Q4 2020 Masco Corp Earnings Call
Yeah.
Good 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. The ask a question today. Please press Star then the number one on your telephone keypad to withdraw your question. Please press the pound Keith I will now turn the call over to David Chaika.
Vice President Treasurer of Investor Relations you may begin.
Thank you Michelle and good morning, welcome to the Masco Corporation's 2024th quarter and full year conference call with me today are Keith Allman, President and CEO of Masco, and John Snub ice Masco, as 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 of 31379 to 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 that could cause our actual results to differ materially from the forward looking statements.
We've described 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.
Our references to operating profit and earnings per share will be as adjusted unless otherwise noted.
We reconciled these adjusted metrics of the GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.
With that I'll 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.
'twenty 'twenty 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.
To meet the needs of our customers and three position masco to outperform the recovery.
Our employees across our business units the tremendous job to deliver on all of these priorities.
Our performance in 2020 was a testament to masco is culture of solving problems, serving customers and delivering better solutions.
I want to thank all of our 18000 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 topline 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.
The 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 plumber.
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-19 related restrictions.
How does grow a drove strong growth in Germany, and China as those markets have recovered nicely from earlier in the year.
In our decorative architectural segment Behr continued its tremendous year with high teens, DIY paint growth and mid single digit propane gross 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 two 3 million shares for $125 million during the quarter.
And we executed three bolt on acquisitions, which we expect to contribute approximately 3% topline growth in 2021.
The largest was the acquisition of Krauss and online plumbing fixture company focused on modern high quality sinks faucets and related products.
Klaus 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 growing in January acquired a 75% interest in easy sanitary solutions or E. S. S. A netherlands based developer and manufacturer of high style linear drain solutions.
Yes S shares how's it always 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 many rollers for both DIY and professional painters under the Wiz and elder and Jenks brand names.
These acquisitions are consistent with our M&A criteria and 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, Behr paint and Liberty hardware.
Delta gained share with double digit gross growth across its retail trade and E commerce channels.
How do you grow of gained share in its two largest markets of Germany and China.
In our Spa business, which was the most impacted by shutdown orders and limits unemployed 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 bear 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.
Pro paint 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.
Our 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 the to deploy nearly $1.1 billion in capital during the year.
We repurchased $727 million of our stock at an average price of approximately $30 per share excuse me $39 per share.
We returned approximately of 145 million of 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.
The 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 $1 billion with a conversion rate of 118%.
And a return on invested capital of approximately 42%.
Yeah.
Now turning to 'twenty one.
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.
Yeah.
For the North American repair and remodel market, we expect the 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 pro paint market to grow mid single digits.
And for our international markets principally Europe.
We expect a low single digit growth environment.
While the U S market will face challenging comps in the back half of 'twenty one.
Leading indicators remain robust.
Home price appreciation was up nearly 13% in December.
And the existing home sales were up over 22% compared to prior year.
Each of these metrics is 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 is 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.
Gross 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.
The $3 45 for.
For 2021.
Turning to capital allocation.
Our board announced its intention to increase our annual dividend to <unk> 94 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 of our 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 'twenty 'twenty one outlook in more detail John.
Thank you Keith and good morning, everyone.
As Dave mentioned most of my comments will focus on adjusted performance from continuing operations, excluding the impact of rationalization and other.
Other one time items.
Turning to slide seven we.
We delivered a strong finish to a record year.
Fourth quarter sales increased a robust 12% excluding currency.
In local currency North American sales increased 13%.
This outstanding performance was mainly driven by strong volume growth in North America, North American faucets, and showers as well as DIY paint.
In local currency international sales increased 8%.
The gross margin was 35, 6% in the quarter up 100 basis points as we leveraged increased volume.
Partially offset by higher rebates and program costs.
Yeah.
Our SG&A as a percentage of sales was 19% in the quarter.
This was primarily due to increases in certain variable costs, such as incentive compensation.
Program costs advertising and legal accruals.
We delivered strong fourth quarter operating profit of $309 million up $52 million of 20% from last year with.
The operating margins expanding 90 basis points to 16, 6%.
Our fourth quarter, EPS increased 36% to 75 cents.
Please note that this performance is based on a normalized tax rate of 25%.
The previously guided 26% of tax rate.
Changes to the IRS guidance in late 2020, and how certain foreign income is taxed in the U S.
Lowered our normalized tax rate to 25%.
And of this change was retroactive restated adjusted EPS numbers for 2019 in.
In the first three quarters of 2020 can be found in the appendix on slide 28.
Turning to the full year 2020 sales increased 7% excluding currency.
Foreign currency translation favorably impacted the full year by $13 million.
In local currency North American sales increased 9% and the international sales decreased 1% as many European markets were slower to recover from the impacts of COVID-19.
