Masco Corporation

Good morning, ladies and gentlemen. Welcome to Maskell Corporation's quarter and full year conference call. My name is Emily and I'll be your 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 the star followed by two. I will now turn the call over to David Chyker, Vice President, Treasurer and Investor Relations. You may begin.

Thank you, Emily, and good morning. Welcome to Masco Corporation's 2022 fourth quarter and full year conference call. With me today are Keith Allman, President and CEO of Masco, and John Sneddweiss, Masco's Vice President and Chief Financial Officer. Our fourth 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. can't take your question now, please call me directly at 313-792-5500. Our statement 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 Commissions. 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 it all over to Keith.

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I'll start this morning with some brief comments on our fourth quarter. Then I'll turn to our full year results and our view on 2023. Before I get started, however, I'm sure you saw our announcement that Johnson & Weiss has decided to retire from MASCO, effective the end of May, and we are working to identify his replacement. John has been a fixture at MASCO and in the industry for over 25 years now, and has been an invaluable partner to me, our board, and the investment community during his 15-year tenure as CFO of our company. He will be sorely missed, and we wish John all the best in his future endeavors. Now please turn to slide five. In the fourth quarter, our top line decreased 5%, as we saw lower volumes across most categories, partially offset by significant pricing actions of 9%. Our operating profit declined in the quarter due to the lower volumes, higher operational costs, and currency. This was partially offset by pricing actions and expense control as SG&A declined $22 million to 17.4% of sales. Our earnings per share for the quarter were $0.65. Earnings per share benefited from a lower average diluted share count as well as effective tax rate of 24%, lower than our previously guided 25%. Turning to our segments, plumbing grew 2% in local currency with a 1% decline in North American plumbing, offset by 7% growth in international plumbing. Hanjroi drove market share gains in many key markets, including China, Germany, and France. our international business has continued to execute well, which speaks to the strength of the Hansgrohe team, its strong brands, and its ability to gain market share. In North America, our spa business has now worked through its extended backlog, and backlogs are now in the normal range of four to six weeks after a tremendous three-year run of more than 50% sales growth. Turning to our decorative architectural segments, Sales declined 8% against a strong 15% comp. DIY paint sales declined low double digits, while propaint continued its excellent performance with mid-single-digit growth against a tremendous comp of over 50%. Now let's review our full year performance. Please turn to slide 6. 2022 was a challenging year. with strong growth in the first half, followed by notable declines in demand in the second half. Despite these volatile conditions, Masco and our 19,000 employees across the globe responded well to deliver for our customers and our shareholders. For the full year, the company grew sales 4%, for a two-year stacked comp of 21%. Strong pricing actions increased sales by 9%, offset by volume declines of 3% and currency impact of 2%. Volume growth in the first half of the year was more than offset by volume declines in the second half. Operating profit declined 7% with an operating margin of 15.6% and earnings per share increased from $3.77 to $3.77 from $3.77. Total commodity and other inflation was low double digits for the full year. This inflation, together with supply chain challenges, resulted in lower margins for the year despite our significant pricing actions. We are focused on improving our margins by continuing to drive productivity as we apply our 80-20 mindset to return to our pre-pandemic levels. Turning to our segments, Our plumbing segment grew 6%, excluding currency, led by strong growth at both Hansgrohe and Watkins. In our decorative architectural segment, full-year growth was 6%. DIY paint grew low single digits for the year, while propaint grew over 25%. Propaint has had a tremendous three-year run of approximately 70% growth and now accounts for one-third of our paint business, or over, $900 million. This strong performance earned Bayer its second consecutive Partner of the Year award for the Home Depot. We will continue to invest in our paint business to capture further share in both the DIY and pro markets. Our recently launched adjacent paint categories such as aerosols, interior stains, and caulks and sealants have performed well and are expanding the offering to additional stores and expect further share gains in 2023. We will be launching Behr Dynasty exterior for the summer painting season, expanding the lineup of our number one rated Dynasty paint line. And we will continue to invest in people and capabilities to better serve the pro painter and continue our strong pro performance. Turning to capital allocation, Our