Q4 2024 Masco Corp Earnings Call
and for the California Public Broadcasting Corporation.
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Please limit yourself to one question with one follow up.
Speaker Change: If we can't take your question now please call me directly at 31379 to 5500.
Speaker Change: Our statements today will include our views about our future performance, which constitute forward looking statements.
Speaker Change: These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements.
Speaker Change: 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.
Speaker Change: Our statements will also include non-GAAP financial metrics.
Speaker Change: Our references to operating profit and earnings per share will be as adjusted unless otherwise noted.
Speaker Change: We reconciled these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.
Keith: With that I will now turn the call over to Keith.
Keith: Thank you Robin and good morning, everyone and thank you for joining US today, Please turn to slide five.
Keith: I wanted to start this morning by reflecting on some of our key accomplishments across our businesses brands and products for 2024.
Keith: Beginning with our plumbing segment, we introduced several innovative new products in the market and entered into new product categories.
Keith: At Delta Faucet.
Keith: We're focused on being a leader in water quality and introduce water filtration products for both the sink and shower categories.
Keith: And how it's growing we continue to increase market share by offering products with premium and customizable designs and products that are focused on saving energy and water.
Speaker Change: At Watkins wellness, we introduced freshwater IQ a smart monitoring system that automatically tests, the water chemistry, and your spa and communicates recommended adjustments to maintain clean natural feeling water.
Speaker Change: Finally, our integration of sort of 360 is ahead of schedule and we are actively launching our branded sites into our existing Watkins dealer network.
Speaker Change: In our decorative architectural segment.
Speaker Change: The strength of our brands continues to resonate with our customers and generate additional share gains.
Speaker Change: Bear was rated number one in interior paint number one in exterior paint and number one in exterior stain and a third party study demonstrating the strength and exceptional quality of our leading behr brand.
Speaker Change: Our investments in our paint business to continue to expand our services and build upon our successful partnership with the home depot.
Speaker Change: Have helped drive share gains in both the DIY and pro paint categories.
Speaker Change: And our pro paint category.
Speaker Change: Annual sales are now over $900 million.
Speaker Change: Which is an increase of over 70% since 2020.
Speaker Change: Our products resonate with pro painters and have enabled us to capitalize on the sizable growth opportunity in the pro paint market.
Speaker Change: Finally, we completed the sale of catch their lighting in 2024.
Speaker Change: We are confident that this transaction to further streamline our portfolio will drive greater value from <unk> shareholders as we focus on the strategic initiatives of our core businesses.
I want to thank all our employees for their excellence in execution.
Speaker Change: Their focus on the customer.
Speaker Change: And their continuous improvement mindset that delivered these key accomplishments during the year.
Speaker Change: With that.
Speaker Change: 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.
Speaker Change: Please turn to slide six.
Speaker Change: We wrapped up 2024 with another quarter of solid operating results.
In the fourth quarter, our topline decreased 3%, primarily due to the divestiture if it gets there.
Speaker Change: Excluding this divestiture and the unfavorable impact of currency sales increased 1%.
Speaker Change: Primarily due to higher volumes and our decorative segment.
Speaker Change: Operating profit increased $19 million in the quarter due to our continued efforts to drive cost savings and efficiency across our operations.
Speaker Change: Operating profit margin improved 140 basis points to 15, 9%.
Speaker Change: Our performance in the fourth quarter marked the seventh quarter in a row of year over year margin expansion.
Speaker Change: With our strong execution, our earnings per share for the quarter increased 7% to 89 cents per share.
Speaker Change: Turning to our segments.
Speaker Change: Plumbing sales decreased 1% in local currency.
Speaker Change: We saw lower volumes in both trade and retail in North America.
Speaker Change: While the industry continues to show signs of stabilization. It remains choppy and has not yet pivoted to sustained growth.
Speaker Change: International Plumbing grew slightly as we saw growth again, this quarter and our business in both Europe, and China, Despite a challenging market environment.
Speaker Change: Operating profit for the segment was $200 million and operating margin was 16, 8%.
Speaker Change: An improvement of 40 basis points.
Speaker Change: We continue to see the benefits of our focus on productivity efficiency and cost savings initiatives throughout our plumbing segment.
Speaker Change: Additionally, our investments in our leading global brands innovative products and customer service are producing results and.
Speaker Change: And we will continue to capitalize on these investments.
Speaker Change: Turning to our decorative architectural segment sales.
Speaker Change: Sales decreased 6% Pri.
Speaker Change: Primarily due to our divestiture.
Speaker Change: Overall paint sales were up mid single digits, including a benefit from inventory timing.
Speaker Change: Excluding this benefit overall paint sales were down low single digits.
Speaker Change: Propane 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%.
Speaker Change: An improvement of 290 basis points.
Speaker Change: Now, let's review our full year performance.
Speaker Change: Turning to slide seven.
Speaker Change: Moscow executed extremely well in 2024.
Speaker Change: And for the second year in a row, we improved nearly every operating metric for the full year.
Speaker Change: Gross margin improved 110 basis points to 36, 3%.
Speaker Change: Operating margin expanded 70 basis points to 17, 5%.
Speaker Change: Plumbing margin expanded 100 basis points to 19%.
Speaker Change: Decorative margin expanded 70 basis points to 18, 5%.
Speaker Change: Earnings per share grew 6% to $4 10 per share up from $3.86 per share in 2023.
Speaker Change: We delivered a return on invested capital of 44%.
Speaker Change: And our strong cash flows, including the proceeds from our divestiture.
Speaker Change: Loud us to return more than $1 billion to shareholders in the form of dividends and share repurchases in 2024.
Speaker Change: Importantly, we.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Turning to slide eight as we look to the future we.
Speaker Change: We are well positioned to achieve strong profitable growth through continued market share gains margin expansion and disciplined capital deployment.
Speaker Change: 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.
Speaker Change: We have demonstrated our ability to navigate these types of situations in the past.