Our SG&A as a percentage of sales decreased 100 basis points to 17, 9% for the full year as a result of our rapid pandemic related cost containment.
For the full year operating profit increase of $196 million per 18% with operating margins expanding 170 basis points to 18, 2%.
Lastly, our EPS increased 37% to $3.12 for the full year.
I want to thank our employees across the globe for their hard work dedication and commitment to safety that enabled us to achieve record results in an extremely challenging year.
Okay.
Turning to slide eight plumbing grew 12% in the quarter, excluding the impact of currency.
North American sales increased 14% in local currency led by Delta is 18% growth in the quarter.
The also continues to drive robust consumer demand across our wholesale retail and E commerce customers.
As Keith mentioned Watkins, our Spa business delivered high single digit growth in the quarter is the continued to experience strong demand for their products.
We have a record backlog despite operating at less than 100% capacity due to ongoing government mandated employee limitations.
Mexican facilities.
International plumbing sales in the fourth quarter increased 8% in local currency.
Hans grew of once again.
Net growth driving double digit growth in both Germany and China.
Operating profit was 220 of $4 million in the quarter up $44 million or 24% with margins expanding 160 basis points to 19, 1%.
The strong performance was driven by incremental volume and cost containment initiatives parse.
Partially offset by higher year end program costs marketing and other increased variable expenses.
Turning to the full year 2020 sales increased 3% excluding currency.
Foreign currency translation favorably impacted full year sales by approximately $15 million.
The local currency North American plumbing sales grew 6% and the international plumbing sales grew decreased 1%.
Full year operating profit was $813 million up $92 million or 13% with margins expanding and outstanding of 160 basis points to 19, 7%.
Turning to 2021.
We expect plumbing segment sales growth to be in the right.
The range of 11% to 14%.
With 4% to 7% organic growth.
Another 4% growth from the recent acquisitions.
And given current exchange rates.
Foreign currency, the favorably benefit plumbing revenue by approximately 3% of $112 million.
We anticipate full year margins will be approximately 18%.
Given that in 2020.
The delayed approximately $40 million in costs and investments due to COVID-19.
We expect the significant portion of this to return in 2021 in the form of investments in our brands.
Service innovation to fuel future growth.
We will also have increased amortization expense of approximately $11 million due to purchase accounting.
Segment operating margins will decline by approximately 60 basis points due to this incremental amortization in the two recent acquisition acquisitions.
Turning to slide nine.
The record of architectural grew 12% in the fourth quarter, driven by mid teens growth in our paint business.
Our DIY paint business continued its strong year with high teens growth.
Propane business rebounded nicely in the quarter with mid single digit growth.
Our builders' hardware and lighting business also benefited from increased consumer demand in each contributed to the segment's results by delivering solid growth.
Operating profit in the quarter.
Increased 9% driven by incremental volume, partially offset by an unfavorable price cost relationship.
As well as higher variable compensation and legal accruals of approximately $10 million.
Turning to full year 2020.
Sales increased 12% driven by the resurgence in DIY paint in the year.
Well of pro business declined slightly over the prior year, we saw solid improvement in demand in the fourth quarter.
Full year operating income increased $98 million or 20% with operating margins expanding 120 basis points to 19, 2%.
In 2021.
We expect decorative architectural segment sales to grow in the range of 2% to 7%.
With the zero to 5% organic growth.
Another one 5% from the acquisition.
We also expect segment operating margins of approximately 19%.
Looking specifically at paint growth for 2021, we currently anticipate our DIY business to be approximately flat with 2020.
And our pro business to increase high single digits.
In addition, the.
The acquisition completed at the end of 2020 will add approximately $3 million of incremental amortization expense due to purchase accounting.
And turning to slide 10, our year end balance sheet was strong with net debt to EBITDA at one times.
We ended the year with approximately $2 $3 billion of balance sheet liquidity.
Which includes full availability of our $1 billion revolver.
Working capital.
<unk> as a percentage of sales finished the year at 15, 2% excluding acquisitions.
And an improvement of 50 basis points over prior year.
This performance was excellent.
As we enter 2021, our inventory levels will require some reinvestment to sustain our outstanding delivery performance.
With our strong operating and working capital performance and lower than normal Capex adjusted free cash flow was extremely strong.
$1 billion.
Representing a 118% of adjusted net income from continuing operations.
During 2020, we repurchased $18 8 million outstanding shares for approximately $727 million.
We increased our annual dividend by 4% to <unk> 56 per share.
Finally, I'm pleased to report that Moody's recently upgraded our credit rating to be <unk>, two based on our improved credit metrics and strong financial performance.
We have summarized our expectations for 2021 on slide 11.
We expect overall sales growth of seven 211% with operating margins in the range of approximately 17%.
