Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2024 Fourth Quarter and Full Year Conference Call. My name is Joel, and I will be your conference operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Robin Zondervan, Vice President, Investor Relations and FP&A. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Masco Corporation's 2024 Fourth Quarter and Full Year Conference Call. With me today are Keith Allman, President and CEO of Masco; and Rick Westenberg, Masco's Vice President and Chief Financial Officer. Our fourth quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We described these risks and uncertainties and our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we file with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides which are available on our website under Investor Relations. With that, I will now turn the call over to Keith.

Thank you, Robin. Good morning, everyone, and thank you for joining us today. Please turn to Slide 5. I wanted to start this morning by reflecting on some of our key accomplishments across our businesses, brands and products for 2024. Beginning with our Plumbing segment. We introduced several innovative new products in the market and entered into new product categories. At Delta Faucet, we're focused on being a leader in water quality and introduced water filtration products for both the sync and shower categories. At Hansgrohe, we continue to increase market share by offering products with premium and customizable designs and products that are focused on saving energy and water. At Watkins Wellness, we introduced FreshWater IQ, a smart monitoring system that automatically test the water chemistry in your spa and communicates recommended adjustments to maintain clean natural feeling water. Finally, our integration of Sauna360 is ahead of schedule, and we are actively launching our branded Sonos into our existing Watkins dealer network. In our Decorative Architectural segment, the strength of our brands continues to resonate with our customers and generate additional share gains. Behr was rated #1 in interior paint, #1 in exterior paint, and #1 in exterior stain in a third-party study demonstrating the strength and exceptional quality of our leading Behr brand. Our investments in our paint business to continue to expand our services and build upon our successful partnership with the Home Depot, have helped drive share gains in both the DIY and Pro paint categories. In our pro paint category, our annual sales are now over $900 million, which is an increase of over 70% since 2020. Our products resonate with pro painters and have enabled us to capitalize on the sizable growth opportunity in the pro paint market. Finally, we completed the sale of…

Thank you, Keith, and good morning, everyone. Thank you for joining. As Robin mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization charges and other onetime items. Turning to Slide 10. Sales in the fourth quarter decreased 3%, but increased 1% excluding the unfavorable impact of our divestiture of Kichler and currency. Our divestiture of Kichler in the third quarter of 2024 decreased sales by 3% in the fourth quarter. In local currency, North American sales decreased 4%, but increased 1% excluding the divestiture impact. International sales increased 2% in local currency. Gross margin in the quarter was 34.8%. SG&A as a percent of sales decreased 170 basis points year-over-year to 18.9% in the quarter, primarily driven by our divestiture and lower expenses. Our operating profit grew $19 million to $291 million, and our margin was strong for the fourth quarter at 15.9%. Our margin performance was primarily driven by executing on our cost savings initiatives and lower expenses. This resulted in EPS growth of 7% to $0.89 per share. . Turning to the full year 2024. Sales decreased 2% over the prior year or 1%, excluding the unfavorable impact of net acquisition and divestiture activity as well as currency. In local currency, North American sales decreased 2% or 1%, excluding the net impact of acquisition and divestiture activity and international sales were in line with the prior year. Our focus on driving operational efficiencies in 2024 contributed to strong gross margin of 36.3%, an expansion of 110 basis points year-over-year. SG&A as a percent of sales was 18.7%. Operating profit for the full year increased $36 million and operating margin expanded 70 basis points to 17.5%. Lastly, our EPS for the full year increased 6% to $4.10 per share. Turning to Slide 11. [indiscernible]…

[Operator Instructions] Your first question comes from Stephen Kim with Evercore ISI.

Appreciate all the color. Yes, really, really helpful there. I wanted to ask you a question about 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 a headwind to 1Q results that maybe you could quantify for us, either on the sales margins or both? .

Stephen, it's Rick. I'll be happy to tackle that. So as we indicated in our opening comments, the inventory timing benefit for the fourth quarter was about a mid-single-digit benefit to our top line. You can imagine the -- or envision that the profit dynamic is consistent with our profitability for the segment, proportionally speaking. And you're right, as it pertains to timing, all else being equal, we would anticipate that to be a headwind as we go into this year 2025, particularly early this year, kind of an equal amount. That said, as it pertains to our overall expectations for the segment, we do anticipate that excluding the divestiture of Kichler, we do expect decorative architecture will be roughly flat for the year and for our pro paint business to be up mid-single digits. So continued progress in that space.

