Masco Corporation

Good morning, ladies and gentlemen. Welcome to the Moscow Corporation 2024 fourth quarter and full year conference call. My name is Joelle, 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 two. I will now turn the call over to Robin Sondervan, Vice President, Investor Relations, and FP&A. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to Masco Corporation's 2024 Fourth Quarter and Full Year Conference Call. With me today are Keith Allman, President and CEO of Masco, and Rick Westenberg, 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. 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 describe these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we file 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 Keith.

Thank you, Robin. Good morning, everyone, and thank you for joining us today. Please turn to slide five. I wanted to start this morning by reflecting on some of our key accomplishments across our businesses, brands, and products for 2024. Beginning with our plumbing segment, we introduced several innovative new products in the market and entered into new product categories. At Delta Faucet, we're focused on being a leader in water quality and introduced water filtration products for both the sink and shower categories. At Hansgrohe, we continue to increase market share by offering products with premium and customizable designs and products that are focused on saving energy and water. At Watkins Wellness, we introduced Fresh Water IQ, a smart monitoring system that automatically tests the water chemistry in your spa and communicates recommended adjustments to maintain clean, natural-feeling water. Finally, our integration of Sauna 360 is ahead of schedule, and we are actively launching our branded saunas into our existing Watkins dealer network. In our decorative architectural segment, the strength of our brands continues to resonate with our customers and generate additional share gains. Behr was rated number one in interior paint. number one in exterior paint, and number one in exterior stain in a third-party study demonstrating the strength and exceptional quality of our leading Bayer brand. Our investments in our paint business to continue to expand our services and build upon our successful partnership with the Home Depot have helped drive share gains in both the DIY and pro paint categories. In our pro paint category, Our annual sales are now over $900 million, which is an increase of over 70% since 2020. Our products resonate with propainters and have enabled us to capitalize on the sizable growth opportunity in the propaint market. Finally, we completed the sale of Kichler Lighting in 2024. We are confident that this transaction to further streamline our portfolio will drive greater value for Masco shareholders. as we focus on the strategic initiatives of our core businesses. I want to thank all our employees for their excellence in execution, their focus on the customer, and their continuous improvement mindset that delivered these key accomplishments during the year. With that, I'll now make some brief comments on our fourth quarter and full year results, and then I'll finish by discussing our outlook for 2025 and provide an update on our margin targets for 2026. Please turn to slide six. We wrapped up 2024 with another quarter of solid operating results. In the fourth quarter, our top line decreased 3%, primarily due to the divestiture of Kichler. Excluding this divestiture and the unfavorable impact of currency, sales increased 1%, primarily due to higher volumes in our decorative segment. Operating profit increased $19 million in the quarter due to our continued efforts to drive cost savings and efficiency across our operations. Operating profit margin improved 140 basis points to 15.9%. Our performance in the fourth quarter marked the seventh quarter in a row of year over year margin expansion. With our strong execution, our earnings per share for the quarter increased 7% to 89 cents per share. Turning to our segments, plumbing sales decreased 1% in local currency. We saw lower volumes in both trade and retail in North America. While the industry continues to show signs of stabilization, it remains choppy and has not yet pivoted to sustained growth. International plumbing grew slightly as we saw growth again this quarter in our business in both Europe and China, despite a challenging market environment. Operating profit for the segment was $200 million and operating margin was 16.8%, an improvement of 40 basis points. We continue to see the benefits of our focus on productivity, efficiency, and cost savings initiatives throughout our plumbing segment. Additionally, our investments in our leading global brands, innovative products, and customer service are producing results, and we will continue to capitalize on these investments. Turning to our decorative architectural segment, sales decreased 6%, primarily due to our divestiture. Overall paint sales were up mid single digits, including a benefit from inventory timing. Excluding this benefit, overall paint sales were down low single digits. Pro paint sales were up high single digits and DIY paint sales were down mid single digits. Operating profit for the segment was $113 million and operating margin was 17.7%, an improvement of 290 basis points. Now let's review our full year performance. Please turn to slide seven. MASCO executed extremely well in 2024. And for the second year in a row, we improved nearly every operating metric for the full year. Gross margin improved 110 basis points to 36.3%. Operating margin expanded 70 basis points to 17.5%. Plumbing margin expanded 100 basis points to 19%. Decorative margin expanded 70 basis points to 18.5%. Earnings per share grew 6% to $4.10 per share, up from $3.86 per share in 2023. We delivered a return on invested capital of 44%. And our strong cash flows including the proceeds from our divestiture, allowed us to return more than $1 billion to