We currently expect the growth will be more heavily weighted towards the first half of the year, Israel, obviously face our impressive 2020 comps in the second half of 2021.
One thing to keep in mind is that in 2021, we expect the newer ties and terminate certain of our U S defined benefit plans and as the second or third quarter.
As a result, we will incur a noncash settlement charge of approximately $450 million when we terminated the plans.
We will adjust out discharge for purposes of our adjusted EPS calculation.
Additionally, we will make a final onetime cash pension contribution of approximately of $140 million to settle these plans.
This amount will reduce our cash from operations similar to the approximately $50 million of defined benefit contributions made to these plans in the past several years.
This also means the beginning in 2022.
Cash from operations will increase by approximately $15 million as compared to prior years, improving our already strong free cash flow conversion.
Lastly, as Keith mentioned earlier, our 2021, EPS estimate of $3 and 25.
To $3 45 reps.
The represents 7% EPS growth at the midpoint of the range.
This assumes of 255 million average diluted share count for the year.
Additional modeling assumptions for 2021 can be found on slide 17 in our earnings deck.
With that I'll now turn the call back over to Keith Thank you John.
2020 was of disruptive year on many fronts.
In these uncertain times are far from over.
While there is clearly much focus on the short term dynamics, let me share with you. How we are thinking about masco for the long term.
Please turn to slide 12.
The repair and remodel industry is attractive with fund the favorable fundamentals.
Growth on average is approximately GDP plus 1% to 2%.
And is less cyclical than the new home construction market.
Favorable demographics will help drive repair and remodel demand and we are on the leading edge of the large millennial cohort forming households.
Older homes require more repair and remodel spending.
The average age of housing has increased due to significant under building of homes since the downturn of 2008.
And the COVID-19 pandemic has clearly increased the desire for more enjoyable living space, which has led to increased home demand and remodeling expenditures.
Masco has a low ticket repair and remodel focused business with the market, leading brands with product and geographic diversification, which provides growth.
And stability through an economic cycle.
We leverage our customer insights broad channel relationships scale diversification and our masco operating system to drive innovation and make our businesses better.
With our market leading brands.
History of innovation.
Strong management teams and focus on serving our customers in this attractive industry combined with our strong free cash flow and capital deployment.
Our long term expectation is to grow earnings per share on average by approximately 10% each year.
This is comp is comprised of above market organic growth in the range of 3% to 5% annually.
Growth from acquisitions in the range of 1% to 3%.
Margin expansion, each year through cost productivity and volume leverage.
And continued capital deployment and.
In the form of share buybacks, which should contribute approximately 2% to 4% EPS growth and dividends, which should add approximately 1% to 2% return on top of the EPS growth.
While 2020, it was an extremely challenging year, we responded exceptionally well.
And are poised to continue to drive shareholder value creation in the future.
Now with that I will turn the call over to Q&A.
Thank you.
To ensure that everyone has the chance to participate we would like to request that you limit yourself to asking one question and one follow up question during the Q&A session. As a reminder, Joe asked the question. Please press star one on your telephone keypad and you withdraw your question. Please press the pound key.
The first question will come from Matthew Bouley from Barclays. Your line is open.
Hey, good morning, Thanks for taking the questions.
So the first one I'll ask on the <unk>.
Plumbing margin guide of 18%.
It sounded like between that additional investment spending and the purchase of amortization that that mostly bridges us.
The two there from 2020 I guess my question is what else might be contemplated in that margin guide thinking about metals inflation.
Pricing in this environment and all of that thank you.
Yes, good morning, Matthew It's John I think you hit the nail on the head with.
The analysis Youre right. The two big things that are causing the decline in year over year plumbing margins.
Are the the some of the spend that's coming back in as well as the the impacts of the.
Two acquisitions in the segment for 2021, what else could impact of the to bridge the difference there might be there.
Probably a little bit of of headwind from commodity inflation, because as you know we don't always perfectly match the timing of.
Any pricing or any other actions, we may take the offset commodity inflation with actually feeling of inflation the inflation through our P&L, So thats, probably but I'd say, that's a pretty small impact of overall.
Okay. Thank you for that John.
The second one.
The the long term.
<unk> of 10% annual EPS growth.
Youre talking to it sounds like annual margin expansion.
My question is to the extent, you're guiding 21% to 17%.
Total are you conceptually, saying that that can continue to move higher and the reason I ask is specifically because of the decorative at 19%.
Still kind of above the older range you want scale. So should we assume that that I'm not looking for specific 'twenty two guidance, but conceptually your expectation is that of 17% margin can continue to move higher.
That's right Matthew.
We have our masco operating system that has proven itself in terms of productivity and total cost productivity across our business units, we obviously expect.
Continued good solid drop down on incremental volume, so, yes, our expectation would be.
That we would continue to expand margins.
The one point I would like to make Matthew is if you look at.
