Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Masco Corp. (NYSE:MAS)

Q2 FY08 Earnings Call

July 29, 2008, 11:00 AM ET

Executives

Timothy Wadhams - President and CEO

Donald DeMarie Jr. - EVP, President and COO

Richard Manoogian - Executive Chairman

Analysts

Michael Rehaut - JP Morgan

Budd Bugatch - Raymond James

Ivy Zelman - Zelman & Associates

Susan McClary - UBS

Nishu Sood - Deutsche Bank Securities

Operator

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2008 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 live 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 note at the end of the earnings release which are cautionary reminders about statements that reflect the company's view about its future performance and about non-GAAP financial measures.

After a brief discussion by management, the call will be opened for analyst questions. If we are unable to get to your question during this call, 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 - President and Chief Executive Officer

Thank you, Nicole. And thank all of you for joining us today for Masco's second quarter earnings call.

As Nicole mentioned, earlier today we issued our press release and some supplemental information. As a result of internal processing improvements effective with this quarter's call, we are modifying our approach to the conference call. To that point, we no longer have provided you with what we used to call 'Business and Financial Highlights' and we are not going to read a prepared script for this call.

Instead, we provided in our financial information, a couple of pages of what we call 'Key Financial Data'. And today our presentation will be in a PDF slide presentation format. Hopefully you've been able to access that on our website.

This is the first time we are using this format. And any feedback that you want to provide are certainly welcome as we try to continue to improve the process to provide you information.

And with that let's move to slide number three, and I'd like to point out that with me today... joining me today are Richard Manoogian, our Executive Chairman and Donny DeMarie, our Executive Vice President and Chief Operating Officer.

So again if you could move to slide 3 please. Net sales from continuing operations were down 15% in the quarter. Earnings per share $0.20 in the second quarter of 2008 as compared to $0.49 in the same quarter of 2007. Gross margins for the quarter were down 230 basis points to 26.5%.

SG&A expense including General Corporate expense as a percent of sales increased to 18.3%, up 110 basis points. General Corporate Expense was down 30 basis points to 1.3% of sales.

Working capital as a percent of sales was up slightly during the quarter to 18.1%. We did return a $131 million of cash in the quarter to shareholders including the repurchase of 3 million shares of our common stock.

We also sold The Heating Group, which we announced late in April for proceeds of $146 million. And we ended the quarter with a strong balance sheet with $850 million of cash and $2 billion of unused bank line.

If you flip to slide number 4 please. As I mentioned, sales were down 15% and in addition to the continued significant declines in housing starts, which are in the first half of 2008, are off 30% and I think even a little bit more than that in the quarter.

We continue to see a significant slowdown in European markets and in North American consumer spending. To put that in perspective, our sales to key retail customers were down 13% in the quarter, and that follows the first quarter when we were down 10% and the fourth quarter when we were down 5%.

And again as we said at the first quarter call, that really has impacted all price points including lower ticket items as well as, we think, even some basic repair and remodel type expenditures. Operating profit was down in the quarter, $146 million. Margins were down to 8.1% from 11.7% or a 360 basis points decline.

If you flip to slide number 5, please. Take a look at sales and operating performance in North America. In North America, our sales were down 19%, and again driven by volume declines to new home construction, pricing concessions and a decline in consumer spending for home improvement products.

Margins declined in the quarter from 14.1% to 9.7%. Again reflecting the significant volume declines that we've experienced and increased costs for material and energy and other commodities.

If you flip to slide number 6, please. International sales increased 6% in the quarter. That was driven by foreign currency translation. In local currencies, international sales were down 6%. And again this is the third consecutive quarter that sales in local currencies for our foreign operations have been down in terms of percent decline.

Profits from an international perspective were up slightly in dollars, reflecting a large part of currency translation. And we did see a slight increase in margin for our international operations moving from 8.3% to 8.7% on sales, which reflects some selling price increases.

If you flip to slide number 7 please. As we've indicated in the past, the company continues to focus on the rationalization of our business and that includes sourcing programs, business combinations or consolidations, plant closures, headcount reductions and other initiatives.

And in the quarter we incurred about $15 million of cost related to severance, ERP system implementations as well as plant closures. Since late 2006, we have closed 11 manufacturing facilities and in our installation business we've closed approximately 70 of our branch location facilities. And company wide have reduced our headcount by 17,000 employees, which represents about 30% of the North American work force.