Speaker Change: 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.
Speaker Change: Moving to our expectations for 2025, I will begin with a following market assumptions.
Speaker Change: For global repair and remodel markets in aggregate, we expect the market to be flat to down low single digits.
Speaker Change: For the North American repair and remodel market, we expect the market to be roughly flat.
Speaker Change: For international markets.
Speaker Change: We expect the markets in aggregate to be down low single digits.
Speaker Change: Our expectations for our own sales in 2025 is to be down low single digits.
Speaker Change: However.
Speaker Change: If we exclude the unfavorable impacts from our divestiture of <unk> of approximately 2% and <unk>.
Speaker Change: Currency of approximately 1%.
Speaker Change: We expect our sales to be roughly flat to up low single digits.
Speaker Change: Our estimate includes our expectations that we will continue to outperform the market in 2025.
Speaker Change: Despite the relatively flat topline assumption.
Speaker Change: We will continue to expand our margins through disciplined pricing innovative product introductions cost savings initiatives and operational efficiencies across our business.
Speaker Change: We have consistently demonstrated our ability to execute and dynamic times and plan to deliver further operating margin expansion across our business in 2025.
Speaker Change: We expect plumbing margins in the range of 19% to 19, 5%.
Speaker Change: And decorative margins also in the range of 19% to 19, 5%.
Speaker Change: Resulting in a <unk> operating margin of approximately 18%.
Speaker Change: Turning to capital allocation.
Speaker Change: Our strategy remains unchanged.
Speaker Change: First we will reinvest in our business to maintain and grow our leadership positions and win in the marketplace.
Speaker Change: This includes ongoing investments in our growth initiatives to continue to gain share in the domestic plumbing.
Speaker Change: Wholesale channel international plumbing and propane.
Speaker Change: Second we will continue to maintain a strong investment grade balance sheet.
Speaker Change: Third.
Speaker Change: We have a targeted dividend payout ratio of 30%.
Speaker Change: I am 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 12 consecutive annual increase.
Speaker Change: And fourth and finally, we will deploy our remaining available free cash flow to share repurchases or acquisitions.
Speaker Change: Based on our projected free cash flow, we expect to deploy approximately $600 million to share repurchases or acquisitions in 2025.
Speaker Change: Our M&A strategy has not changed we continue to review and selectively pursue opportunities that have the right strategic fit.
Speaker Change: And the right return for Masco.
Speaker Change: 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.
Speaker Change: Two $4 45.
Speaker Change: Per share.
Speaker Change: 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 how it's growing.
Speaker Change: We expect to expand margins to 20% in 2026 up from 19% in 2024.
Speaker Change: For our decorative segment.
Speaker Change: Led by our industry, leading Behr brand, we expect to achieve margins of 19% to 20% in 2026 up from 18, 5% in 2024.
Speaker Change: This range reflects the benefit from our kitchen divestiture.
Speaker Change: Really offset by slower than initially expected return to growth in the DIY paint market.
Speaker Change: For Masco overall, we expect to expand operating profit margins to 18, 5% in 2026.
Speaker Change: Up 100 basis points from 17, 5% in 2024.
Speaker Change: 170 basis points from 16, 8% in 2023.
Speaker Change: 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.
Speaker Change: Therefore, we believe we can achieve these margins through leveraging incremental volume exercising pricing discipline and executing on operational improvements.
Speaker Change: I want to finish by reiterating the structural factors that remain supportive of increased repair and remodel activity in the mid to long term.
Speaker Change: Homeowners that took advantage of low mortgage rates are likely to remain in their homes for longer and invest in upgrades and remodels.
One 7 million more homes will reach the prime remodeling ages of 20% to 39 years old by 2027.
Speaker Change: Home equity levels are at record high levels.
Speaker Change: Millennial household formation is rising.
Speaker Change: All of these structural forces provide tailwind 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.
Speaker Change: With these favorable fundamentals the continued successful execution of our strategic initiatives.
Speaker Change: Our disciplined capital deployment, we are well positioned to outperform the competition and deliver double digit EPS growth through cycles for our investors.
Speaker Change: Now I'll turn the call over to Rick to go over our fourth quarter full year and 2025 outlook in more detail Rick.
Rick: Thank you Keith and good morning, everyone. Thank you for joining.
Speaker Change: As Robin mentioned my comments today will focus on adjusted performance.
Speaker Change: Excluding the impact of rationalization charges and.
Speaker Change: And other one time items.
Speaker Change: Turning to slide 10.
Speaker Change: Sales in the fourth quarter decreased 3%.
Speaker Change: But increased 1% excluding the unfavorable impact.
Speaker Change: Our divestiture of Kettler and currency.
Speaker Change: Our divestiture of <unk> in the third quarter of 2024.
Speaker Change: Decreased sales by 3% in the fourth quarter.
Speaker Change: In local currency North American sales decreased 4%.
Speaker Change: But increased 1%.
Speaker Change: Putting the divestiture impact.
Speaker Change: International sales increased 2% in local currency.
Speaker Change: Gross margin in the quarter was 34, 8%.
Speaker Change: SG&A as a percentage of sales decreased to 170 basis points year over year.
Speaker Change: The 18, 9% in the quarter.
Speaker Change: Primarily driven by our divestiture and lower expenses.
Speaker Change: Our operating profit grew $19 million to $291 million.
Speaker Change: And our margin was strong for the fourth quarter at 15, 9%.
Speaker Change: Our margin performance was primarily driven by executing on our cost savings initiatives.
Speaker Change: And lower expenses.
Speaker Change: This resulted in EPS growth of 7% to 89 per share.
Speaker Change: Turning to the full year 2024.
Speaker Change: Sales decreased 2% over the prior year.
Speaker Change: Or 1%, excluding the unfavorable impact of net acquisition and divestiture activity.
Speaker Change: As well as currency.