Our margin and you factor out, let's say from the obviously 2020 was a very unique year, but if you look at how we perform 19 and our estimated guide in 2021 and you factor out.
Some of that investment accounting for acquisition or excuse me of purchase accounting that John talked about when you look at ex say lets say the middle of our of our guide the dropdown that were anticipating out of this incremental volume is right in there in that 25% to 30% range that we've talked about so clearly 2020 was unique.
The kind of a perfect storm for margin, if you will where we had good.
Leverage on incremental volume, we cut way back on some costs that we as I've talked about before we know that the.
Those cutbacks weren't going to continue and that we need to continue to invest in.
In areas like channel.
The penetration of E Commerce long term connected home and those sorts of things and we're going to continue to do that and we're going to continue to invest in our brands because it works, but yes, youre exactly right. We expect continued margin expansion.
Maybe the one thing I'll add to Keith's comments.
Well, maybe two things one is that as you think about the continued margin expansion.
I would think about it in the context of tens of basis points.
The basis points of continued margin expansion.
And then second specifically with with respect to your thoughts around the decorative architectural segment.
All of that.
Our kitchen of their business.
We have indicated that the business returning around in a lot of the the good work that the team has done over the course of the last year year and a half there will start to bear fruit in 2021.
And supplementing that good work will also be some.
The reduced amortization from the acquisition of that and then the range of seven or $8 million on an annual basis.
So I think that also helps explain a little bit of the higher margins in decorative architectural.
Great. Thank you for all of the color very helpful.
Your next question comes from John level from Bank of America. Your line is open.
Hey, guys. Thank you for taking my questions as well.
Maybe just starting with decorative architectural in the zero to 5% organic.
Outlook for top line could you help us understand maybe some of the drivers that could.
You get the higher end of that range.
Well.
I'm, sorry, you broke up a little bit John you asked for some of the drivers that would get us.
I apologize yeah. So just wondering.
It's a fairly wide range just curious what realizing of the comps are tough what could get you to the higher end of that 5% organic range.
Really it's about the consumer and continued demand.
Driving the the.
The desire to freshen their homes to spend more time in their homes and to have their homes look better and the fact that we're hitting that sweet spot with a relatively low price points. So fundamentally the high end of that range it would come from.
DIY paint.
And continued growth there.
Got you and then on Watkins.
It sounds like the backlog is very encouraging curious, though how close to a 100% cap are you guys now in view of what's your ability to sort of execute on that backlog in 2021.
And we're doing pretty well.
We're getting better and better at dialing in our factories given some of the restrictions.
Who knows where these restrictions will go I suspect that they will start to ease as globally the pandemic.
Darts to wane, but we don't know that for sure.
But fundamentally we're doing a good job we are.
Looking at growth in this business and we had growth in the fourth quarter. So it's.
We're really happy with how the the.
Business in our <unk>.
By business in General has responded.
John the one thing I would add to Keith's comments is it.
David point, Mike and the team down there of reacted just.
Just tremendously to the conditions that have been dealt or the conditions delta them.
Because of the strong backlog, we do expect double digit growth from from net unit.
Here in 'twenty one.
Compared to 'twenty, so very optimistic about how the business units should perform.
Thank you guys.
The next question will come from Stephen Kim from Evercore ISI. Your line is open.
Yes, thanks, very much I just wanted to follow up on Johns question, there on that zero to five of organic for a Dec arc just wanted to make sure that.
We got a sense for how that might flow quarterly I mean Dec arc basically.
Obviously, the pet benefited from the pandemic on DIY, but you had pretty strong organic growth pretty much throughout the year and almost every quarter. So just wanted to get a sense of where like how big of a delta or are we talking about in terms of <unk>.
Growth rates from let's say the front half of the year to the back half of the year or any other kind of.
Help you can give us about the quarterly trajectory.
Yes, Stephen it's John and you're right I mean, we did experienced very strong growth in the decorative architectural segment and specifically in paint.
On the 20 in most quarters I mean, if you think about even in the first quarter of 2020 of the segment was up 9% and.
Our paint sales were up kind of high teens per cent and.
What we're expecting now Stephen.
Is.
On the.
On a run rate basis, the kind.
The strong growth is the pain has been enjoying in the last couple of quarters to extend in the first half of the year and then obviously as we get up against the tough comps of.
Q3 and Q4.
The growth dials back of it and Keith.
Keith point, the what drives us to the higher end of the range of consumer demand.
If we.
We see continued strength from the consumer.
In the opinion of activity that could push us to the very high end of the range.
Sure.
It.
If it doesn't materialize.
Kind of kind of in the mid points of the low end of that range.
Got it yeah, okay that that helps in understanding the degree of conservatism in there.
The second question.