That's helpful. Appreciate that. And then the acquisition continues to be a modest driver to sales longer term. I was wondering if you could give us -- remind us again sort of where your focuses are in that 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 things -- what kind of opportunities you are seeing out there? And the macro environment, how conducive that is currently actually acting on some of these? Or if this is more -- maybe more something that you think the timing would favor maybe the back half of the year?

Stephen, this is Keith. As we said in our prepared remarks, our strategy with regards to M&A hasn't changed. We're looking for the right strategic fit for Masco to drive our strategy of bolt-ons in paint and plumbing. So specifically to your question, we're looking at both paint and 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, 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 or the first -- or the front half, it's really about finding those bolt-ons that are the right fit. We're patient, as we've talked in the past. And I think Sauna360 is a good example of what we're looking for. 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 for what we're looking for and what the overall M&A market looks like for us today.

That is very helpful. Appreciate it. 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?

Absolutely. I mean there's aspects of our 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, presence in markets plays a piece the overall innovation pipeline of a target certainly factors into it and overlaying all of that is our ability to create shareholder value through our expertise in channel and brand. .

Your next question comes from John Lovallo with UBS.

The first one is just on the maintained fiscal year 2016 margin targets despite the sale of Kichler. I mean, assuming Kichler contributed about $250 million of sales at sort of mid-single-digit EBITDA margins. It would appear that this could mechanically improve margins by like 100 basis points. I know you mentioned an offset from, I think, softer DIY, so curious when do you think those DIY volumes could turn positive? It's been several years of negative comps at this point?

Well, that's a bit of a million-dollar question, of course. And the way we think about it first is we look at the fundamentals. And when you think about whether it's millennial household formations or age of housing stock or what we believe to be deferred 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 as the market recovered from that pull forward, we're well below the historical line of growth even factoring in 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 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 certainly the efficiency. Very proud of what the team has been able to do over the last couple of years and in depressed markets as it relates to improving our margins and our overall operating efficiency. So when that happens, we look to the point-of-sale information that we have and trends that we're seeing in the market to help inform that. And I'll tell you that where we sat coming out of 2024 is in more of a position of stability than 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 the ability to execute well in these kind of volatile markets because of our portfolio, because of our Masco operating system where we drive down to the penny, how we manage our businesses and that's been very productive for us, and we're going to continue to do that.

Okay. So just to be clear, the DIY headwind is offsetting the Kichler benefit, the mechanical titular benefit. .

That's right.

Okay. Got it. And then second question is you mentioned some recent mitigation efforts in relation to the China tariffs. Curious if there are tariffs on Mexico, there is the walk-ins facility there. Is there anything you can do to resource any of that product elsewhere, given that it's 1 of 2 facilities, I believe?

Yes. We do have a manufacturing plant in Mexico for our spa business. Of course, we have significant manufacturing facilities in the United States. I think we have some 30 manufacturing facilities in the United States and 20 distribution centers throughout the country. So far and away, our biggest footprint is here in North America. And we do have the opportunity to resource product from Mexico into the United States, significant manufacturing down in Southern Cal -- near the border in the San Diego area where Watkins headquarters is. So there is a capability to move products from Mexico. .

Your next question comes from Anthony Pettinari with Citi.

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 maybe if you can speak to plumbing and DA.

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 costs. Commodity and freight costs are down from their peaks in mid-2024, but they still remain elevated and so we expect that to be a bit of a headwind as we go into this 2025 calendar year. That said, we do expect our pricing to more than offset the commodity headwind and therefore, to have a positive price cost dynamic as we go into -- as we are entering into 2025. As it pertains to decorative architectural products, overall inflation, we do see a bit of a headwind, and we are seeing some inflation -- sorry, some upward pressure as it pertains to our raw material inputs of resins and TiO2 -- we're not calling it quite yet, but we are seeing some pressure there. With regards to pricing, as we've mentioned previously, 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 DAP in 2025.

Okay. That's very helpful. And then just company-wide, I mean, you cited cost savings initiatives as a driver of margin expansion in '24. 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, maybe smaller -- 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.

Sure, Anthony. So with regards to our cost savings initiative and operational efficiencies, those continue to be a huge priority. And as 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. We're going to continue to drive that performance. As we've 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.

