Masco (MAS)

Q2 2010 Earnings Call

July 27, 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

Nishu Sood - Deutsche Bank AG

Susan Maklari - UBS

Michael Rehaut - JP Morgan Chase & Co

Megan McGrath - Lehman Brothers

Joshua Chan

Ivan Marcuse - Northcoast Research

Eric Bosshard - Cleveland Research

Joshua Pollard - Goldman Sachs Group Inc.

Budd Bugatch - Raymond James & Associates

Ivy Lynne Zelman

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2010 Second 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 you to direct your attention to the current slides and the note at the end of the earnings release, which are cautionary reminders about statements that reflect the company’s views about the 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 questions during the call, please call the 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.

Timothy Wadhams

Thank you, Cindy. And thank all of you for joining us today for Masco's Second Quarter 2010 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. Net sales in the second quarter of 2010 increased 2% compared to last year's second quarter. Income from continuing operations was $0.01 per share compared to $0.19 per share on an as-reported basis. I should point out that foreign currency did cost us about 1% in terms of the sales change. And I want to talk about earnings per share and margins on a reconciled basis and will do that in just a couple of seconds.

We did execute a new credit agreement in the second quarter, a line of $1.25 billion. We also retired $59 million of debt. And we ended the quarter in a very strong cash position, with $1.4 billion of cash at June 30, 2010.

If you'd please flip to Slide #4. I want to take a look at margins without some of the restructuring charges that occurred in this year's second quarter as well as last year's. And looking at gross profit, on an as-reported basis, our gross profit margin was 26.7%, down 30 basis from 27% in the second quarter of last year. However, if we adjust those gross profit margins for rationalization charges, and obviously, we've got a much more significant rationalization charge this year given some of the things we're doing with our Cabinet business, gross margins would have been on an adjusted basis for both years 28.4% versus 27.4%.

In addition, at the bottom of the slide, in terms of operating profit, if we add back rationalization charges in both years, and again, these are the total rationalization charges, the rationalization charges that were reconciled for gross margin are those charges that affected cost of sales. And also add back one-time charges from the second quarter of 2009. Our operating margins on a comparative basis would've been 8.3% versus 7.3%. Again, with both on an adjusted basis, both gross margin and operating margin up 100 basis points.

If you flip to Slide #5, in terms of earnings per share. In addition to rationalization charges in the quarter, we also had impairment charges for financial assets, and that would be true in 2009 as well. And if we add those back and normalize our tax rate at 36%, our comparative earnings would've been $0.16 in the second quarter of 2010 compared to $0.17 last year.

In addition, and I think this is an important point for investors, this year's earnings are reduced by $0.02 related to incremental interest expense from the bond issue we had earlier this year. And we also had a swing in terms of currency translation impact. Last year, we had gains of $11 million. This year, we had a loss of $5 million. That swing is about $0.03. So our $0.16 includes an additional $0.05 of interest expense and change in currency loss.

If you please flip to Slide #6. Taking a look at some of the trends that we've been tracking over the course of the last couple of quarters, and again, these are on an as-adjusted basis. We've included the as-reported numbers in the appendix. We've talked about margins. You can see the key retailer sales were flat in the quarter. I think many of you know we have announced the exit of certain products related to Cabinets. And if we were to exclude Cabinets in both quarters, our key retail sales would have been up 3% in the second quarter. As it relates to Cabinets at retail, we do have a significant launch that will take place for KraftMaid in the fall of this year. Incremental margins were again very strong in the quarter. We had incremental sales of $35 million with incremental profit of $24 million with an incremental margin of 69%.

If you please would flip to Slide #7. The 2% sales gain was driven primarily by Plumbing, both in North America and internationally, as well as sales of windows and paints and stains. In addition, we did have unfavorable currency impact of $17 million. And you can see here, these next set of slides are presented on a segment basis. They exclude general corp-related expenses as well as rationalization charges. But in terms of profitability, you can see a nice increase here from 8.6% to 9.6%., again, driven by both volume as well as cost reductions, which offset a less favorable relationship between price and commodity.

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