The paragraph is an introduction to Masco Corporation's 2024 Fourth Quarter and Full Year Conference Call. The operator, Joel, welcomes participants and mentions that the call is being recorded. Robin Zondervan, Vice President of Investor Relations and FP&A, introduces the call, noting that Keith Allman, President and CEO, and Rick Westenberg, CFO, are present. Earnings release and presentation slides are available on Masco's website. After initial remarks, analyst questions will be taken, with a limit of one question and follow-up per analyst. Forward-looking statements and their associated risks are highlighted, along with the inclusion of non-GAAP financial metrics. Keith Allman then begins his presentation.

The paragraph highlights key achievements across various segments of the company for 2024. In the Plumbing segment, new products were introduced, including water filtration systems at Delta Faucet, energy and water-saving designs at Hansgrohe, and the FreshWater IQ monitoring system at Watkins Wellness. The integration of Sauna360 is ahead of schedule. In the Decorative Architectural segment, Behr has been recognized as a leader in interior and exterior paint, with significant sales growth driven by its partnership with Home Depot. The company also completed the sale of its lighting business to streamline its portfolio and enhance shareholder value.

The paragraph highlights the company's strong operating results for the fourth quarter and the full year of 2024, despite a 3% decrease in top-line revenue due to the divestiture of Kichler and unfavorable currency impacts. Excluding these factors, sales increased by 1% mainly due to higher volumes in the decorative segment. Operating profit rose by $19 million, and the operating profit margin improved by 140 basis points to 15.9%, marking the seventh consecutive quarter of year-over-year margin expansion. Earnings per share increased by 7% to $0.89. In the Plumbing segment, sales decreased by 1% in local currency due to lower volumes in North America, although international sales grew slightly, with positive performance in Europe and China. The segment's operating profit was $200 million, and the operating margin improved by 40 basis points. The company credits its focus on productivity, efficiency, cost savings, and investments in brands, products, and customer service for the positive outcomes.

The paragraph discusses the performance of Masco's Decorative Architectural segment and its overall financial results for 2024. Sales in this segment decreased by 6% due to a divestiture, but paint sales saw varied results with professional sales increasing and DIY sales decreasing. The segment's operating profit was $113 million, with a margin improvement. For the full year, Masco improved its operating metrics, with gross and operating margins increasing and earnings per share growing by 6%. The company returned over $1 billion to shareholders and achieved a compound annual EPS growth of over 12% over five years. Looking ahead, Masco is positioned for growth, focusing on market share gains and margin expansion, while its 2025 estimates factor in China tariffs but exclude future tariff impacts.

The company is confident in its ability to handle future challenges, drawing on past experience with issues like COVID and supply chain disruptions. For 2025, they anticipate a flat to slightly declining market in global and North American repair and remodel sectors, expecting international markets to decline slightly. Their own sales are projected to decrease slightly, but when adjusted for divestitures and currency impacts, sales are expected to be stable or slightly increased. The company plans to outperform the market and expand margins through various strategies, setting a target operating margin of 18%. Their capital allocation strategy remains focused on reinvesting in the business to maintain leadership and growth, particularly in the domestic and international plumbing sectors.

The company plans to maintain a strong investment-grade balance sheet and aims for a 30% dividend payout ratio, with a 7% dividend increase for 2025, marking the 12th consecutive annual rise. They intend to use approximately $600 million of free cash flow for share repurchases or acquisitions, seeking an additional 1% to 3% annual growth through strategic acquisitions. Expected 2025 earnings per share are projected between $4.20 and $4.45. The company reaffirms its 2026 margin expansion goals, targeting 20% margins in their Plumbing segment and 19%-20% in the Decorative segment, noting benefits from divestitures and challenges in the DIY paint market. Overall, they aim to grow operating profit margins to 18.5% in 2026, expecting a challenging market in 2025 before returning to historical growth rates in 2026.

