Masco (MAS)

Q1 2011 Earnings Call

April 26, 2011 8:00 am ET

Executives

Timothy Wadhams - Chief Executive Officer, President and Director

Donald Demarie - Chief Operating Officer and Executive Vice President

John Sznewajs - Chief Financial Officer, Vice President and Treasurer

Analysts

Nishu Sood - Deutsche Bank AG

Christopher Wiggins - Oppenheimer & Co. Inc.

William Wong

Joshua Chan

Sam Darkatsh - Raymond James & Associates, Inc.

Ivan Marcuse - Northcoast Research

Presentation

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Operator

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Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2011 First Quarter Earnings Conference Call. As a reminder, today's conference call will be recorded and simultaneously webcast. 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 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 will be open for analyst questions. If we are unable to get to your question during this call, please call Masco Corporation Investor Relations office at (313) 792-5500.

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

Timothy Wadhams

Thank you, David, and thank you for joining us today for Masco's first quarter 2011 earnings call. I'm joined today 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. Sales in the quarter were down 4%. Excluding rationalization charges, gains from financial investments and normalizing our tax rate at 36%, our loss for the quarter would have been $0.05 a share, and that compares to $0.03 of income on the same basis in the first quarter of 2010. On an as reported basis, we lost $0.13 in the quarter compared to a $0.02 loss in the first quarter of 2010. We had a nice job of managing working capital. I'll talk a bit more about that later on, and we ended the quarter with $1.5 billion of cash.

If you flip to Slide #4. [indiscernible] both gross profit and operating income reconciled for rationalization charges, our gross margin would have been down 140 basis points to 25.3%. And on that same basis again, reconciling for rationalization charges, our operating profit would have decreased from 5% last year to 3% this year. I mentioned that sales were down 4%. That equates to about $80 million of sales decline. Of that decline, about $53 million relates to cabinet products that we previously announced that we were exiting. So if you exclude that, we would have been down a little less than a 1.5%, rounding down to 1%. As I mentioned in the press release, if we exclude the exited cabinet products, both February and March would have been relatively flat in terms of sales with last year, again, across the entire company.

Our international sales performed well. We were up 5% in terms of local currencies, had pretty good margins on those sales, just a little bit less than 10%, last year, a little over 10%. And our sales to our key Retail customers were down high single digit. A big portion of that, well, almost all of that, relates to Cabinets, and a big portion of that relates to the products that we announced that we were exiting. Without the product exit, we would have been down just slightly low single digits in terms of sales to key retailers.

On an $80 million [indiscernible] would anticipated based on contribution margin about a $25 million drop in profitability. We're down again on an adjusted basis, about $39 million year-over-year, and the additional $15 million or so is represented by about $10 million of price/commodity relationship that is unfavorable in this quarter versus last year's first quarter, and we also had some new product and program launch-related costs in the quarter, as well as a negative product mix. So that pretty much explains the decremental margin, which approximated 50% in the quarter.

If you flip to Slide #5. Again, taking a quick look at our earnings per share, as we mentioned reconciling for rationalization charges and also taking out the positive impact of the gains on the financial investments, we would have lost about $0.05 in the quarter compared to the $0.03 of the income last year.

If you flip to Slide #6. In terms of our Cabinet business, we were down about 24% in the quarter compared to last year. If we exclude the Cabinet-related products that we're exiting, we would have been off about 13%. We had a decremental margin of 26%, which pretty much approximates our contribution margin. We did have slightly less favorable price/commodity relationship in the quarter. As we've mentioned in the past, during the last quarter, we've got some particleboard challenges in Europe. We also had under absorption of fixed cost, but also had some cost reductions that offset a good portion of that.

If you flip to Slide #7. We continue to be on track with the cabinet integration. We believe in the fourth quarter -- or excuse me, in the first quarter, that on a sequential basis compared to the fourth quarter, that we were able to increase our share position. So again, if we compare the first quarter of '11 versus the first quarter of 2010, probably down still a little bit in terms of share. But on a sequential basis, coming from the fourth quarter into the first quarter, we have some nice gains in the home center channel, driven largely by promotions. We continue to do well in the builder channel and in the dealer channel, we feel like we more than held our own in the first quarter.

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