Keith I believe you made a comment about maybe it was maybe it was of you John about the about the $800 million in share repurchases.
I believe you said $800 million of share repurchase or acquisitions of all I just want to clarify are you, saying that you.
Do you intend to do $800 million in buybacks and then any acquisitions that you do would be incremental to that or is the 800 million going to be like all of the youre allocating for both and Youll sort of see how the acquisition of shape up over the course of the year.
No change in how we've talked about it's David that's for both so we view those those funds as fungible in that if there's an acquisition that we see that meets our criteria as I said, we're focused more on the.
Bolt ons of close to the core I think what we talked about with these three acquisitions as a good indication of where we're focused and what our strategy is but fundamentally it's at $800 million, that's fungible between acquisitions and <unk>.
Share repurchases and with our strong balance sheet, we have room. If there was something bigger from an acquisition standpoint that we wanted to go after we certainly have the.
The capability and the dry powder to do that but fundamentally we havent changed about how we're thinking about it in terms of Rio reallocating of free cash flow.
Okay, great. Thank you very much guys.
And your next question comes from Sal <unk> from Jefferies. Your line is open.
Hey, guys. Congrats on the strong quarter. It sounds like you have pretty good line of sight in the first quarter, an easier comp in <unk>, but if we come in at the high end of your guide do you see the opportunity for upside more back half weighted because youre, assuming some moderation.
Yeah, Phil I think that's the way to think about it.
Like you said, we've got better visibility in the first part of the year, it's going to be tough to see it's a little tough to see right now how exactly things play out in the.
The back half of the year.
A number of moving pieces.
And it all depends on them really of how the.
The endemic in the vaccines unfold and so.
How that ultimately that ends up driving consumer behavior and consumer demand so youre right.
More and more clear in the first part of the year of less clarity of the second half.
Got it sounds like you're not seeing any slowdown either day to day, that's pretty encouraging.
And then implicit in your guide what type of inflation, you're assuming and how do you plan on tackling debt it looks like their paint prices based on some of our scrape have started to move up ready. So do you expect that price cost squeeze in the AAP to kind of be more neutral in <unk> and any handholding you can provide on the shape of the margin profile for plumbing.
Because theres a lot of moving pieces there.
Yes, so I'll start out maybe a little bit of an a.
Keith can supplement my remarks, so first comment I mean, maybe it will take a step back fill and talk more broadly about the commodity basket that we're facing and then.
Talk about the shape of the the plumbing.
Margins. So if you take a look of the various raw materials of the impact our financial statements.
Obviously.
The copper and zinc have started to inflate in that really in the back half of the year, but really have been pretty strong since the middle of the fourth quarter kind of the November timeframe really started to see.
The copper and zinc inflate the.
The same time.
If you think about the input costs or the input basket that goes into paint, which are really twofold. One is the titanium dioxide and the other out of the.
More of the petroleum linked engineered resins, we have started to see inflation in both.
Probably more so on the engineered resins side than the <unk>. Two recently is starting to inflate and as a matter of fact as I think about the inflation as it hits.
The raws in paint the engineered resins have probably even accelerated more in the last several weeks.
And so the way we're going to approach. This is the way we've historically approach.
The raw materials one.
Obviously, we think in total bill the.
The raw material inflation will be kind of of <unk>.
Low single digit range on us during the course of the year.
But we'll go after it and the way, we typically do and that is.
We negotiated with our suppliers, we work out of our internal cost productivity and then we also to.
To the extent that's required we will take pricing actions.
And as I think you recall.
We tend to be price cost neutral over time that said, we can't always perfectly timing of things. So you might see a quarter or so of.
The margin contraction because of.
The us feeling the pricing impact or the <unk>.
Cost impact of the raw material inflation before we're able to implement price, but that should level out over time.
Keith I don't know if there's anything else you want to add I think you hit out of where we are experiencing.
Some commodity pressures and some cost pressures if you think about it let's say a mid single digit type of inflation in our paint basket and probably lower than that in our in our plumbing basket logistics, we're seeing some some.
The pressure there, but logistics is a low single digit cost for us so it's not.
Such a big impact and this isn't this is I think nothing that's new to us.
Been in the seat now going on seven years and we've seen this several different cycles of this kind of thing and we go at it with productivity improvements through our Masco operating system. We go at it with supplier negotiations.
And because of our consistent investment innovation and brands, we're able to when we need to go after it with price so over time as we've talked about.
We're a neutral as it relates to the price cost and there's some leads and lags in that net can go both ways, but fundamentally we don't view that as changing at all we don't expect it to change going into 'twenty one.
Okay.
With respect to your <unk>.
Question.
Related to the kind of how we're thinking about plumbing.
Plumbing margins through the year.
Similar to a couple of other the other answers we've already given in the probably a little bit better more of a benefit in the first part of the year.
Yes.