Your next question comes from Sam Reid with Wells Fargo.

I wanted to talk on your growth outlook. Kind of when you think about that 1H versus 2H 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 2H relative to 1H. 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 it?

Well, first of all, we look at the fundamentals that I've talked about before. And they are really stacking up in the favor of an improved market. When you think about 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, equity in the home, average home prices, age of stock, millennial household formations, 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 investing in their homes. So all things that I just mentioned are tailwinds to that. . Secondly, and broadly speaking, we look at how the year finished out and how we're entering this year versus last year. And our estimation is that while it will be 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 and laying out 2025 with a particular focus on being able to manage our business in dynamic times when changes happen that weren't necessarily called for. And as I mentioned in my prepared remarks, we did a fantastic job and gained significant share during our most volatile times, be it COVID, supply chain interruptions, Texas freezes, colorant plants that explode, all those sorts of things that were curveballs thrown at us, we were able to not only manage it in terms of consistent margin expansion, but manage it in terms of consistent share gain as well, and that's our plan going forward.

No, that helps. And then maybe switching gears, touching on tariffs a bit more. And then drilling down the plumbing specifically, was there any distributors kind of retail activity where there was perhaps a step-up in plumbing inventory ahead of tariffs thinking specifically kind of in that late November, early December period right after the election when the expectations for tariffs potentially ramping more likely in the narrative, just curious kind of did you see any inventory stock up ahead of that?

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 channel.

Your next question comes from Matthew Bouley with Barclays.

So sticking with the topic of tariffs. I think the way you quantified it, I don't know if that's in terms of a growth impact, if that's maybe $0.15 or a little bit more than that impact to the year. My question is on the mitigation. If that's mainly sourcing or operational or if there's any assumption of kind of incremental price and how you guys are thinking about mitigating that? Did you announce any kind of incremental price since China tariffs went through? Or did sort of your initial price increases cover it? Just kind of how are you thinking a little bit more detail and maybe quantification around that mitigation side of it?

Sure, Matt. So as it pertains to our mitigation actions, we're really -- we've been preparing for mitigation over the last several months. As you would imagine, this has been telegraphed for a while, and we've been preparing both short-term and long-term litigation actions. And it's really a combination of a number of levers like we did in the 2019, 2018, 2019 time frame. And that is a combination of the sourcing footprint. And as I mentioned in my opening comments, we've 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, a change in our sourcing footprint, while preserving cost and operational efficiencies. In addition, we are having discussions with our suppliers in terms of some partial offset as well as pricing. Those are all in flight with regards to the action. We're not going to quantify the specific components of those here, but we do believe that the combination of those mitigation actions will significantly 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 in our 2025 guidance. One thing to note is there is -- from a timing perspective, the tariffs as we all know, went into place on February 4. There is some delay with regards to when they will roll into our in terms of parts and components that are on their way to the U.S. as well as they flow through our inventory. Our mitigating actions will have will layer in over time, and we'll some will be concurrent with the tariff impact and some will be delayed. And so that factors into a little bit of our cadence of our operating profit margins being flattish in the first half of the year and increasing in the second half of the year. So hopefully, that provides some additional color.

Got it. Yes. Very helpful. And then secondly, maybe jumping over to the paint side. you're kind of guiding DIY down low singles and Pro up mid-singles in 2025. Clearly, that's a continuation of a reasonably long trend here. So 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. And in that sense, maybe it makes more sense to just push harder on to the Pro side. So just how are you thinking about any eventual return to growth on the DIY side?

Matt, I think there was a bit of a structural explanation. As you think about going back a few years and the baby boomers and those -- the baby boomers being a significant DIY cohort and as they are getting older, there is a tendency to switch to some degree to a do-it-for-me model for some of that cohort. And I think structurally, that combating that or kind of weighing in on the other side is the household formations, the millennials. And we're seeing that clearly. I think it's rather obvious. But we're also seeing that there and they're [indiscernible] not just single project [indiscernible]. And when you look at where we are with regards to our portfolio and particularly in the case of coatings or architectural paint, it's a relatively low cost as a percent of total project costs when you look at the product cost. So it's a very -- it's practically a perfect combination for a DIY product. It's a low cost on the product. It's something that's relatively easy to do. It makes a big bang for the buck in terms of the change it makes in a person's home and it's something that a couple can do with their small children around. So it's it's a good project for us. And I think that from a structural perspective, those are a couple of dynamics. I would remind you that we're expecting to -- in our business to outperform the market. So when we adjust for x divestiture, we plan on being relatively flat in our Deco segment.