shareholders in the form of dividends and share repurchases in 2024. Importantly, we have achieved compound annual earnings per share growth of over 12% over the last five years, delivering on our target of double-digit EPS growth through cycles. This growth demonstrates the strength of our brands, service, and innovation, and the benefits of a portfolio focused on lower ticket repair and remodel oriented products. Turning to slide eight, as we look to the future, we are well positioned to achieve strong profitable growth through continued market share gains, margin expansion, and disciplined capital deployment. The 2025 estimates we are providing today include the impact from the recently enacted China tariffs, net of mitigation actions, but do not include impacts from any potential future tariffs. We have demonstrated our ability to navigate these types of situations in the past, from COVID to unforeseen supply chain challenges to previously enacted tariffs. And we are confident that we have the right teams and plans in place to respond quickly to any new tariffs. Moving to our expectations for 2025, I will begin with the following market assumptions. For global repair and remodel markets in aggregate, we expect the market to be flat to down low single digits. For the North American repair and remodel market, we expect the market to be roughly flat. For international markets, we expect the markets in aggregate to be down low single digits. Our expectations for our own sales in 2025 is to be down low single digits. However, if we exclude the unfavorable impacts from our divestiture of Kichler of approximately 2% and currency of approximately 1%, we expect our sales to be roughly flat to up low single digits. Our estimate includes our expectations that we will continue to outperform the market in 2025. Despite the relatively flat top line assumption, we will continue to expand our margins through disciplined pricing, innovative product introductions, cost savings initiatives, and operational efficiencies across our business. We have consistently demonstrated our ability to execute in dynamic times, and plan to deliver further operating margin expansion across our business in 2025. We expect plumbing margins in the range of 19 to 19 and a half percent and decorative margins also in the range of 19 to 19 and a half percent, resulting in a mass cooperating margin of approximately 18%. Turning to capital allocation, our strategy remains unchanged. First, we will reinvest in our business to maintain and grow our leadership positions and win in the marketplace. This includes ongoing investments in our growth initiatives to continue to gain share in the domestic plumbing, wholesale channel, international plumbing, and propane. Second, we will continue to maintain a strong investment grade balance sheet. Third, we have a targeted dividend payout ratio of 30%. I'm pleased to share that our board approved a 7% increase in our dividend for 2025, which will bring our annual dividend to $1.24 per share and marks the 12th consecutive annual increase. And fourth and finally, we will deploy our remaining available free cash flow to share repurchases or acquisitions. Based on our projected free cash flow, we expect to deploy approximately $600 million to share repurchases or acquisitions in 2025. Our M&A strategy has not changed. We continue to review and selectively pursue opportunities that have the right strategic fit and the right return for MASCO, with the goal of adding 1% to 3% annual top-line growth through acquisitions over the long term. Based on our expected operating performance and capital deployment actions, we anticipate earnings per share for 2025 to be in the range of $4.20 to $4.45 per share. One year ago, we provided our margin expansion targets for 2026, and we are reiterating those targets on this call. For our plumbing segment, With our industry-leading brands, including Delta and Hansgrohe, we expect to expand margins to 20% in 2026, up from 19% in 2024. For our decorative segment, led by our industry-leading Behr brand, we expect to achieve margins of 19% to 20% in 2026, up from 18.5% in 2024. This range reflects the benefit from our Kichler divestiture, partially offset by a slower than initially expected return to growth in the DIY paint market. For Masco overall, we expect to expand operating profit margins to 18.5% in 2026, up 100 basis points from 17.5% in 2024, and up 170 basis points from 16.8% in 2023. While we expect a stabilizing but challenging market in 2025, we anticipate that the market will return to its historical growth rates of 3% to 5% in 2026. Therefore, we believe we can achieve these margins through leveraging incremental volume, exercising pricing discipline, and executing on operational improvements. I want to finish by reiterating the structural factors that remain supportive of increased repair and remodel activity in the mid to long term. Homeowners that took advantage of low mortgage rates are likely to remain in their homes for longer and invest in upgrades and remodels. 1.7 million more homes will reach the prime remodeling ages of 20 to 39 years old by 2027. Home equity levels are at record high levels and millennial household formation is rising. All of these structural forces provide tailwinds for our business and increase our confidence for a strong repair and remodel market in the coming years. We believe we are well positioned to capitalize on future volume growth. as our capacity, efficiency, productivity, and cost structure are set up to drive favorable incremental benefits from additional volume. With these favorable fundamentals, the continued successful execution of our strategic initiatives, and our disciplined capital deployment, we are well-positioned to outperform the competition and deliver double-digit EPS growth through cycles for our investors. Now, I'll turn the call over to Rick to go over our fourth quarter, full year, and 2025 outlook in more detail.