The paragraph discusses the potential for growth in the repair and remodel market due to supportive structural factors, such as homeowners investing in upgrades, an increase in homes reaching prime remodeling ages, high home equity levels, and rising millennial household formation. The company expects to capitalize on this growth through its capacity, efficiency, and cost structure, aiming for double-digit earnings per share growth. The paragraph transitions to Rick Westenberg discussing the company's fourth-quarter and full-year outlook, noting a 3% decrease in sales that turns into a 1% increase when excluding the impact of divesting Kichler and currency fluctuations.

In the fourth quarter, international sales rose by 2% in local currency, while the gross margin was 34.8%. SG&A expenses decreased to 18.9% of sales, aided by divestiture and reduced costs, contributing to a $19 million increase in operating profit, reaching $291 million, with a 15.9% margin. This performance led to a 7% growth in EPS to $0.89 per share. For the full year 2024, sales dropped 2%, or 1% excluding acquisition and currency impacts, with North American sales down 2% and international sales stable. Operational efficiencies improved the gross margin to 36.3%, while operating profit rose by $36 million, expanding the margin to 17.5%. Full-year EPS increased 6% to $4.10 per share. In the fourth quarter, sales slightly declined by 1% due to lower volume and mix, though favorable pricing offset some declines. North American plumbing sales fell 2%, affected by wholesale and retail softness but supported by e-commerce and specialty spa dealers. International plumbing sales increased by 2% due to favorable volume and pricing, despite an unfavorable mix.

The paragraph outlines financial performance results for a company across various segments. In the fourth quarter, the company achieved $200 million in segment operating profit, up 1% year-over-year, with a margin of 16.8%, driven by cost savings and lower expenses despite challenges like higher commodity costs. Plumbing sales for 2024 were stable, with a slight growth attributed to favorable pricing and an acquisition, offset by lower volume and unfavorable mix. North American plumbing sales increased by 1% while international sales remained stable. Overall, the full-year operating profit rose by 6%, improving the margin by 100 basis points to 19%. Decorative Architectural sales decreased by 6% in Q4 due to divestiture and unfavorable currency impacts, with notable performance in paint sales influenced by inventory timing. The quarter’s operating profit was $113 million, up 13%, with a 17.7% margin driven by volume growth and cost-saving efforts, despite an unfavorable price-cost relationship.

The paragraph discusses a financial overview and outlook for Masco. In the past year, sales decreased by 5% due to the divestiture of Kichler and a slight decline in the paint business. Despite this, Pro paint sales increased mid-single digits, while DIY sales fell as expected. Operating income for the year was $550 million, with an operating margin improvement to 18.5%. The company maintained a strong balance sheet, with a gross debt-to-EBITDA ratio of 1.9x and $1.6 billion in liquidity. Working capital improved and free cash flow exceeded $900 million, allowing Masco to return over $1 billion to shareholders. Looking forward to 2025, Masco expects sales to decrease slightly, influenced by the 2024 Kichler divestiture, but anticipates an operating margin increase to 18%. The sales outlook accounts for recent China tariffs but not potential future tariffs, assuming a flat or slightly declining global repair and remodel market.

The paragraph discusses financial expectations for the company's sales and margins, highlighting a projected unfavorable currency impact of 1%. Sales are expected to be flat to slightly up year-over-year, with a decline in the first half and growth in the second half. The company will invest for future growth while maintaining cost discipline, aiming for stable SG&A as a percent of sales. Operating margins are projected to be flat in the first half due to tariff impacts and trade show costs, with expansion anticipated in the second half. For 2025, the Plumbing segment is expected to see flat to slightly increased sales and margins of 19% to 19.5%, driven by pricing, efficiencies, and cost-savings. The Decorative Architectural segment anticipates flat to slightly declining sales, with margins improving to 19% to 19.5%, aided by a divestiture and cost savings. The pro paint business is expected to grow, while the DIY paint business may slightly decrease.

