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Text: Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow-up.
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 filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics.
I hope you and your families are safe and healthy.
2020 was a challenging year for all of us as the virus started reshaping our lives, our economy, and our business we established 3 priorities to guide us throughout the year.
Number 1, keep our employees safe; 2, meet the needs of our customers; and 3, position Masco to outperform the recovery.
Our employees across our business units did a tremendous job to deliver on all of these priorities.
Our performance in 2020 was a testament to Masco's culture of solving problems, serving customers, and delivering better solutions.
Now, let me provide you some brief comments on our 4th quarter before I turn to our full year results and conclude with our thoughts on 2021.
Turning to slide 4, our top line increased 12% excluding the impact of currency in the 4th quarter.
We saw growth across our entire portfolio, led by strong growth in North American plumbing, international plumbing and our paint business.
Operating profit increased 20% and our operating margin expanded 90 basis points to 16.6% in the quarter as we leveraged our strong volume growth.
Our earnings per share for the quarter increased an outstanding 36%.
Turning to our segments, Plumbing grew 12% excluding currency, with 14% growth in North American plumbing and 8% growth in International plumbing.
North American plumbing was led by Delta faucet company with 18% growth.
Our Spa business also achieved growth in the 4th quarter as we continued to effectively manage covered related restrictions.
Hansgrohe drove strong growth in Germany in China as those markets have recovered nicely from earlier in the year.
In our Decorative Architectural segment, Behr continued its tremendous year with high teens DIY paint growth and mid-single digit propane growth in the 4th quarter.
Our lighting and our Bath & Cabinet Hardware businesses also contributed nicely to growth in the quarter.
In regards to capital allocation, we resumed our share repurchase program by repurchasing 2.3 million shares for $125 million during the quarter.
And we executed 3 bolt-on acquisitions, which we expect to contribute approximately 3% top line growth in 2021.
The largest was the acquisition of Kraus, an online plumbing fixture company focused on modern high quality sinks, faucets, and related products.
Kraus will operate as an affiliate of Delta faucet company.
This leading digitally native brand will complement our online capabilities in the fast growing e-commerce channel.
Also in our plumbing segment, Hansgrohe in January acquired a 70% interest in easy sanitary solutions or ESS, a Netherlands based developer and manufacturer of high-style linear drain solutions.
ESS shares Hansgrohe's focus on innovation, design, and responsibility and will further expand our strong presence in the shower space.
In our Decorative Architectural segment we acquired Work Tools international, a leading manufacturer of high quality precision paint tools and accessories, including brushes rollers, and mini rollers for both DIY and professional painters under the WHIZZ, and Elder & Jenks brand names.
These acquisitions are consistent with our M&A criteria in that they are leaders in their respective categories, have a strong fit with our existing strategy, increase our market share and complementary or adjacent product categories and meet our bolt-on acquisition return criteria, which is to exceed our risk-adjusted cost of capital within a 3-year timeframe.
Now let's review our full year performance.
For the full year, sales grew 7%, led by double-digit growth from Delta faucet, Behr paint and Liberty Hardware.
Delta gained share with double-digit growth across its retail, trade, and e-commerce channels.
Hansgrohe gained share in its two largest markets of Germany and China.
And our Spa business, which was the most impacted by shut down orders and limits on employees in its Mexican facilities, overcame significant obstacles to end the year down only mid single digits and enters 2021 with a record backlog, due to the tremendous demand for its products.
In our Decorative Architectural segment, we were well positioned with our leading brands Behr and Kilz and our strong channel partners to capitalize on the powerful resurgence in DIY paint.
This resulted in full-year growth of over 20% in DIY paint.
Propane demand was soft in Q2 and Q3 but returned to growth in the 4th quarter and is accelerating into 2021.
While total company sales grew 7%, operating profit increased 18% as we leveraged the strong volume growth and enacted significant cost reduction across the organization including hiring and wage freeze for part of the year, significantly lower brand and marketing spend, a freeze on certain growth investments for part of the year, and obviously drastically reduced travel and entertainment expense.
These actions coupled with our strong volume leverage resulted in significant operating margin expansion of 170 basis points in 2020.
Our strong cash generation allowed us to deploy nearly $1.1 billion in capital during the year.
We repurchased $727 million of our stock at an average price of approximately $39 per share.
We returned approximately $145 million in dividends to shareholders.
We completed 4 bolt-on acquisitions for $227 million and we finished the year with over $1.3 billion in cash on hand and net leverage of one-time.
This strong operating profit growth combined with our significant capital deployment resulted in exceptional financial results, 37% earnings-per-share growth to $3.12 per share exceeding our 2019 Investor Day guidance for 2021, a full year earlier than planned.
Free cash flow of over $1 billion with a conversion rate of 118% and a return on invested capital of approximately 42%.
Now turning to '21.
While precise forecasting is a significant challenge in this dynamic environment, I would like to share with you our view of the markets where we compete.
For the North American repair and remodel market, we expect a market growth to be in the low to mid single digit range with strong growth in the first half, followed by difficult comps in the second half.
For the paint market, a subset of the repair and remodel market for us, we expect the DIY paint market to be down low to mid single digits and the propane market to grow mid single digits.
