Masco Corporation (MAS)

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Masco (MAS)

Q2 2011 Earnings Call

July 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

Daniel Oppenheim - Crédit Suisse AG

Nishu Sood - Deutsche Bank AG

Christopher Wiggins - Oppenheimer & Co. Inc.

Josh Levin - Citigroup Inc

Robert Wetenhall - RBC Capital Markets, LLC

David S. MacGregor

Joshua Chan - Robert W. Baird & Co. Incorporated

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2011 Second 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 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 time, 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, Connie, and thank all of you for joining us today for Masco's second quarter 2011 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. Sales in the quarter were down 1%. Excluding rationalization charges, gains and impairments from financial investments and adjusting for a normalized tax rate of 36%, income as reconciled would have been $0.05 a share compared to $0.16 in the second quarter of 2010. On an as reported basis, we earned $0.02 in the second quarter compared to $0.01 in the prior year. Working capital improved in the quarter to 15.6%. We'll talk about that a little later on, and we ended the quarter with $1.6 billion of cash.

If you flip to Slide #4, please. Gross profit and operating profit as reconciled for the rationalization charges and for a litigation charge in the second quarter, gross profit would have been down about 150 basis points to 26.9%, and our operating margin would have been 5.5%, a 280 basis point decline. A little bit of color in terms of our overall financial performance. I mentioned that sales were down 1%. That equates to about $26 million. That includes an unfavorable change in terms of product exits. As we've announced previously, we have exited the ready-to-assemble product group that ended in the second quarter, and that was a reduction of about $49 million in terms of sales. Offsetting that was positive impact from foreign currency of $54 million.

Our International operations were up 5% in the quarter in local currencies, and had another very strong quarter in terms of operating performance with margins at 9.8%. That compares to 9.5% last year. Sales to key Retail customers were down mid-single digits in the quarter. All of that is represented by the exit of the ready-to-assemble product group. Without that impact, we would have been flat in the quarter in terms of key Retail sales, and that includes some declines of Wal-Mart that we'll talk about in a little bit.

Just to give you a perspective, in the first quarter, if you eliminate the exited products, we would have been down low single digit as we communicated a while back, sales of $26 million. Our operating profit on a reconciled basis was down $59 million. We think volume accounted for about $25 million of that. And obviously, we did benefit from foreign currency translation. So that masks some of the volume decline. Price/commodity relationships in aggregate cost us about $10 million in the quarter, and almost all of that is in Cabinets and Plumbing. Mix was about negative $10 million in the quarter, and almost all of that is in Plumbing. We did have a little bit of combined mix and price/commodity impacting Other Specialty Products. In addition, we incurred some expenditures for some of the growth initiatives that include our international expansion in Paint and Plumbing, some new Retail programs, innovation and the dealer initiative in Cabinets and the Pro initiative in our Paint group. And we'll talk about those as we go through the segments.

If you would please flip to Slide #5, where we reconcile earnings per share. As you can see here, this takes into account the reconciliation for the rationalization charges, as well as the litigation charge. And the pretty significant impact in both quarters related to financial investments. In the second quarter of 2010, we had an impairment charge of $33 million. In the second quarter of 2011, we had gains from the disposition of financial investments of $33 million. Those are coincident numbers. As I mentioned, adjusting or reconciling, if you will, we made $0.05 in the second quarter compared to $0.16 last year. And on as reported basis, just as a reminder, earnings per share were $0.02 compared to $0.01 in the prior year.

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