The paragraph discusses the company's financial plans and expectations for 2025, including a $175 million reinvestment through capital expenditures, a 7% increase in dividends to $1.24 per share, and a $600 million allocation for share repurchases or acquisitions. Earnings per share (EPS) are projected to be between $4.20 and $4.45, with a 24.5% effective tax rate. The impact of newly enacted China tariffs is expected but the company plans to mitigate the $45 million annualized cost through strategic actions like pricing adjustments and supplier negotiations. Despite the uncertain tariff environment, the company expresses confidence in minimizing the impact. Additionally, the company credits its supply chain teams for successfully managing sourcing and costs.

The paragraph discusses the response to tariff situations and provides financial assumptions for 2025 in their earnings deck. Stephen Kim from Evercore ISI asks about the impact of inventory timing in the decorative architectural segment. Richard Westenberg responds, indicating that the fourth-quarter inventory timing provided a mid-single-digit benefit to the top line and a proportional profit dynamic. This benefit is expected to be a headwind in early 2025. Excluding a divestiture, the decorative architecture segment is expected to be flat for the year, with progress anticipated in the pro paint business. Additionally, acquisitions are noted as modest long-term sales drivers.

In the paragraph, Stephen Kim asks Keith Allman about Masco's focus areas, particularly regarding potential opportunities in plumbing versus decorative architectural spaces, and the timing of such activities. Keith responds by stating that Masco's M&A strategy remains unchanged, focusing on strategic fit through bolt-ons in paint and plumbing. While the market seems slightly soft, there's some potential for deals, though not significantly different. Masco is patient and seeking tuck-in acquisitions like Sauna360, where they can leverage channel expertise, brands, or specific technologies. Keith confirms that technology is indeed a factor in their M&A outlook.

The paragraph discusses the company's approach to mergers and acquisitions (M&A), highlighting the consideration of technology, market presence, and innovation pipelines in potential target companies. Additionally, it mentions the potential to enhance shareholder value through expertise in branding and market channels. During a Q&A, John Lovallo from UBS questions the company's ability to maintain fiscal year 2016 margin targets after selling Kichler, which may have improved margins by about 100 basis points. Keith Allman responds by explaining that the demand for DIY projects is influenced by factors such as millennial household formations and the age of the housing stock. He notes that current demand is below historical trends, mainly due to deferred projects and consumer confidence, but expects a favorable market opportunity when confidence returns and these projects resume.

The paragraph discusses a company's capacity and efficiency improvements in addressing increased demand and market volatility, highlighting stability coming out of 2024. It emphasizes their ability to manage volatile markets through their Masco operating system. The discussion then shifts to a conversation between John Lovallo, Richard Westenberg, and Keith Allman, where it's confirmed that DIY headwinds offset benefits from Kichler. They also discuss efforts to mitigate China tariffs and mention a manufacturing plant in Mexico for the spa business, while noting their primary manufacturing presence is in North America with 30 facilities in the U.S. and 20 distribution centers.

The paragraph discusses the company's strategy for managing cost inflation and pricing as it looks ahead to 2025. They expect low single-digit inflation in commodities and freight for plumbing, with these costs still elevated but lower than their 2024 peak. Pricing is anticipated to offset this headwind, resulting in a positive price-cost dynamic. For decorative architectural products, there is some upward pressure on raw materials like resins and TiO2, but the company expects a price-cost neutral scenario due to an existing arrangement with their channel partner. Additionally, cost savings initiatives are cited as a factor for margin expansion in 2024.

The paragraph features a discussion between Richard Westenberg and Anthony regarding the importance of cost savings initiatives and operational efficiencies for their business. Richard explains that these initiatives, supported by the Masco operating system, have successfully expanded margins in recent years and remain a priority to ensure continued growth, especially for 2025. The Q&A session transitions to Sam Reid from Wells Fargo asking about the company's growth outlook, particularly the confidence in growth acceleration in the second half of the year. Keith Allman responds, emphasizing that favorable market fundamentals contribute to their optimistic growth expectations for the latter half of the year.