Speaker Change: In local currency North American sales decreased 2%.
Speaker Change: Or 1%, excluding the net impact of acquisition and divestiture activity.
Speaker Change: And international sales were in line with the prior year.
Speaker Change: Our focus on driving operational efficiencies in 2024 contributed to strong gross margin of 36, 3%.
Speaker Change: An expansion of 110 basis points year over year.
Speaker Change: SG&A as a percentage of sales was 18, 7%.
Speaker Change: Operating profit for the full year increased $36 million.
Speaker Change: And operating margin expanded 70 basis points to 17, 5%.
Speaker Change: Lastly, our EPS for the full year increased 6% to $4 10 per share.
Speaker Change: Turning to slide 11.
Speaker Change: <unk> sales decreased 1% in the fourth quarter.
Speaker Change: Currency had a minimal impact on our results.
Speaker Change: Lower volume and unfavorable mix each reduced sales by 1%.
Speaker Change: Partially offset by favorable pricing of 1%.
Speaker Change: In local currency North American plumbing sales decreased 2% in the quarter.
Speaker Change: Driven by softness in the wholesale and retail channels.
Speaker Change: Partially offset by growth in the ecommerce channel.
Speaker Change: And our specialty spa insomnia dealers.
Speaker Change: In local currency international plumbing sales increased 2% in the quarter.
Speaker Change: Driven by favorable volume and pricing actions.
Speaker Change: Partially offset by unfavorable mix.
Speaker Change: This performance was driven by growth we achieved across various European markets.
Speaker Change: And slight growth in China.
Speaker Change: Despite a challenging market environment.
Speaker Change: Segment operating profit in the fourth quarter was $200 million.
Speaker Change: Up 1% year over year.
Speaker Change: And operating margin was 16, 8% up 40 basis points.
Speaker Change: This operating profit performance was driven primarily by cost savings initiatives and lower expenses.
Speaker Change: Partially offset by unfavorable volume and mix.
And higher commodity and freight costs.
Speaker Change: Turning to the full year 2024.
Speaker Change: Plumbing sales were in line with the prior year or up 1%, excluding the unfavorable impact of currency.
Speaker Change: Favorable pricing contributed 2% of growth in our Santa <unk> hundred 60 acquisition in the third quarter of last year <unk>.
Contributed 1%.
Speaker Change: This was largely offset by lower volume and unfavorable mix, which each decreased sales by 1%.
Speaker Change: In local currency.
Speaker Change: North American plumbing sales increased 1%.
Speaker Change: Including a 2% impact from acquisitions.
Speaker Change: And international plumbing sales were in line with the prior year.
Speaker Change: Full year operating profit increased 6% and margin expanded 100 basis points to 19%.
Speaker Change: Turning to slide 12.
Speaker Change: Decorative architectural sales decreased 6% in the fourth quarter.
Speaker Change: The divestiture of <unk> lowered sales by 9% and.
Speaker Change: And currency had an unfavorable impact of 1%.
Speaker Change: In the quarter total paint sales increased mid single digits.
Speaker Change: Aided by a favorable impact of inventory timing.
Excluding this favorable impact.
Speaker Change: Paint sales were down low single digits year over year.
Speaker Change: With propane sales up high single digits.
Speaker Change: In DIY paint sales are down mid single digits.
Speaker Change: Operating profit in the fourth quarter was $113 million.
Speaker Change: Up 13% year over year.
Speaker Change: And operating margin was 17, 7%.
Operating profit performance was driven by incremental volume <unk>.
Speaker Change: Including the impact of favorable inventory timing.
Speaker Change: And cost savings initiatives.
Speaker Change: Partially offset by an unfavorable price cost relationship.
Turning to the full year 2024.
Speaker Change: Sales decreased 5% driven by our <unk> divestiture and a low single digit decline in our paint business.
Speaker Change: For the year excluding.
Speaker Change: Excluding the impact of the inventory benefit.
Speaker Change: Propane sales were up mid single digits slightly better than expected.
Speaker Change: In DIY paint sales were down high single digits consistent with our expectations.
Speaker Change: Full year operating income was $550 million in this segment.
Speaker Change: And operating margin expanded 70 basis points to 18, 5%.
Speaker Change: Turning to slide 13.
Speaker Change: Our balance sheet remained strong with gross debt to EBITDA at one nine times at year end.
Speaker Change: We ended the year with $1 6 billion of liquidity.
Speaker Change: Including cash and availability under our revolving credit facility.
Speaker Change: Working capital improved by six days to 53 days.
Speaker Change: Or 15, 1% of sales.
Speaker Change: This improvement includes the favorable impact related to the divestiture of <unk>.
Speaker Change: And is expected to normalize at approximately 16% of sales going forward.
Speaker Change: Our free cash flow for the year was over $900 million.
Speaker Change: Driving our free cash flow conversion to 96%.
Speaker Change: Given our strong cash performance, coupled with the proceeds from our divestiture.
Speaker Change: We were able to return over $1 billion to shareholders through dividends and share repurchases.
Speaker Change: Including the repurchase of $268 million in stock in the fourth quarter.
Speaker Change: Now, let's turn to slide 14, and review our outlook for 2025.
Speaker Change: Please note that guidance being provided today includes the impact from the recently enacted China tariffs.
Speaker Change: Net of mitigation actions.
Speaker Change: But does not include any potential future tariffs.
Speaker Change: For Masco overall, we expect 2025 sales to be down low single digits.
Speaker Change: But operating margin to expand to approximately 18%.
Speaker Change: Up from 17, 5% in 2024.
Speaker Change: Our 2025 sales guide reflects an assumption that the global repair and remodel markets in aggregate will be flat to down low single digits.
Speaker Change: Our sales in 2025, which are expected to be down low single digits.
Speaker Change: Will be impacted by the 2020 for divestiture of catch there.
Speaker Change: Which will reduce sales by approximately 2% year over year.
