Masco (MAS)

Q3 2011 Earnings Call

October 25, 2011 8:00 am ET

Executives

John G. Sznewajs - Chief Financial Officer, Vice President and Treasurer

Timothy Wadhams - Chief Executive Officer, President and Director

Donald J. Demarie - Chief Operating Officer and Executive Vice President

Analysts

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Michael Rehaut - JP Morgan Chase & Co, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Ivy Lynne Zelman - Zelman & Associates, Research Division

Josh Levin - Citigroup Inc, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Masco Corporation 2011 Third Quarter Conference Call. As a reminder, today's conference is being 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 the Investors 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 analysts' questions. If we are unable to get to your question during this time, please call the Masco Corporation Investor Relations office at (313) 792-5500.

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

Timothy Wadhams

Thank you, Debbie, and thanks to all of you for joining us today for Masco's third quarter earnings call. I'm joined by Donnie Demarie, our Executive Vice President, Chief Operating Officer; and John Sznewajs, our CFO.

And if you would please flip to Slide #3. The operating environment for our businesses continues to be challenging as commodity cost pressures, a very competitive retail environment and depressed consumer confidence continue to impact our performance. In this challenging environment, we continue to strengthen our market positions. We believe that we maintained or gain share in our major product categories. We've introduced new products and programs and got some very nice industry recognition, which we'll talk about as we work our way through the presentation. And we've taken some additional actions to strengthen our position in several of our markets.

And if you flip to Slide #4, I want to talk about some of the things that have transpired here over the last couple of months. As it relates to Milgard, our window business in the Western United States, in September, we exited our glass business. We also, in October, closed -- announced the closure of 3 of our manufacturing facilities. That's going to cost us, we estimate about $30 million, of which about $5 million will be cash. And we expect to save, on an annual basis, about $7 million, give or take. Those actions, together with some other actions that we've taken in other business units, should result in headcount reductions of about 750 for the period September through the end of the year. Obviously, those continue to be very, very difficult issues, difficult decisions, but certainly necessary in the environment that we're in.

We also announced in our press release the divestiture of 4 of our non-core diversified products businesses and service businesses in our installation segment that include framing, commercial drywall and millwork. Those businesses will show up in our discontinued ops line in the fourth quarter. We'll be restating the prior year periods. From a modeling perspective, I think you can assume about $100 million of top line in terms of sales and about $20 million of operating losses related to those businesses. Now that operating loss number could move a little bit as we get into some of the detail based on allocations, may be intercompany activity, that type of thing. But again, I think that's pretty good guidance in terms of modeling.

If you flip to Slide #5, our sales in the quarter were up 3%. We benefited from foreign currency by about $40 million and that basically offsets the plant product exits in cabinets for our ready-to-assemble business, which was a negative 38 in the quarter. If you exclude the rationalization charges, gains on financial investments, impairment charges and normalize our tax rate, our earnings would have been $0.08 a share compared to $0.11 in the third quarter of 2010. We did not include in that reconciliation the impact of the metal hedge. We lost $10 million in the third quarter of 2011. We had income of $4 million in the third quarter of 2010. And again, those are not in the reconciliation of EPS. That cost us about $0.02 in the third quarter of 2011, and eliminating the gain in the third quarter of 2010 would not move the $0.11. It's still around to $0.11. On a reported basis, we made $0.10 a share compared to a loss of $0.02 last year, and we ended the quarter with $1.6 billion of cash.

And if you flip through Slide #6, please. In terms of gross profit and operating profit, on an adjusted basis, we were down 180 basis points in gross margin, and again that does not include any impact from the hedge. If you were to pro forma the hedge into that adjusted number, the difference would have been about 100 basis points. In terms of operating profit, down 110 basis points, as adjusted on this slide. Again, if we include the hedge impact, that would've narrow to about 40 basis points, third quarter last year to third quarter this year.

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