strong balance sheet allowed us to deploy approximately $1.2 billion in capital during the year. We repurchased 16.6 million shares for $914 million, representing approximately 7% of our outstanding shares. We increased our quarterly dividend 19% and paid $258 million in dividends to shareholders. We finished the year with net leverage of 1.8 times, providing us ample financial flexibility. Our balanced, disciplined approach to capital allocation and strong cash flow resulted in a return on invested capital of approximately 39%. Lastly, on the ESG front, we believe our business should be part of the solution to the world's climate crisis. Therefore, we have established a target to reduce our emissions by 50% by the year 2030, aligned with science-based targets. This is consistent with our commitment to doing business the right way and our purpose to provide better living possibilities for our homes, our environment, and our community. I want to thank all our employees for their outstanding efforts throughout 2022. It is a team effort to continue to deliver for our customers and shareholders. Now, turning to 2023, we expect the softening demand trends in the second half of 2022 to continue into 2023 as our markets adjust to increasing interest rates, persistent inflation, and tighter consumer spending. Overall, we anticipate volumes to decline in the low double-digit range, offset to a small extent by pricing actions. Our current market assumptions for 2023 are as follows. For the North American repair and remodel market, we expect the market to be down approximately low double digits. This is after a very strong three-year run of approximately 20% growth. For the paint market, we expect the DIY paint market to be down high single digits and the pro market to decline by mid-single digits. And for our international markets, principally Europe, we expect markets to contract by high single digits. As a result, we anticipate MASCO sales in 2023 to decline approximately 10%. With this lower top line assumption, we will drive to minimize our decremental margins to be in the low 20% range versus our typical 30% decremental margins. We are focused on recovering the significant cost inflation we experienced over the past two years through operational productivity, supply chain normalization, and additional pricing actions. With this focus, we expect our operating margin to be approximately 15% in 2023. Turning to capital allocation, our strategy remains unchanged. First and foremost, we will invest in our business to maintain and grow our leadership positions and win in the recovery. The second pillar of our capital allocation strategy is to maintain a strong balance sheet with gross debt to EBITDA levels of below two and a half times. Third, we have a targeted dividend payout ratio of 30%. Our board declared a 2% increase in our dividend for 2023. which will bring our annual dividend to $1.14 per share and marks the 10th consecutive annual increase. We expect our cash flow conversion to be over 100% in 2023 as we manage our working capital. We will deploy that free cash flow after dividends to share repurchases or acquisitions. Based on our projected free cash flow, We expect to deploy approximately $500 million to share repurchases or acquisitions in 2023, in addition to paying the remaining $200 million of our term loan. Lastly, there is no change to our M&A strategy. We continue to review and selectively pursue opportunities that have the right strategic fit and the right return for MASCO. With the actions we are taking to address this more challenging environment, coupled with our continued strong capital deployment, we anticipate earnings per share for 2023 to be in the range of $3.10 to $3.40 per share. While we expect the near-term environment will remain challenging as our markets and the economy adjust to higher interest rates and prices, We believe the long-term fundamentals of our repair and remodel markets are strong. Cyclical factors such as home price appreciation and existing turnover will remain challenged and likely a headwind for 2023. However, structural factors such as consumers staying in their homes longer, the age of housing stock, and high home equity levels will drive increased repair and remodel activity in several ways. Many homeowners have taken advantage of low mortgage rates and are likely to remain in their homes longer. One and a half million more homes will reach the prime remodeling ages of 20 to 39 years old over the next three years. And home equity levels remain high and can withstand significant pullbacks in home prices and still be above 2019 levels. All of these structural forces provide tailwinds for our business. and increase our confidence for a strong repair and remodel market after the economy stabilizes in 2023. We will continue to invest in our brands, capabilities, and people to outperform the competition in both the near and the long term. With favorable fundamentals and our continued focus on executing our growth strategy, together with our strong free cash flow and capital deployment, we are positioned to continue to drive shareholder value creation for the long term. Now, I'll turn the call over to John to go over our fourth quarter, full year, and 23 outlook in more detail. John?