Speaker Change: Additionally, given the stronger U S dollar.
Speaker Change: We anticipate currency will have an unfavorable impact of approximately 1%.
Speaker Change: Excluding these impacts we expect our sales to be roughly flat to up low single digits year over year.
Speaker Change: As we think about the cadence for the year, excluding the impact of our divestiture and currency.
Speaker Change: We expect sales to be slightly down in the first half of the year.
Speaker Change: With modest growth in the back half of the year.
Speaker Change: We will continue to invest in our business for future growth, while also maintaining cost discipline.
Speaker Change: As a result, we expect SG&A as a percent of sales to be in line with 2024.
Speaker Change: As always we will take appropriate actions to address our costs as the year developed based on market conditions.
Speaker Change: Also as it relates to operating margins with a softer sales outlook in the first half of the year the timing of net tariff impact.
Speaker Change: As well as additional trade show cost in Q1.
Speaker Change: We anticipate total Mexico margins will be roughly flat in the first half of the year.
Speaker Change: With expansion expected in the second half.
Speaker Change: In our plumbing segment, we expect 2025 full year sales to be flat to up low single digits.
Speaker Change: We anticipate the full year plumbing margin will be in the range of approximately 19% to 19, 5%.
Speaker Change: Margin expansion will primarily be driven by pricing discipline.
Speaker Change: Operational efficiencies and continued cost savings initiatives.
Speaker Change: In our decorative architectural segment.
Speaker Change: We expect 2025 sales to be down mid single digits.
Speaker Change: We're roughly flat with the prior year, excluding the impact of our divestiture.
Speaker Change: Looking specifically at our paint business in 2025.
Speaker Change: We anticipate our pro paint business to increase mid single digits.
Speaker Change: And our DIY paint business to decrease low single digits.
Speaker Change: We anticipate the full year decorative architectural margin.
Speaker Change: To be in the range of approximately 19% to 19, 5%.
Speaker Change: Up from our 2020 for a margin of 18, 5%.
Speaker Change: Driven by the favorable impact of our divestiture.
Speaker Change: As well as cost savings initiatives.
Speaker Change: With regards to capital allocation.
Speaker Change: We expect to reinvest approximately $175 million through capital expenditures.
Speaker Change: To pay a dividend of $1 24 per share up 7% from the 2024 dividend.
Speaker Change: And to deploy approximately $600 million towards share repurchases or acquisitions in 2025.
Speaker Change: Finally, as Keith mentioned earlier, our 2025 EPS estimate is $4 20 to.
Speaker Change: To $4 45 per share.
Speaker Change: This assumes a 211 million average diluted share count for the year and.
Speaker Change: And a 24, 5% effective tax rate.
Speaker Change: Which is consistent with our 2024 effective tax rate.
Speaker Change: As mentioned previously our 2025 guidance includes the impact from the recently enacted China tariffs.
Speaker Change: To provide an update on our China exposure.
Speaker Change: In 2025, we expect to import approximately $450 million from China.
Speaker Change: Which represents a reduction of approximately 45% since 2018.
Speaker Change: From a segment perspective.
Speaker Change: 80% of this exposure resides in our plumbing products.
Speaker Change: And 20% in decorative architectural products.
Speaker Change: As a result, the impact of the newly imposed 10% tariff on all imports from China.
Would have an annualized impact of approximately $45 million before mitigating actions.
Speaker Change: That said, we have been proactively planning various short term and longer term actions such as pricing.
Speaker Change: Negotiating with our suppliers and changing our sourcing footprint.
Speaker Change: Based on these plans and our proven ability to navigate previous tariffs.
Speaker Change: We're confident that we will be able to mitigate these additional costs and minimize the impact to our results in 2025.
Speaker Change: The overall tariff environment remains highly uncertain.
Speaker Change: We will provide update to the impacts on our business and outlook for 2025 as more information becomes available.
Speaker Change: I would like to take a moment to thank our supply chain teams.
Speaker Change: They have done a tremendous job of managing our sourcing footprint to reduce our exposure while managing our costs.
Speaker Change: And they continue to pursue opportunities to further optimize our operations.
Speaker Change: We will continue to closely monitor the tariff situation.
Speaker Change: And we will be prepared to respond as this fluid situation continues to unfold.
Speaker Change: Lastly, additional financial assumptions for 2025 can be found on slide 17 of our earnings deck.
Speaker Change: With that I would.
Speaker Change: I'd like to open up the call for questions.
Speaker Change: Operator.
Speaker Change: Thank you.
Speaker Change: To ensure that everyone has a chance to participate.
Speaker Change: Lastly, as you limit yourself to asking one question and one follow up question during the Q&A session.
Speaker Change: I'll ask a question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press star to your first question comes from Stephen Kim with Evercore ISI. Your line is now open.
Speaker Change: Thanks, very much guys I appreciate all the color.
Stephen Kim: Really really helpful. There.
Stephen Kim: I wanted to ask you a question about the of.
Stephen Kim: The timing that you talked about in decorative architectural just was curious if you could give us a sense for this inventory timing how much of an operating margin benefit. You think you may have received in the quarter and whether or not this is going to be.
Stephen Kim: Headwind to <unk> results, but maybe you could quantify for us either on the sales margins or both.
Stephen Kim: Yes, good morning, Stephen It's Rick I would be happy to tackle that.
Stephen Kim: We indicated in our opening comments.
Stephen Kim: The inventory timing benefit for the fourth quarter was about a mid single digit benefit to our top line.
Stephen Kim: You can imagine the or envision that the profit dynamic is consistent with our profitability for the segment proportionately speaking.
Stephen Kim: And you're right as it pertains to timing all else being equal we would anticipate that to be.
Stephen Kim: A headwind as we go into this year of 2025, particularly early this year kind of an equal amount.
Stephen Kim: That said as it pertains to our overall expectations for the segment, we do anticipate that excluding the divestiture of <unk>, we do expect decorative architectural it'll be roughly flat for the year and for our pro paint business to be up mid single digits. So continued progress in that space.