Was it just the way the margins shaped up in 2020, and then obviously, we face much more significant margins in the second half of the year.
And so that is.
The comp and the <unk>.
Back half of 2020 I think are.
The margins in Q3 of last year were $23 24 percentage. So those those tough margins will be tough to comp against and so probably not as good of margins in the back half of the year.
Okay. Thanks, a lot really helpful.
And your next question will come from Nishu Sood from UBS. Your line is open.
Thanks. So first question I wanted to ask was about the guidance and the acquisitions you mentioned that the acquisitions will contribute about I think you said, the 3% and revenue growth is there an EPS impact as well I know there is some amortization so maybe it nets out to nothing but yeah, what how will that impact how is it a part of the.
The EPS guidance for 'twenty one.
Yes, it's a relatively small piece of the overall <unk>.
Guide issue, because if you think about circa of $15 million of amortization of.
These businesses, it's probably a couple of cents.
Got you. Thanks, and then the second question.
On the decorative architectural.
In the in your third quarter call with some visibility into price cost et cetera.
You'd expected the margins to be 17%, obviously they came in somewhat short of that what drove that I mean, you highlighted price cost, but it's obviously notable that youre expecting very strong margins and youre decorative architectural division in the 'twenty. One so I just wanted to understand what drove the downside.
That will reverse in the install low margins to be pretty nice in the in 'twenty one.
Yeah, Nishu I think it's a pretty straightforward answer I think I think what drove the margin down in the fourth quarter was kind of a couple of things.
One was we had higher variable costs.
The higher incentive compensation cost I should say due to just the outstanding performance.
The segment enjoyed and then the other piece of it is we chewed up some legal accruals and the two of those in aggregate kind of came in at about $10 million. So if you kind of view those as onetime in nature, you are kind of right there as to where you would expect us to be.
Gotcha, Okay, great. Thanks.
The next question will come from Michael Rehaut from Jpmorgan. Your line is open.
Thanks, Good morning, everyone.
First I wanted to go into the the pain outlook for 2021, and if I heard it right.
Youre expecting your own DIY business to be flat versus the market to be down low to mid single digits grow to be up high single digits versus your.
Your outlook for the market to be up mid single.
So I was hoping if you could just.
Give us a little more detail in terms of what's driving your outlook for the share gains in both of those businesses in 'twenty one.
Really its demonstrated performance.
We've got a strong brand.
The brands really when you think about kills as well as Baer.
We've had and demonstrated that our investments in the propane area is working and we're going to continue to make those investments. So it's really.
Demonstrated performance on how well our investments in brand innovation and.
Propane growth of working.
Okay.
I appreciate that Keith I guess I was just wondering if you know this.
This is you know share gains by home depot or some new products.
Anything you know the kind of more let's say specific to 2021 and two of its of any catalyst or initiatives.
Yeah, absolutely it's more of what you've seen in the past so absolutely new products and our new products rollout for 2021 is strong and we're going to continue to invest in that.
The brand and the brand strength as it relates to advertising and various programs that we are rolling out both the idea in DIY as well as pro and then continued investment in feet on the street and driving growth.
Specifically with the pro so it's more of the same recipe of brand service and innovation.
Okay No I appreciate that.
I guess secondly, I just wanted to circle back to the comments around the operating margins per for the businesses.
And.
If you go back to the analyst day.
At that time.
You're kind of looking at long term margin targets that were.
Plus or minus right in line with.
With the performance.
The margins that you were achieving at that time. So in other words you were looking at a margin outlook that was roughly parity with with the level of profitability, you're generating now it sounds like youre, saying something a little different debt.
You're expecting some amount of margin improvement going forward and John I. Appreciate your comments, saying, maybe in the tens of basis points not the hundreds.
But talking about an incremental margin being above.
The margin that Youre currently generating sort of just wanted to understand maybe what changed between then and now it was my understanding that you know.
The outlook given at the last analyst day was more driven by the fact that you certainly have kind of a level of reinvestment in the business.
And the investment for growth investment in your channel partners.
And that was what was more keeping it at the range that it was so just trying to get a better sense of.
What's different in the margin outlook today versus back then.
Yes, Mike.
Well I'll kick this one off and if Keith Keith plenty of some other color to that this one but.
I think the principal difference between what you heard from US at our 2019 of Investor day and what.
We're talking about now in terms of.
Both growth and margin profile has to do with our underlying assumptions for the market in 2019.
Outlined fairly muted market growth.
Going forward in Q3 of the period of 'twenty, one which is really what we outlined in.
Obviously things have played out much different than that and even if you consider.
We are laying out for 2021 today.
It is better growth than we would have.
Forecasted back in the fall of 2019, and so I think that's the principal difference.
Our business is doing everything else that we would expect the new the driving innovation absolutely.
