Masco Earnings Call Insights: Program Costs and Focus on New Products

Masco Corporation (NYSE:MAS) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Program Costs

George Staphos – Bank of America Merrill Lynch: Congratulations on the progress in the year. I had two questions. First of all, would you be able to either qualitatively or perhaps more precisely discuss the level of program costs and growth incentives spending you expect in ’13 relative to 2012? How might that (vary) within the segments? Then I had a follow on.

John G. Sznewajs – VP, Treasurer and CFO: George, we expect that the program – kind of that program costs to be about flat for the year. There will be some puts and takes depending on the segment in 2013. I think we’ll be down a little bit in our Paint segment. We launched some new products last year. They had some program costs associated with and also Liberty Hardware some program costs. We had also incurred some program costs in Plumbing in 2013 as we launched a significant number of new products. So those were part of the year where we’re at a high-watermark last year, probably come off that a little bit in 2013 in those two segments.

George Staphos – Bank of America Merrill Lynch: The related question, there was some progress on SG&A to sales in the quarter on a year-on-year basis. I know you’re pleased with the cost reduction progress you had during the year. Having said that, the ratio is still relatively high as compared to other companies that we look at. Can you give us some discrete goals or steps you expect to see in 2013, whereby you might be able to reduce that SG&A to sales ratio?

John G. Sznewajs – VP, Treasurer and CFO: You are right, we did make some progress in the year and in the quarter on this. I think generally the way then we would look at this, as we increase our revenues over the course of 2013 and beyond, we would expect to get some operating leverage as a result of those increased sales. At the couple of years ago before the downturn we were kind of running at 16%, 17% sales SG&A as a percent of sales. We definitely think we can get back in that direction as our sales volume increase over the course of the next several years.

Timothy Wadhams – President and CEO: George, I would add, one element there as we have mentioned a couple of times in the past, we have in the Behr’s sales force, for example, 450 people who help service the Home Depot stores from a paint perspective. We also have a retail sale service support group that works with Lowe’s. Those are fixed costs for us that don’t really vary very much based on top line volume. So I think john’s point about leverage is things continue to pick up is certainly accurate.

Focus on New Products

Michael Rehaut – JPMorgan: First question on new products really been a focus for you guys, and I was hoping you could give any granularity in terms of 2013, in terms of your views on incremental contribution either by segment or overall and perhaps able to give us a sense of what the new products contributed to sales in 2012?

John G. Sznewajs – VP, Treasurer and CFO: In terms of new products, going forward, Mike, in 2013, we really did just launched the example in the Plumbing segment. We launched the total program in the foundation’s program in late third quarter early fourth quarter of last year. So we expect to see the waterfall effect of that hit the financial statements in 2013. In addition to that, we won a number of other programs in some other segments as well. We got some product launches taking place in cabinet area in the first quarter of this year and potentially some later in the year in cabinetry. Clearly, those will take a little bit longer to digest they don’t – when we cabinets – the new cabinet products, for instance, they don’t necessarily have an immediate impact on the top line. It takes several quarters before those really begin to feel the effects of those. So I would say that to your point we’ve been investing heavily in new products over the course of the last several years and throughout the downturn in respect that we will continue to do that. So I will think that our vitality index that Tim referenced on the call, just north of 30% will be consistent in 2013.

Michael Rehaut – JPMorgan: Also I had a question about some of the movement around either restructuring and the Danish cabinets units, you also highlighted the solid profit improvement in Liberty Hardware. So when you think about maybe some of the lagging units that you have in the portfolio. We’ve taken a couple of actions, one, fixing one disposing. But if you look across the different segments that you operate, the five major segments, if you’ve identified any other areas where either you feel that maybe it’s non-core or that there is a fix that you’re putting your arms around, where perhaps you can – if you don’t want to necessarily identify it by actual segment for competitive purposes or market purposes, give us a sense of the amount of dollars that represents and you know, over what time period, perhaps some of the, either lagging units or non-core units might be addressed?

Timothy Wadhams – President and CEO: This is Tim. I would say that, as we look at the portfolio today, the only business that we have that is in a – what we would describe as an under performance kind of situation would be in the Cabinets segment. We’ve got two businesses there, obviously North America we’ve talked a little bit about our plans to improve that. We also have a business in the United Kingdom in Cabinets, which is Moores, relatively small business, roughly $70 million, $80 million U.S. on the top line. They continue to be in loss position, but we have seen some signs of progress there in terms of market share gains particularly as it relates to public building. So those would be the two areas that would be problematic at this point in time. The rest of our businesses obviously would range in terms of returns and profitability, but those would be the two that are getting the most attention from a turnaround standpoint.

Michael Rehaut – JPMorgan: I was wondering if you can talk a little bit more in terms of just the overall Cabinets strategy, where you talked about promotions, but also the expectations that big ticket remains slow. So as you thought about strategy overall, think that, how would you describe the promotion activity. The strategy with that, is it sort of more targeted, more focused as you think about that in terms of leading to more profitability in Cabinets. Could you just talk a little bit more about how you are viewing that?

Timothy Wadhams – President and CEO: In Cabinets, we have seen a bit more discipline as it relates to promotional activity and I think there is a couple of drivers there. We and others have taken some actions, for example, what we’ve done is, really moved to an allowance for the ultimate end consumer, which gives them a little more flexibility as to how they might apply that in terms of their experience in their process. The other thing that I think has added a little bit of discipline to the process is that demand has seen to be increased a little bit, so there is a little bit more traffic at this point in time. We have always contended that the promotional activity would probably abate a bit as demand started to pick up, so I think there’s a couple of factors at play there. In terms of our view of bigger ticket remodel, our sense is that that’s going to continue to be slow for a period of time and I don’t really see a catalyst for the bigger ticket remodel side at this point, we think there is a lot of pent-up demand there. A lot of the survey work that we’ve done suggest that people are willing and desirous to take on a bigger project. Credit is still somewhat challenging, obviously with some of the changes that took place earlier this year, our disposable income is down, so our sense is, it’s probably going to take a little while longer for us to get major traction with some of the bigger ticket remodel activity. But as I say, we think there is pent-up demand there and that should be a plus for the industry going forward.

Michael Rehaut – JPMorgan: I guess, in terms of the Installation, you talked about the mix shift that hurt in terms of little bit less activity on the multi-family side. On the single family side, has that continued to rebound here and so that we are getting share here. Do you think about doing more in terms we talked about, treating this as an opportunity now where yield is slightly more, but strategically focused to get a few more products in as you have historically – as we see more of the rebound in that insignificantly.

John G. Sznewajs – VP, Treasurer and CFO: This is John. I’ll take this one. As it relates to your question on will we do we more products in single family, I think we’re going to be fairly disciplined in our approach. We are now focusing on five core products that we install, installation obviously being the lead but with gutters, after paint garage doors, fireplaces being the others. So, you know, I don’t think you should expect – anticipate us to expand that product offering in the near future. One of the things I should probably point out, you mentioned multifamily as part of your question. We are continuing to see an extended lag, particularly in the multifamily side of things. In speaking with the folks in the field recently, it looks as though we are today insulating. This is not anecdotal, but actually more consistent than anecdotal. We are insulating today multifamily starts that were counted as starts in the second quarter of last year. So you can see now the effect of the lag on us – in our business in that segment.

A Closer Look: Masco Earnings Cheat Sheet>>