Stephen Kim: Yep.
Stephen Kim: That's that's helpful. I appreciate that.
Stephen Kim: And then.
Stephen Kim: The acquisition.
Stephen Kim: <unk> continues to be a modest driver to sales longer term I was wondering if you could give us or remind us again sort of where your focus is or in that.
Stephen Kim: I'm thinking, particularly are you expecting to lean more is that pretty much all plumbing or are you thinking that we should also expect something in the decorative architectural space just give us a sense for what kinds of thing what kind of opportunities you are seeing out there and.
Stephen Kim: The the macro environment, how conducive that is currently to actually acting on some of these or if this is more maybe more something that you think the timing would favorite maybe the back half of the year.
Stephen Kim: Steven This is Keith good morning.
Stephen Kim: As we said in our prepared remarks.
Stephen Kim: Our strategy with regards to M&A hasn't changed.
Stephen Kim: We're looking for the right strategic fit.
Stephen Kim: For Masco to drive our strategy of bolt ons in paint and plumbing. So specifically to your question we're looking at both.
Stephen Kim: In plumbing with regard to the overall market I would say that it remains to be a little bit soft maybe a little bit of uplift in terms of the deals that we're seeing.
Stephen Kim:
Stephen Kim: But not a significant change so I'd hesitate to.
Quantify if we think that our acquisitions would come to fruition more in the back half of the first the front half.
Stephen Kim: Really about finding those bolt ons that are the right fit.
Stephen Kim: Were patient as we've talked in the past.
Stephen Kim: I think.
Stephen Kim: So on a 360 is a good example of what we're looking for.
Stephen Kim: Tuck in acquisitions paint and plumbing, where we can leverage either our channel expertise or our brands or we can take particular technologies from a specific acquisition. So hopefully that gives you a flavor for what we're looking at what the what we're looking for and what the overall M&A market looks like for us today.
Speaker Change: That is very helpful. I appreciate it.
Speaker Change: I guess, Keith just the one thing that you didn't mention that I thought maybe you might is the degree to which technology might be something that factors into your M&A outlook.
Speaker Change: Absolutely.
Speaker Change: Theres aspects of our of our <unk>.
Speaker Change: M&A pipeline, where we are looking at technology that we would think would be more advantageous for us to buy rather than grow our own and it goes the other way as well so it's a mixed bag, but technology plays a piece of it.
Speaker Change: <unk> presence in markets plays a piece.
Speaker Change: Overall innovation pipeline of a target certainly factors into it and overlaying all of that is our ability to create shareholder value.
Speaker Change: <unk> and channel and brand.
Speaker Change: Okay. Thanks, so much guys I appreciate it.
Speaker Change: Your next question comes from John Lovallo with UBS. Your line is now open.
John Lovallo: Good morning, guys. Thank you for taking my questions.
Speaker Change: First one is just on the maintained fiscal year 'twenty six margin targets. Despite the sale of <unk> I mean, assuming titular.
Speaker Change: We did about $250 million of sales that sort of mid single digit EBITDA margins. It would appear that this could mechanically improved margins by like a 100 basis points.
I know you mentioned, an offset from I think softer DIY. So curious.
Speaker Change: When do you think those Ti why volumes could turn positive it's been several years of negative comps at this point.
Speaker Change: Yeah.
Speaker Change: Well, that's a bit of a million dollar question of course, and the way we think about it first as we look at the fundamentals.
When you think about whether it's the millennial household formations or age of housing stock or what we believe to be.
Speaker Change: <unk> demand we've talked about this in the past where when you look at the pull forward from Covid and then when you look at what happens to demand.
Speaker Change: The market recovered from that pull forward.
Speaker Change: We're well below the historical line of growth even factoring in.
Speaker Change: And compensating for the pull forward of the demand. So we believe we're in a deferred state and fundamentally it comes down to consumer confidence so as we see consumer confidence.
Speaker Change: Start to change and people come out of that deferred mode and pull the trigger on these deferred projects. We think it's going to be a wonderful opportunity for us and we have the capacity in place to be able to address the increased demand and we have <unk>.
Speaker Change: Certainly the efficiency.
Very proud of what the team has been able to do over the last couple of years.
Speaker Change: And depressed markets as it relates to improving our margins and our overall operating efficiency.
Speaker Change: When that happens.
Speaker Change: We look to.
Speaker Change: The point of sale information that we have and trends that we're seeing in the market to help inform that and I will tell you that where we set coming out of 2024 is in more of a position of stability.
Speaker Change: What we saw in the prior year, but fundamentally it's an estimate of when that consumer comes back it's a volatile market and I think one of the keys for US is the fact that we have demonstrated.
Speaker Change: The ability to execute well in these kind of volatile markets because of our portfolio because of our masco operating system, where we drive.
Speaker Change: Down to the Penny, how we manage our businesses and.
Speaker Change: That's been very productive for us and we're going to continue to do that.
Speaker Change: Okay. So just to be clear the DIY headwind is offsetting the.
Speaker Change: Kitchen benefit the mechanical it gets the benefit.
Speaker Change: Alright.
Speaker Change: Okay got it and then second question is you mentioned some recent mitigation efforts.
Speaker Change: Relationship with China tariffs curious if there are tariffs on Mexico. There. There is the Watkins facility. There is there anything you can do to resource or any of that product elsewhere. It given that it's one of two facilities I believe.
Speaker Change: Yes, we do have a.
Speaker Change: Our manufacturing plant.
Speaker Change: And in Mexico for our spot business of course, we have.
Speaker Change: Significant manufacturing facilities in the United States I think we have some 30.
Speaker Change: Manufacturing facilities in United States, and 20 distribution centers throughout the country. So.
Speaker Change: Far and away our biggest footprint is here in North America, and we do have the opportunity.