Are they pushing for share gains, yes are they doing all of the right things in terms of their service and delivery capability, yes. So all of those good things are happening.
But I think fundamentally the big difference is our perspective on on market growth Keith I don't know if there's anything else you don't want it.
Your head of John we had a different perspective on topline growth is the main driver when you compare the difference between our Investor day in 19 of where we sit today, but it's also a combination of of continuing our total cost productivity and leveraging of our masco operating system. So long term a little bit.
The different outlook, the 19 versus where we sit today, we're committed to organic growth in that 3% to 5% range I think we can add another 1% to 3%.
In acquisitions buyback in that 2% to 4% range in that debt.
That's how we we see that the long term, 10% growth in EPS and then of course, the 1% to two per cent dividend yield on top of that so that's fundamentally of how we're looking at it.
Great. Thanks very much.
And your next question will come from Susan Mcclary.
From Goldman Sachs. Your line is open.
Thank you good morning.
My first question is you know you talked a little bit in your prepared comments about the trends between DIY and pro and the fact that you saw a little bit of the pick up in pro in the fourth quarter and that's expected to continue this year can you just give us a bit more color on that exactly how that starting to come together and how you expect that ramp to come through over the next couple of the.
Quarters.
Well, we certainly saw the growth pick up in the fourth quarter and I'm not going to get into specific month by month here, but it's continuing into <unk>.
The 2021 here and I think by and large it has to do with residential repaint and consumers being more comfortable.
With contractors and pros inside their house.
And I think I think that's the fundamental driver.
We're seeing it mainly in the interior side and you would expect that from the seasonality perspective, but I think thats Susan fundamentally the driver.
Got you Okay and then my next question as you know when we do you think about the mix shift coming through it feels like in 2020 of the mix shift which was incredibly favorable as we think about that mix between DIY and pro as we think about things normalizing as the go forward how should we think about the impact of that has on the margin profile and how you're kind of thinking.
About maybe incorporating that into the guide.
So Susan maybe taking a step back and talking about mix broadly across our business.
So we did we did see favorable mix across many of our businesses in 2020.
But it was a relatively modest impact overall.
We saw some favorable mix obviously in some of our plumbing fixtures, we saw some of it in our spa business as we saw some of our higher end spot so and to your point, we saw it in paint with a little bit better mix of Lora, DIY and the little bit less pro.
About that as we go into 2021.
Again, I don't think mix is going to have a significant impact could there be a.
It's a modest headwind.
Mixed in our paint business, yes, but it would be relatively modest.
Would say that the the negative mix that we've been.
Experienced in plumbing in Europe will probably likely continue into 2021, that's been something we've been experiencing probably for about 24 months now and we don't see that changing too much but again overall when I wanted to make sure you take away that it's not going to be an overall of significant impact of the business.
Got you Okay. That's helpful. Thanks.
Okay.
And your next question will come from Mike Dahl from RBC capital markets. Your line is open.
Hi, Thanks for taking my questions.
First question I wanted to.
Back to kind of the plumbing outlook for from a topline standpoint.
John I think you mentioned during the remarks, the international would be low single digits, which I presume is mostly plumbing, but I was hoping to get more of a breakdown of kind of how you see the composition of the organic growth of 4% to 7%.
Presumably the Watkins businesses.
Is the up north of that but could you give us.
Any sense of kind of how youre seeing Watkins what the core North American phosphate business is doing and then.
If that international comment was.
Was reflective of what you expect specifically for international plumbing that that'd be great.
Yeah, I think you've nailed the mic Watkins, we're expecting really solid double digit growth from them in 2021.
As I mentioned before the team is doing an outstanding job of maintaining our high quality and getting our units out and obviously that's good mix for us as we've talked about so yeah. Good leading the growth story in plumbing would be Watkins for sure.
You are right in terms of international in that low single digit guidance.
Primarily our European business and that's a mixed bag as you might expect we are continuing to see strong growth in our home markets of Central Europe.
In China, and we continue to be challenge as you might expect as is everybody in England, and Italy, and some other locations. So it's a mixed bag, but you're right on in terms of the low single digits, when we look across North American plumbing.
We'll expect to see.
Really solid continued share gains across all of our channels, but.
The higher growth rate in E Commerce, and I think our our acquisition of Crouse, the leading digitally native brand in the space feeds right into that.
<unk> gives us a lot of flexibility and capabilities to continue to outgrow that on the retail front, we have been the leader in share of shelf of the faucet aisle for many many years and that's continuing and we're continuing to invest to keep that lead. So we expect good growth there and obviously.
Between our brass craft.
And Delta very solid brands in the plumbing wholesale trade. So we continue we expect to continue to outgrow the market. There. So you've hit it on the on the head with the with regards to how we're thinking about international Watkins, leading the way obviously E commerce as the channel will grow faster than others, and we're going to continue to gain share across the board.