And for our international markets, principally Europe, we expect a low single-digit growth environment.
While the US market will face challenging comps in the back half of '21, leading indicators remain robust.
Home price appreciation was up nearly 30% in December and existing home sales were up over 22% compared to prior year.
Each of these metrics has a strong correlation with our sales on a lag basis.
Based on these assumptions and our expectation that we will continue to gain share and outperform the market, we anticipate Masco's growth to be in the range of 5% to 9% excluding currency for 2021, and 7% to 11% including currency.
This is based on expected organic growth of 2% to 6% excluding currency, growth from our completed acquisitions of approximately 3%, and growth from foreign currency translation of approximately 2%.
We expect margins to be approximately 17% and earnings per share to be in the range of $3.25 to $3.45 for 2021.
Turning to capital allocation.
Our Board announced its intention to increase our annual dividend to $0.94 per share beginning in the second quarter of 2021, a 68% increase.
As we have raised our targeted dividend payout ratio from 20% to 30% based on the strength of our business model and cash generation capabilities.
In addition to announcing its intention to increase our annual dividend, our Board also approved a new $2 billion share repurchase authorization.
Our strategy remains unchanged to deploy our free cash flow after dividends to share repurchase or acquisitions and based on our strong liquidity position of over $1.3 billion in cash at year-end and then our projected free cash flow, we expect to deploy approximately $800 million to share repurchases or acquisitions in 2021.
As Dave mentioned, most of my comments will focus on adjusted performance from continuing operations, excluding the impact of rationalization and other one-time items.
Turning to slide 7, we delivered a strong finish to our record year.
Fourth quarter sales increased a robust 12% excluding currency.
In local currency, North American sales increased 13%.
This outstanding performance was mainly driven by strong volume growth in North America -- North American faucets and showers as well as DIY paint.
In local currency, international sales increased 8%.
Gross margin was 35.6% in the quarter, up 100 basis points as we leveraged increased volume, partially offset by higher rebates and program costs.
Our SG&A as a percentage of sales was 19% in the quarter.
This was primarily due to increases in certain variable costs such as incentive compensation, program costs, advertising, and legal accruals.
We delivered a strong 4th quarter operating profit of $309 million, up $52 million or 20% from last year with operating margins expanding 90 basis points to 16.6%.
Our 4th quarter earnings per share increased 36% to $0.75.
Please note that this performance is based on a normalized tax rate of 25% versus the previously guided 26% tax rate.
Changes to IRS guidance in late 2020 and how certain foreign income is taxed in the US lowered our normalized tax rate to 25%.
As this change was retroactive, restated adjusted earnings per share numbers for 2019 and the first 3 quarters of 2020 can be found in the appendix on slide 28.
Turning to the full year 2020, sales increased 7% excluding currency.
Foreign currency translation favorably impacted the full-year by $13 million.
In local currency, North American sales increased 9% and international sales decreased 1% as many European markets were slower to recover from the impacts of COVID-19.
Our SG&A as a percentage of sales decreased 100 basis points to 17.9% for the full year as a result of our rapid pandemic related cost containment.
For the full year, operating profit increased $196 million or 18% with operating margins expanding 170 basis points to 18.2%.
Lastly, our earnings per share increased 37% to $3.12 for the full year.
Turning to slide 8, Plumbing grew 12% in the quarter, excluding the impact of currency.
North American sales increased 14% in local currency led by Delta's 18% growth in the quarter.
Delta continues to drive robust consumer demand across our wholesale, retail, and e-commerce customers as Keith mentioned Watkins, our Spa business, delivered high single-digit growth in the quarter, as they continued to experience strong demand for their products.
They have a record backlog despite operating at less than 100% capacity due to ongoing government mandated employee limitations in our Mexican facilities.
International plumbing sales in the 4th quarter increased 8% in local currency.
Hansgrohe once again led growth driving double-digit growth in both Germany and China.
Operating profit was $224 million in the quarter, up $44 million or 24% with margins expanding 160 basis points 19.1%.
The strong performance was driven by incremental volume and cost containment initiatives, partially offset by higher year-end program costs, marketing and other increased variable expenses.
Turning to the full year 2020, sales increased 3% excluding currency.
Foreign currency translation favorably impacted full year sales by approximately $15 million.
In local currency, North American plumbing sales grew 6% and international plumbing sales decreased 1%.
Full-year operating profit was $813 million, up $92 million or 13% with margins expanding an outstanding 160 basis points to 19.7%.
Turning to 2021, we expect plumbing segment sales growth to be in the range of 11% to 14% with 47% organic growth, another 4% growth from the recent acquisitions and given current exchange rates foreign currency to favorably benefit plumbing revenue by approximately 3% or $112 million.
We anticipate full year margins will be approximately 18% given that in 2020 we delayed approximately $40 million in costs and investments due to COVID.
We expect a significant portion of this to return in 2021 in the form of investments in our brands, service, innovation to fuel future growth.
We will also have increased amortization expense of approximately $11 million due to purchase accounting.
Segment operating margins will decline by approximately 60 basis points due to this incremental amortization in the 2 recent acquisitions.