Your next question comes from Trevor Allinson with Wolfe Research.

First, I want to follow up on the reiterated 2026 margin targets for both Plumbing and [indiscernible]. You provided some of the color on the unchanged [indiscernible] guide, softer volumes offsetting some of the Kichler divestiture tailwinds. On plumbing, presumably, volumes are also weaker than you likely expected when initially laying out that 2026 guidance, but you're still retaining margin expectations there. Can you just talk about maybe what's coming in better than what you were previously anticipating that's perhaps offsetting some of the softer volumes there?

I've got a lot of confidence based on what we've been able to do in the past. Our production system is very mechanical as it relates to moving projects through a pipeline. So we have visibility of the size of our 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, or our batting average on our product. So we are just getting more confident in our ability to continue to grind and continue to drive productivity. So that's a piece of it. Certainly, we have strong efficiencies that then feed towards our 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. We feel good about our momentum in this space. and the plumbing business is running extremely well.

Okay. Understood. That's very encouraging. And then second, going back to supply chain and China exposure, I mean, clearly, there's 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 you look out 12 months from now, do you expect to continue driving your China supply chain exposure even lower? And any help there on perhaps where that could go?

Yes. We do expect that, and we're continuing to do that. We're doing it carefully. We're working with our existing supply base by and large. So we're protecting our quality. We're protecting our delivery and fill rates. And we're working with suppliers that we've we've worked with for well over a decade and are involved in our innovation pipeline and work with us in all aspects of our business. So they're true partners. So we would anticipate continuing to create a shift, if you will, or continuing with our shift away from China. We're also working on value engineering where we can continue to drive out costs that do not create customer benefit. We're working on cost sharing with our suppliers. And of course, we have prices to lever as well.

Your next question comes from Susan Maklari with Goldman Sachs.

Building up 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 next year or two?

Yes. Our pipeline has our Vitality Index fairly steady at right around 30% of products less than 36 months old that were new. So I think it's steady as she goes, and we're continuing to drive it. We look at effectively solving customer pain points. So we don't necessarily target a particular technology for the technology sake. Rather, we begin with a customer back approach. So things like returning product to service sooner after you're painting, things like being able to paint when you have a tighter window with regards to good sunny weather, for example, intuitive solutions to what people care about in terms of water filtration, both in the shower and in the sync, ease of use those sorts of things. So we have a defined process that looks at and mines out, if you will, customer pain points and things that are the customer is interested in. And in doing so, inevitably, that ends up being something that they're willing to pay for that ultimately ends up helping with respect to our margin and making up for some headwinds that we might experience in other places in the business. So both in decorative architectural and in our plumbing space, both internationally and in North America, we have a very strong innovation pipeline and the people who are executing it are doing a great job. .

Okay. That's helpful. And then you mentioned that you expect working capital to normalize to about 16% of sales this year. And 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?

Sure, Susan. It's Rick. With regards to working capital, we did see a benefit of the divestiture at Kichler 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 really throughout our supply chain. And so as we continue to drive efficiencies in terms of our productivity, our cost savings initiative, we would see the benefit of that flow through working capital, but I think it's fair to assume that as for estimation or projection purposes, that working capital as a percent of sales will scale with the business, and will stay at around about 16% of sales.

And your last question comes from Adam Baumgarten with Zelman & Associates. .

Just 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 [indiscernible] at Home Depot or if you expect any going forward?

No, we really haven't Adam. It's been fairly typical.

Okay. Got it. And then just lastly, just to clarify on the factoring in of the net impact of the incremental China tariffs. Just to be clear, I know you didn't give a number, but is that a modest negative impact you're embedding in '25?

Yes, Adam, it's Rick. So with regards to the net impact, it really depends on the timing in terms of the flow-through. 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'll factor that within -- with regards to our guidance range, and we would expect to mitigate a large chunk of that and minimize the impact in 2025.

There are no further questions at this time. I will now turn the call over to Robin Zondervan for closing remarks.

We'd 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.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.