paint, and Liberty Hardware. Delta gained share with double-digit growth across its retail, trade, and e-commerce channels. Hansgrohe gained share in its two largest markets of Germany and China. And our spa business, which was the most impacted by shutdown orders and limits on employees in its Mexican facilities, overcame significant obstacles to end the year down only mid-single digits and enters 2021 with a record backlog due to the tremendous demand for its products. In our decorative architectural segment, we were well-positioned with our leading brands, Bayer and Kills, and our strong channel partners to capitalize on the powerful resurgence in DIY paint. This resulted in full-year growth of over 20% in DIY paint. Propaint demand was soft in Q2 and Q3, but returned to growth in the fourth quarter and is accelerating into 2021. While total company sales grew 7%, operating profit increased 18% as we leveraged the strong volume growth and enacted significant cost reduction across the organization, including a hiring and wage freeze for part of the year, significantly lower brand and marketing spend, a freeze on certain growth investments for part of the year, and obviously, drastically reduced travel and entertainment expense. These actions, coupled with our strong volume leverage, resulted in significant operating margin expansion of 170 basis points in 2020. Our strong cash generation allowed us to deploy nearly $1.1 billion in capital during the year. We repurchased $727 million of our stock at an average price of approximately $39 per share. We returned approximately $145 million in dividends to shareholders. We completed four bolt-on acquisitions for $227 million. And we finished the year with over $1.3 billion in cash on hand and net leverage of one time. This strong operating profit growth, combined with our significant capital deployment, resulted in exceptional financial results. 37% earnings per share growth to $3.12 per share, exceeding our 2019 investor day guidance for 2021, a full year earlier than planned. Free cash flow of over a billion dollars with a conversion rate of 118%. and a return on invested capital of approximately 42%. Now turning to 21. While precise forecasting is a significant challenge in this dynamic environment, I'd like to share with you our view of the markets where we compete. For the North American repair and remodel market, we expect market growth to be in the low to mid single digit range. with strong growth in the first half, followed by difficult comps in the second half. For the paint market, a subset of the repair and remodel market for us, we expect the DIY paint market to be down low to mid-single digits and the propane market to grow mid-single digits. And for our international markets, principally Europe, we expect a low single-digit growth environment. While the US market will face challenging comps in the back half of 21, leading indicators remain robust. Home price appreciation was up nearly 13% in December, and existing home sales were up over 22% compared to prior year. Each of these metrics has a strong correlation with our sales on a lag basis. Based on these assumptions, and our expectation that we will continue to gain share and outperform the market. We anticipate Masco's growth to be in the range of 5% to 9% excluding currency for 2021, and 7% to 11% including currency. This is based on expected organic growth of 2% to 6% excluding currency, growth from our completed acquisitions of approximately 3%, and growth from foreign currency translation of approximately 2%. We expect margins to be approximately 17% and earnings per share to be in the range of $3.25 to $3.45 for 2021. Turning to capital allocation, our board announced its intention to increase our annual dividend to 94 cents per share beginning in the second quarter of 2021. a 68% increase, as we have raised our targeted dividend payout ratio from 20% to 30%, based on the strength of our business model and cash generation capabilities. In addition to announcing its intention to increase our annual dividend, our Board also approved a new $2 billion share repurchase authorization. our strategy remains unchanged to deploy our free cash flow after dividends to share repurchase or acquisitions. And based on our strong liquidity position of over $1.3 billion in cash at year end, and in our projected free cash flow, we expect to deploy approximately $800 million to share repurchases or acquisitions in 2021. Now, I'll turn the call over to John to go over our fourth quarter, full year, and 2021 outlook in more detail. John?