Turning to slide 9.
Decorative Architectural grew 12% in the 4th quarter driven by mid-teens growth in our paint business.
Our DIY paid business continued its strong year with high-teens growth and our propane business rebounded nicely in the quarter with mid single-digit growth.
Our builders' hardware and lighting business also benefited from increased consumer demand and each contributed to the segment's results by delivering solid growth.
Operating profit in the quarter increased 9% driven by incremental volume, partially offset by an unfavorable price-cost relationship as well as higher variable compensation and legal accruals of approximately $10 million.
Turning to full year 2020, sales increased 12% driven by the resurgence in DIY paint in the year.
While our Pro business declined slightly over the prior year, we saw solid improvement in demand in the 4th quarter.
Full-year operating income increased $98 million or 20% percent with operating margins expanding 120 basis points to 19.2%.
In 2021, we expect Decorative Architectural segment sales to grow in the range of 2% to 7% with 0% to 5% organic growth and another 1.5% from the acquisition.
We also expect segment operating margins of approximately 19%.
Looking specifically at paint growth for 2021, we currently anticipate our DIY business to be approximately flat with 2020 and our pro business to increase to high single digits.
In addition, the acquisition completed at the end of 2020 will add approximately $3 million of incremental amortization expense due to purchase accounting.
Turning to slide 10, our year-end balance sheet was strong with net debt to EBITDA at 1 times and we ended the year with approximately $2.3 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percentage of sales finished the year at 15.2% excluding acquisitions and an improvement of 50 basis points over prior year.
This performance was excellent.
As we enter 2021, our inventory levels will require some reinvestment to sustain our outstanding delivery performance.
With our strong operating and working capital performance, and lower than normal capex, adjusted free cash flow was extremely strong at $1 billion representing 118% of adjusted net income from continuing operations.
During 2020, we repurchased 18.8 million outstanding shares for approximately $727 million and we increased our annual dividend by 4% to $0.56 per share.
Finally, I'm pleased to report that Moody's recently upgraded our credit rating to Baa2 based on our improved credit metrics and strong financial performance.
We have summarized, our expectations for 2021 on slide 11.
We expect overall sales growth of 7% to 11% with operating margins in the range of approximately 17%.
We currently expect that growth will be more heavily weighted toward the first half of the year as we will obviously face our impressive 2020 comps in the second half of 2021.
One thing to keep in mind is that in 2021, we expect to annuitize in Germany, certain of our US defined benefit plans and as the second or 3rd quarter.
As a result, we will incur a non-cash settlement charge of approximately $450 million when we terminate the plans.
We will adjust out this charge for purposes of our adjusted earnings per share calculation.
Additionally, we will make a final one-time cash pension contribution of approximately $140 million to settle these plans.
This amount will reduce our cash from operations, similar to the approximate $50 million of defined benefit contributions made to these plans in the past several years.
This also means that beginning in 2022 cash from operations will increase by approximately $15 million as compared to prior years improving our already strong free cash flow conversion.
Lastly, as Keith mentioned earlier, our 2021 earnings per share estimate of $3.25 to $3.45 cents represents 7% earnings per share growth at the midpoint of the range.
This assumes a 255 million average diluted share count for the year.
Additional modeling assumptions for 2021 can be found on slide 17 in our earnings deck.
2020 was a disruptive year on many fronts and these uncertain times are far from over.
While there is clearly much focus on these short-term dynamics, let me share with you how we are thinking about Masco for the long term.
The Repair and Remodel industry is attractive with favorable fundamentals.
Growth on average is approximately GDP plus 1% to 2%, and is less cyclical than the new home construction market.
Favorable demographics will help drive repair and remodel demand and we are on the leading edge of the large millennial cohort forming households.
Older homes require more repair and remodel spending and the average age of housing has increased due to significant under-building of homes since the downturn of 2008 and the COVID-19 pandemic has clearly increased the desire for more enjoyable living space, which has led to increased home demand and remodeling expenditures.
Masco has a low-ticket repair and remodel focus business with market leading brands with product and geographic diversification, which provides growth and stability through an economic cycle.
We leverage our customer insights broad channel relationships, scale, diversification, and our Masco operating system to drive innovation and make our businesses better.
With our market leading brands, history of innovation, strong management teams, and focus on serving our customers in this attractive industry combined with our strong free cash flow and capital deployment, our long-term expectation is to grow earnings per share on average by approximately 10% each year.
This is comprised of above market organic growth in the range of 3% to 5% annually.
Growth from acquisitions in the range of 1% to 3%, margin expansion each year through cost productivity and volume leverage and continued capital deployment in the form of share buybacks, which should contribute approximately 2% to 4% earnings per share growth and dividends, which should add approximately 1% to 2% return on top of the earnings per share growth.
While 2020 was an extremely challenging year, we responded exceptionally well and are poised to continue to drive shareholder value creation in the future.

user
compname posts q4 adjusted earnings per share $0.75 from continuing operations.
q4 adjusted earnings per share $0.75 from continuing operations.
anticipate 2021 adjusted earnings per share to range from $3.25 to $3.45 per share.

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