The paragraph discusses several factors influencing the demand for remodeling and renovation (R&R), such as equity in homes, average home prices, age of housing stock, and millennial household formations, noting these are positive indicators or "tailwinds." The expectation for the industry is slightly declining in the first half of the year, followed by modest growth in the second half, with a return to growth anticipated in 2026. The company plans to navigate these dynamic conditions based on past successes managing crises like COVID and supply chain disruptions. Additionally, the conversation shifts to potential impacts of tariffs on plumbing inventory, particularly in late 2020, questioning whether there was increased stockpiling ahead of possible tariff implementations.

The paragraph discusses Masco's strategy for mitigating the impact of tariffs, particularly those related to China. There was no significant change in channel inventories in Q4, and Masco is taking several measures to mitigate tariff impacts. These include adjusting their sourcing footprint, reducing reliance on China by 45% since 2018, and pursuing discussions with suppliers for partial offsets and pricing strategies. These mitigation efforts involve a combination of short-term and long-term actions to maintain cost and operational efficiencies.

The paragraph discusses a company's strategy to mitigate the impact of tariffs on their business, emphasizing that various mitigation actions are expected to protect them from significant exposure until 2025. The tariffs, implemented on February 4, affect parts and components headed to the U.S., creating a delay in their impact on inventory. The company anticipates flattish operating profit margins in the first half of the year, with an increase in the second half. Matthew Bouley then shifts the conversation to the paint market, noting the decline in DIY sales and an increase in professional (Pro) sales. He suggests that the DIY market may be experiencing a structural shift towards a "do it for me" approach, prompting a consideration of focusing more on the Pro market for growth. Keith Allman acknowledges there might be a structural explanation for this trend.

The paragraph discusses the changing DIY (do-it-yourself) trends among different generations, particularly baby boomers and millennials. As baby boomers age, they are shifting towards a "do-it-for-me" model, while millennials, who are forming new households, are engaging in DIY projects. The article highlights that projects like painting are cost-effective and accessible for DIY enthusiasts, offering significant aesthetic changes with minimal expenses and effort. The company expects to outperform the market in its DIY-focused business segment despite some internal adjustments following a divestiture. The narrative then shifts to a Q&A session about the company's 2026 margin targets in their plumbing and other segments, noting that while volumes may be softer than initially expected, they are still maintaining their margin expectations.

Keith Allman expresses confidence in the company's ability to improve productivity and efficiency, contributing to a positive momentum in their business, particularly in the plumbing sector. This confidence stems from a well-understood and efficient production system. In response to a question about the supply chain and exposure to China, Allman confirms the company's plan to reduce reliance on Chinese suppliers over the next 12 months. This reduction will be managed carefully to maintain quality and delivery standards, leveraging long-term partnerships with existing suppliers involved in their innovation pipeline.

The paragraph discusses a company's strategic shift away from China and efforts to reduce costs through value engineering and partnerships with suppliers. In response to a question about innovation, an executive describes maintaining a consistent 30% vitality index, focusing on introducing products within 36 months that address customer pain points, such as ease of use and effective solutions for painting and water filtration. This customer-centric approach is aimed at creating products that customers are willing to pay for, thereby offsetting potential price elasticity issues and supporting business margins.

The paragraph discusses a conversation about working capital and sales projections within a company. Susan Maklari inquires about expected changes in working capital as a percentage of sales, with Richard Westenberg explaining the impact of divesting Kichler, which lowered the percentage to 15% for 2024 but is expected to normalize around 16%. The focus is on maintaining discipline and efficiency in managing working capital. Additionally, Adam Baumgarten asks about changes following PPG's architectural divestitures, and Keith Allman responds that there have been no significant changes. Lastly, there is a brief mention of considering the effects of China's tariffs.

In the call, Richard Westenberg addresses a question about the expected negative impact in 2025, explaining that while the extent of the impact depends on timing, the company is actively minimizing it through mitigation actions. They anticipate reducing a significant portion of the impact within their guidance range. The call concludes with Robin Zondervan thanking participants and ending the session.

This summary was generated with AI and may contain some inaccuracies.