Masco Q3 2010 Earnings Call Transcript

Masco Q3 2010 Earnings Call Transcript
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Masco (MAS)

Q3 2010 Earnings Call

October 26, 2010 8:00 am ET

Executives

Timothy Wadhams - Chief Executive Officer, President and Director

John Sznewajs - Chief Financial Officer, Vice President and Treasurer

Donald Demarie - Chief Operating Officer and Executive Vice President

Analysts

Keith Hughes - SunTrust Robinson Humphrey Capital Markets

Michael Rehaut - JP Morgan Chase & Co

Kenneth Zener - KeyBanc Capital Markets Inc.

David MacGregor - Longbow Research LLC

Joshua Pollard - Goldman Sachs Group Inc.

Sam Darkatsh - Raymond James & Associates

Eric Bosshard - Cleveland Research

Ivy Lynne Zelman

Presentation

Operator

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Previous Statements by MAS
» Masco Q2 2010 Earnings Call Transcript
» Masco Corporation Q1 2010 Earnings Call Transcript
» Masco Corporation Q3 2009 Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2010 Third Quarter Conference Call. [Operator Instructions] If you have not received the press release and supplemental information, they are available on Masco’s website, along with today’s slide presentation, under the Investor Relations section at www.masco.com.

Before we begin management’s presentation, the company wants to direct your attention to the current slide and the note at the end of the earnings release, which are cautionary reminders about statements that reflect the company’s views about its future performance and about non-GAAP financial measures. After a brief discussion by management, the call would be open for analyst questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at (313) 792-5500.

I would now like to turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead.

Timothy Wadhams

Thank you, Clay, and thanks all of you for joining us today for Masco's Third Quarter Earnings Call. I'm joined by Donnie Demarie, our Executive Vice President and Chief Operating Officer; and John Sznewajs, our CFO.

And if you would please flip to Slide #3. Third quarter was a tough quarter for Masco, particularly for our businesses related to new home construction, repair/remodel activity, specifically bigger-ticket items. Activity which really includes our Installation and Cabinet-related businesses primarily. Our sales were off 6% to $2 billion. We had unfavorable currency translation that have impacted about 2% of that. And again, major part of our sales decline was in Cabinets and Installation Services. On an as-reported basis, our loss per share was $0.02 in the quarter, which compares to $0.14 of income in the third quarter of 2009.

Gross profit margins as reported decreased 200 basis points in the quarter, and we'll take a look at reconciled EPS and margins in just a second. Working capital as a percent of sales improved to 16.2% compared to 17.3% last year, and we ended the quarter with $1.5 billion of cash.

If you would please flip to Slide #4. I mentioned gross margins as reported down 200 basis points. If we reconcile gross margins and operating margins for rationalization charges in both periods and a litigation charge in the third quarter of last year, both of those metrics, gross margins and operating margins were down 80 basis points to 26.9% for gross profit and 7.2% for operating margins.

On a year-to-date basis, by the way, which the reconciliation is included in our appendix, both gross margins and operating margins on a year-to-date basis reconciled for the same items would have been up 110 basis points each.

Looking at our results from a big picture standpoint, reconciled operating profit was off $25 million. Sales volume contributed approximately $30 million, $35 million to that decline. We also had unfavorable price commodity relationships of approximately $30 million, and those two items were partially offset by net savings in the quarter from rationalization activities, our focus on lean of approximately $40 million.

If you flip to Slide #5, this shows the reconciliation of earnings per share. Again, on the same basis as we discussed, operating margins earlier a little earlier taking out rationalization charges and normalizing our tax rate. And in that process, we would have had $0.11 per share in the third quarter of 2010, compared to $0.18 last year in the third quarter. This year's EPS in the third quarter also included about $0.02 of additional other expense, $0.01 of that is interest and then there's some miscellaneous items that impact the other $0.01.

If you flip to Slide #6, this presents some of the trends that we've been tracking on a quarterly basis. We already talked about sales, gross profit and operating loss and again, these are on an as-adjusted basis. The as-reported numbers are in the appendix.

Key retail sales were off 4%, reflecting declines in both small ticket and big-ticket items, and that includes $23 million in terms of products that we have exited that changed year-over-year or quarter-over-quarter, if you will, in terms of Cabinets and we'll talk about that in a second or two. We did have a decremental margin in the quarter of 20%, and that compares favorably to our contribution margin of about 30% on a company-wide basis.

If you flip to Slide #7. Both North America and International sales were off 6%. I would point out that International sales increased 4% in local currencies. And when you take a look at margins, margins from a segment perspective were down from 9.7% last year to 8.6% this year, and again, these are segment margins. And I would point out that internationally, we had a very strong quarter at a little bit over 12% in ROS, obviously down from the almost 14% last year but a very strong quarter in terms of International-related operations and operating profit.

If we flip to Slide #8, we'll talk about our segments and I would point out that the segment numbers are as adjusted. We've included the rationalization charges in the footnote at the bottom of the slide, and we'll start with Cabinets.

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