Speaker Change: To resource product from Mexico into the United States significant manufacturing.
Speaker Change: Down in Southern California.
Speaker Change: Near the border in the San Diego area, where Watkins headquarters is so there is a capability to move products from Mexico.
Speaker Change: Okay. Thank you guys.
Speaker Change: Your next question comes from Anthony Pettinari with Citi. Your line is now open.
Hi, good morning.
Anthony Pettinari: I was wondering if you could talk a little bit more about kind of the cost inflation assumptions embedded in the 25 guidance and any kind of offsetting pricing actions that could be considered in the guide and maybe if you could speak to plumbing and then DNA.
Anthony Pettinari: Yes, sure Anthony it's Rick so with regards to our expectations for commodities as we go into this 2025 calendar year, our expectations on plumbing is low single digit inflation and that includes commodity and freight cost commodity and freight costs are down from their peaks in mid 2024, but they still remain elevated.
Anthony Pettinari: And so we expect that to be a bit of a headwind as we go into 2025 calendar year that said, we do expect our pricing to more than offset the commodity headwind and therefore to have a positive.
Anthony Pettinari: Price cost dynamic as we go into as we are entering into 2025.
Anthony Pettinari: It pertains to the decorative architectural products.
Anthony Pettinari: Overall inflation, we do see a bit of a headwind and we are seeing some inflation or sorry, some upper.
Anthony Pettinari: Upward pressure as it pertains to our raw material inputs of resins in Tio too we're.
Anthony Pettinari: We're not calling it quite yet, but we are seeing some pressure there with regards to pricing as we've mentioned.
Anthony Pettinari: Previously.
Anthony Pettinari: We do have an arrangement with our channel partner with regards to price cost neutral in terms of our dynamics and so from a price cost perspective, we are assuming a price cost flat dynamic for VIP in 2025.
Speaker Change: Okay, that's very helpful.
Speaker Change: And then just company wide I mean, you cited cost savings initiatives as a driver of margin expansion in 'twenty four I'm wondering as you think about this year would the margin benefit or the dollar amount of cost savings initiatives be similar this year would it be greater or maybe smaller.
Speaker Change: Or is that something that you would dial up or down kind of as the year goes on just wondering if you can kind of frame that.
Anthony Pettinari: Sure Anthony so with regards to our cost savings initiatives and operational efficiencies those continue to be a huge priority of ours.
Speaker Change: Keith articulated we've had a lot of success driving those initiatives and leveraging our masco operating system to drive efficiencies throughout our businesses and that's allowed us to expand margins each of the last couple of years with regards to our overall business.
Speaker Change: We're going to continue to drive that performance as we articulated our expectations for the market and the industry for 2025 are rather modest and so in order to deliver continued margin expansion, we're going to continue to drive the operational efficiencies and cost savings initiatives as we've done in previous years.
Speaker Change: Okay. That's helpful I'll turn it over.
Speaker Change: Yeah.
Speaker Change: Your next question comes from Sam Reed with Wells Fargo. Your line is now open.
Sam Reed: Awesome. Thanks, so much I wanted to talk on your growth outlook.
Sam Reed: And then when you think about that one <unk> versus $2 <unk> dynamic that you talked to kind of what gives you the confidence that growth can accelerate in the second half is it based on industry growth improving in <unk> relative to <unk> and then can you just give us some underlying assumptions that might be embedded in that outlook macro et cetera, just to help us frame.
Sam Reed: Thanks.
Sam Reed: Well first of all we look at the fundamentals that I've I've talked about before.
Sam Reed: They are really stacking up in the favor of an improved market when you think about.
Sam Reed: A bit repetitive here, but it is very significant when you think about the age of stock and then the key metrics as you asked for some metrics that we look at.
Sam Reed: Equity.
Sam Reed: In the home average home prices age of stack.
Sam Reed: Household formations.
Sam Reed: Those are the things that are really correlated quite well to R&R demand and at the end of the day, it's about the consumer and being confident in investing in their homes. So all things that I just mentioned are tailwind to that.
Sam Reed: Secondly, and broadly speaking we look at how the year finished out at how we're entering this year versus last year.
Sam Reed: Our estimation is that while it will be.
Sam Reed: Call it slightly down in the first half and modest growth in the second half our estimation is that this industry will return to growth in 2026, and that's how we're calling in laying out 2025.
Sam Reed: Particular focus and being able to manage our business and dynamic times when changes happen.
Sam Reed: That weren't necessarily called for.
Sam Reed: And as I mentioned in my.
Sam Reed: Our prepared remarks, we did a fantastic job and gained significant share during our most volatile times, we had COVID-19 supply chain interruptions, Texas freezes colorant plant set a slow at all of those sorts of things that were curve ball thrown at US we were able to not only manage it in terms of consistent margin expansion, but manage.
Sam Reed: In terms of consistent share gain as well and that's our plan going forward.
Sam Reed: No that helps and then maybe switching gears touching on tariffs a bit more.
Speaker Change: And then drilling down the plumbing, specifically was there any distributors.
Speaker Change: <unk> retail activity, where there was perhaps a step up in plumbing inventory ahead of tariffs.
Speaker Change: Specifically kind of in that late November early December period, right after the election.
Speaker Change: When their expectations for tariffs potentially ramping we're likely in the narrative just curious kind of did you see any inventory stock up ahead of that.
Speaker Change: Sam It's Rick no. We did not we didn't see any material change in the channel inventories in Q4, So I know what you're referring to in terms of some contingency planning, but we didn't see that in any meaningful way at least in terms of our channels.
Speaker Change: Got you. Thanks, so much I'll pass it on.
Matthew Bouley: Your next question comes from Matthew Bouley with Barclays. Your line is now open.
Matthew Bouley: Hey, good morning, everyone. Thank you for taking the questions.
Matthew Bouley: So sticking with the topic of tariffs.