Okay, Thanks, Keith and that kind of dovetails into my second question, which is around.
Some of the long term strategy, specifically with respect to M&A and ecommerce.
So it's picked.
Picked up a couple of good tuck ins here and you're now kind of formally guiding to some.
<unk> contribution from M&A going forward.
Part of question.
Is really.
What are you seeing in in the markets in your pipeline.
With respect to M&A, that's kind of giving you the confidence that this will continue to be a steady stream that you can incorporate into a long term.
Same work and then and then second specifically with respect to plumbing.
And the push and acceleration in E Commerce, how should we think about kind of.
Using your using the crowd the acquisition as kind of a starting point or an acceleration point to further scale. Your your other brands versus.
They're being.
Significant other acquisition opportunities specifically within kind of the plumbing digital or E Commerce channel.
Mike on the on the.
M&A component and to your direct question what gives me the confidence it's a couple of things first and foremost it's the team the deal team.
John John is leading it.
The people that he has and his team.
Our outstanding and they've demonstrated demonstrated it by what they were able to do in 2020 as you know even though these were smallish acquisitions of the workload and the work on cultivating these isn't any less than the big acquisition and they were able to do it.
Seemingly well so I'm confident in the team secondly, it's the actual pipeline at our MLS process of of cultivation and looking at it.
What's available so it's still it's still a challenge as valuations really haven't softened that much and that informs the need to stay close to the core and that's our strategy as I said before we.
We will look at bigger ones, but fundamentally we're looking at tuck ins, where we can bring.
Synergies to make our return work and we're going to stay disciplined.
But that combination of a good team of good pipeline together with the discipline is what gives us the confidence I'm sorry, Mike. Your other question was on E Commerce.
I wouldn't say debt.
Okay go ahead.
Oh, yes, it was E commerce and how much we should think about is going to come from additional M&A versus using the platform you've already built and now accelerated through the krauss to scale your existing brands.
Yes, I think.
You know the there maybe opportunities for further acquisitions, and where we can acquire capabilities, where we can acquire brands in certain spaces that makes sense, we will do that but fundamentally its about our existing brands and continuing to drive with the outstanding teams that we've developed and the investments that we've made as it really.
The partnership with peer play as well as.
The more building products associated.
Hooked up with bricks and mortar so we're going to continue to drive that and that's where the lion's share will be but we'll be opportunistic for other opportunities.
Yeah.
Okay. Thanks Keith.
And your next question will come from Adam Bob Barker from Credit Suisse. Your line is open.
Hey, good morning, Thanks for taking my questions.
Sticking with paint just if we think about promotions given just sort of a more normalized growth year should we expect those and is that embedded in your guidance for promotions to be up in 2021 versus 2020.
Yes.
We're expecting a more normalized here this year as you may recall.
We and our channel partner of pulled back on some of the promotions, particularly in some of the major summer holidays in 2020.
As a result of not wanting to drive too many consumers into their stores in preventing the spread of the virus and so what we believe now will take place and we'll see how this ultimately plays out is that the 'twenty 'twenty, one reverts to a more normalized year of at least at this point.
Okay, Great and then just on the work tools International acquisition. It looks like those brands are actually sold at lows not at home depot do you see an opportunity just given your presence obviously in the paint aisle of the depot to move those brands.
Into home depot overtime.
I'm not going to talk specifically about our plans as we roll this out youll see them as we begin to grow but I would say, it's consistent with what we've done in the past in terms of looking for expansion in terms of adjacent products as well as adjacent channels.
That's something that we bring to many of these acquisitions. So our focus is on bringing the power of our channel presence and our innovation to the acquisitions and then learning from them be it on the.
The online capabilities like with Crouse.
Or with certain brands, so it's a combination.
Great. Thanks.
And your final question from today will come from Keith Hughes from true Ms. Your line is open.
Thank you.
My questions have been answered, but just switching back to international plumbing.
Have you seen the sales pace right.
The decline significantly the last six to eight weeks versus the fourth quarter given some of the shutdowns.
Things going on particularly in Western Europe is my question.
So so Keith no.
Just looking at the first couple of weeks of of the new year. We have seen continued strong demand in western Europe, obviously, some of the markets are different but and of course Central Europe, Germany.
And China ahead of the Chinese new year's sales have been very strong.
The U K to your point because of the Lockdown has been.
A little slower.
But we like the performance of the first couple of weeks of the or the new year.
Okay. Thank you.
And that concludes today's call we'd like to thank all of you for joining US. This morning and for your continued interest in Masco as always please feel free to contact me David Chaika at 31379 to 5500, if you of any further questions. Thank you and stay safe.
Thank you everyone. This will conclude today's conference call you may now disconnect.
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