Matthew Bouley: So I think the way you quantified it I don't know if thats in terms of our gross impact if that's maybe 15 or a little bit more than that impact to the year.
Matthew Bouley: My question is on the mitigation.
Matthew Bouley: If that's mainly sourcing our operational or if theres any assumption of kind of incremental price and.
Matthew Bouley: And how are you guys are thinking about mitigating that did you announce any kind of incremental price since China tariffs went through or to sort of your initial price increases cover it just kind of how you're thinking a little bit more detail on maybe quantification around that mitigation side of it. Thank you.
Matt: Sure Matt Good morning.
Matt: So as it pertains to our mitigation actions were really we've been preparing for mitigation for the last several months.
Matt: I'd imagine this has been telegraph for a while and we've been preparing both short term and long term mitigation actions and it's really a combination of a number of levers like we did in the 2008 and 2019 2018 2019 timeframe.
Matt: That is a combination of the sourcing footprint and as I mentioned in my opening comments we have.
Matt: <unk> successfully reduced our exposure to China by 45% since 2018 really excellent work by the supply chain team here at Masco with regards to managing in a very methodical way of change in <unk>.
Matt: And footprint, while preserving a cost and operational efficiencies.
Matt: In addition, we are having discussions with our suppliers in terms of some partial offset as well as pricing.
Matt: Those are all in flight with regards to the the actions, we're not going to quantify the specific components of those here, but we do believe that the combination of those mitigation actions.
Matt: Well significantly and mitigate our exposure and minimize the impact to 2025 and as we indicated in our in the opening comments that we've factored in the net impact of tariffs.
Matt: In our 2025 guidance.
Matt: One thing to note is there is from a timing perspective.
Matt: The tariffs as we all know got went into place on February 4th.
Matt: There is some delay with regards to when they will roll into our call in terms of.
Matt: Parts.
Matt: And they're on they're on their way to the U S as well as they flow through our inventory.
Matt: Mitigating actions will have.
Matt:
Matt: We will layer in over time, and well some will be concurrent with the tariff impacts and some will be delayed and so that factors into a little bit of our cadence of our operating profit margins being flat.
Matt: Flattish in the first half of the year.
Matt: <unk> in the second half of the year. So hopefully that provides some additional color.
Speaker Change: Got it yeah. Thank you for that Rick very helpful.
Matt: And then secondly, maybe jumping over to the paint side.
You're kind of guiding DIY down low singles in pro up mid singles in 2025, clearly that's a continuation of a reasonably long trend here.
Matt: The question is kind of where we are on DIY. You mentioned this kind of deferred state of demand and just kind of slower than expected return to growth. There I mean, the longer we get into this do you start thinking it's just something more structural around the industry kind of going back to do it for me.
Matt: And in that sense, maybe it makes more sense to just push harder onto the pro side. So just how are you thinking about any eventual return to growth on the DIY side. Thank you.
Speaker Change: Matt I think there was a bit of a <unk>.
Speaker Change: Structural explanation as you think about going back a few years and the baby boomers and those of the baby boomers being a significant.
Speaker Change: DIY cohort.
Speaker Change: And.
Speaker Change: As they are.
Speaker Change: We are getting older. There is a tendency to switch to some degree to a do it for me model for some of that cohort.
Speaker Change: And I think structurally that combating that or.
Speaker Change: Weighing in on the other side is the household formations and millennials and we're seeing that clear.
Speaker Change: Clearly I think it's rather obvious but we're also seeing that they're DIY ers or theyre not just single project Diyer and when you look at where we are with regards to our portfolio and particularly in the case of coatings architectural paint.
Speaker Change: It's a relatively <unk>.
Speaker Change: Low cost as a percent of total project cost when you look at the product cost. So it's it's.
Speaker Change: It's a very it's practically a perfect combination for a DIY product.
Speaker Change: Low cost out of the product, it's something that's relatively easy to do it makes a big Bang for the Bakken in terms of the change it makes in a person's home and that's something that.
Speaker Change: A couple can do with their small children around so.
Speaker Change: It's a good project for us and I think that from a structural perspective that those are a couple of dynamics.
Speaker Change: We would remind you that we're expecting.
Speaker Change: Our business to outperform the market.
Speaker Change: So when we adjust for X X divestiture, we plan on being relatively flat in our dental segment.
Speaker Change: Got it thanks, Keith Good luck guys. Thank you.
Speaker Change: Your next question comes from Trevor Allinson with Wolfe Research. Your line is now open.
Trevor Allinson: Hi, Good morning. Thank you for taking my questions first I just wanted to follow up on the reiterated 2026 margin targets from both plumbing and that guard you provided some of the color on the unchanged Dec arc guide softer volumes offsetting some of the kitchen, Larry divestiture tailwind on plumbing, presumably volumes are also weaker than you like we expected.
Trevor Allinson: Initially laying out that 2026 guidance, but you are still retaining margin expectations. There can you just talk about maybe what's coming in better than what you were previously anticipating that perhaps offsetting some of the softer volumes there.
Trevor Allinson: I've got a lot of confidence based on what we've been able to do in the past our our production system is very mechanical as it relates to moving projects through our pipeline. So we have visibility of the size of our.
Trevor Allinson: Productivity pipeline and we also have data on how long it takes to move through the pipeline and what is our hit rate. If you will our batting average on our products. So we are just getting more confident in our ability to continue to grow.
Trevor Allinson: <unk> and continue to drive productivity, so that's a piece of it.
Trevor Allinson: Certainly we have a strong.
Trevor Allinson: Efficiencies that Dan.
Trevor Allinson: <unk> towards our.
Trevor Allinson: Incremental profit on incremental volume and we're getting more confidence in that and that is improving so it's a combination but in a word I'd say momentum.
Trevor Allinson: We feel good about our momentum in this space and plumbing the plumbing business is running extremely well.
Trevor Allinson: Okay understood, that's very encouraging and then.
Trevor Allinson: Second going back to supply chain in China exposure.
Trevor Allinson: Really theres been threats for tariff rates to move even higher from here moving forward. As you guys look out 12 months I. Appreciate you've made a lot of progress here already but if you look out 12 months from now do you expect to continue driving your China supply chain exposure even lower.
Trevor Allinson: Any help there on perhaps where that could go.
Trevor Allinson: Yes, we do expect that we're continuing to do that we are doing it carefully we're working with our existing supply base by and large so we're protecting our quality we're protecting our.
Trevor Allinson: Delivery and fill rates and we're working with.
Trevor Allinson: Suppliers that we've worked with for well over a decade.
Trevor Allinson: And.
Trevor Allinson: Our evolved in our.
Trevor Allinson: Innovation pipeline and work with us in all aspects of our business. So they're true partners. So we would anticipate continuing to.
Trevor Allinson: Sure.
Trevor Allinson: Create a shift if you will are continuing with our shift.
Trevor Allinson: Away from China. We're also working on value engineering, where we can continue to drive out cost that do not create customer benefit.
Trevor Allinson: We're working on cost sharing with our suppliers and of course, we have prices a lever as well.
Speaker Change: Got you I appreciate all the color and good luck moving forward.
Trevor Allinson: Thank you.
Your next question comes comes from Susan Mcclary with Goldman Sachs. Your line is now open.
Susan Mcclary: Hey, good morning, everyone.
Speaker Change: Yes, perhaps building office, you can win and Keith just going.
Speaker Change: So of your comments there on new products can you talk a bit about the innovation pipeline that you have how that's perhaps offsetting any price elasticity that could be a potential headwind in some of these operations and any thoughts on the R&D and the vitality index and how we should be thinking about those over the <unk>.
Speaker Change: Next year or two.
Speaker Change: Yes, our pipeline has our vitality index fairly steady at right around 30% of.
Speaker Change: Products less than 36 months old that were that were new so I think.
Speaker Change: It's steady as she goes and we're continuing to drive it.
Speaker Change: We look at <unk>.
Speaker Change: Effectively solving customer pain points. So we don't necessarily target a particular technology for the technology sake, rather we've been began with a with a customer back approach so things like.
Speaker Change: Returning returning product to service sooner after you're painting.
Speaker Change: Things like being able to paint when you have.
Speaker Change: A tighter window with regards to.
Speaker Change: <unk>.
Speaker Change: Good Sunny weather for example.
Speaker Change: Intuitive salute.
Speaker Change: Solutions to what people care about in terms of.
Speaker Change: Water filtration both in the shower ended the sink.
Speaker Change: Ease of use those sorts of things. So we have a defined process that looks at mines out if you will customer.
Speaker Change: Customer pain points and things that are the customers interested in and in doing so inevitably that ends up being something that theyre willing to pay for.
Speaker Change: That ultimately ends up helping.
Speaker Change: With respect to our margin and making up for it.
Some headwinds that we might experience other places in the business. So both on decorative architectural and in our plumbing space both.
Speaker Change: Internationally and in North America, we have a very strong innovation.
Speaker Change: Pipeline and the people who are executing it are doing a great job.
Speaker Change: Okay. That's helpful and then.
Speaker Change: You expect working capital to normalize to about 16% of sales this year.
Speaker Change: Plugging in the 2026 targets at a high level suggests you could see another step up in that working capital to sales can you talk a bit about the efforts that you can realize there, especially perhaps as some of these efforts around efficiencies productivity and cost savings come through how should we think about the upside.
Speaker Change: Sure Susan it's Rick with regards to working capital we did see a benefit of the divestiture of kitchell are really in the calculation for 2024, and that's why we were down closer to 15% as indicated in my opening remarks, we would expect that to normalize around 16%. Obviously, we're very focused with regards to being disciplined on working capital.
Speaker Change: Oh really through all of our supply chain and so as we continue to drive efficiencies in terms of our productivity or cost savings initiatives, we would see the benefit of that flow through working capital, but I think it's fair to assume that.
Speaker Change: For estimation or projection purposes that working capital as a percent of sales will scale with the business and we will stay at around about 16% of sales.
Speaker Change: Okay. Thank you and good luck with everything.
Speaker Change: And your last question comes from Adam.
Adam Garten: Garten with Zelman and associates. Your line is now open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: In paint it's been a couple of months since the PPG architectural divestitures closed just curious if you've noticed any changes in the paint aisle at home depot or if you expect any going forward.
Speaker Change: No, we really havent, Adam it's been fairly typical.
Speaker Change: Okay got it and then just lastly, just to clarify on the.
Speaker Change: Factoring in of the net impact of the incremental China tariffs just to be clear I didn't give a number but is that a modest negative impact you're embedding in 'twenty five.
Adam Garten: Yeah, Adam it's <unk>.
Adam Garten: Rick So with regards to the net impact it really depends on the timing in terms of the flow through.
Adam Garten: But we let me put it this way we're minimizing the impact we're obviously executing our mitigation actions as we speak that's flowing through and we've factored that within regard with regards to our guidance range and we would expect to mitigate a large chunk of that and minimize the impact in 2025.
Speaker Change: Okay got it thanks best of luck.
Speaker Change: There are no further questions at this time I will now turn the call over to Robyn Zondervan for closing remarks.
Robyn Zondervan: Wed like to thank all of you for joining us on the call. This morning and for your interest in Masco that concludes today's call have a wonderful day.
Robyn Zondervan: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Robyn Zondervan: Yes.
Robyn Zondervan: Okay.
Robyn Zondervan: Okay.
Robyn Zondervan: Okay.
Robyn Zondervan: Yes.
Robyn Zondervan: Okay.
Robyn Zondervan: Yes.
Robyn Zondervan: Okay.
Robyn Zondervan: Okay.
Robyn Zondervan: Yes.
Robyn Zondervan: Sure.
Robyn Zondervan: Okay.