Approximately 6,000 of that headcount reduction has taken place as a result of 2008 actions and activities that we've had to take. And obviously these are very difficult decisions. But certainly consistent with us trying to right sizes the business in this tough economic environment.

If you flip to slide number 8, please. I mentioned gross margins are down 230 basis points, in the quarter. Again, that reflects lost leverage as a result of lower sales volume. Particularly, as it relates to fixed overhead and some of our fixed cost in the... in our cost structure. We also had increasing cost for inputs, material and energy cost along with freight and logistics. And are experiencing a pretty competitive marketplace from a pricing perspective.

I mentioned earlier that SG&A although was up a 110 basis points as a percent of sales. Again reflecting in lost leverage as a result of the decline in sales and decline in volume. We did decrease SG&A by of approximately $46 million in the quarter.

If you flip to slide number 9. Just want to take a quick look at our EPS for the quarter. We did report $0.20, again compared to $0.49 in the prior year. And just to give you a little bit of flavor of some of the components included in that $0.20. As we mentioned earlier this year we have the increased tax rate and I'll talk about that when we get to guidance in just a minute. But our tax rate in the quarter was approximately 47%. And compared to our more normalized rate of approximately 36%. That represented about a $0.05 impact in terms of earnings.

I mentioned earlier the $15 million of rationalization charges, again for severance ERP system implementation as well as plant closures. Year-to-date that numbers is about $24 million. But that did aggregate about $0.03 in the quarter.

Early this year when we issued our guidance, we indicated that we thought we'd be around $0.06 to $0.07 of rationalization related costs. And it looks like at this point that number is probably going to be a little closer to $0.08 to $0.09. And again, representing some of the actions that we've taken including additional severance related costs.

We also had a penny in aggregate related to financial investment impairments which were $3 million in the quarter. And currency losses, which were $5 million. In aggregate that's $8 million and represents about $0.01 in terms of earnings per share.

If you move to slide number 10. In terms of working capital, I mentioned that we increased slightly. We're up about 20 basis points compared to where we were last year in the second quarter, 18.1% of sales as compared to 17.9%. Our definition is 'receivables plus inventory minus accounts payable' in terms of that percentage comparison to sales.

Receivable days were up two days, as compared to last year. Inventory days were up 3 days to 54 days and that was in part of offset by an increase in accounts payable days from 42 to 44 days, in terms of the quarter.

If you move to slide 11. In the quarter I mentioned that we have returned $131 million of cash to shareholders. We did repurchase 3 million shares in the quarter. We currently have, at quarter end, 33 million shares remained on our authorization in terms of share repurchase. And I would point out that in July, we repurchased about 900,000 shares of our stock.

As we mentioned on the last call, management continues to expect to recommend to our Board of Directors, later this year, that we increase Masco's dividends for the 50th consecutive year.

We expect free cash flow to approximate $640 million, which is almost twice the annual dividend cost in dollars. We've already said that over the long-term we believe that our ability to generate excess cash will allow us to return $1 billion to shareholders on an average annually. And that there would be some years where we exceeded that amount as we did the last five years, and some years where we maybe less than $1 billion.

Our priorities in this difficult market situation that were in right now, from a capital allocation standpoint, is to first invest in our business. And to continue to fund the dividend. While we continue to believe that the long-term fundamental for our markets are positive, given the uncertain operating environment and the uncertainty as to whether we will see it recovery in our markets in 2009, 2008 dividends and share repurchases may not aggregate $1 billion.

I now want to move to our segments, and if you would move to slide no 12, please. And again the information we're going to talk about from a segment standpoint and in fact the information that we have been focused on is 'as reported information'. We have provided you with reconciliations in the information that we send out, some of the schedules, information on segment reporting both with and without some of the rationalization charges. But this information will be 'as reported'.

In terms of cabinets and related products, sales in that segment were down 18%. And in North America we continue to be impacted by a decline in new home construction, as well as a softness in consumer spending. And as we've indicated, we've seen for several quarters, a slowing for bigger ticket items at retail. And a less favorable product mix.

On the international side of the business, we had a fairly significant decline in the quarter, which really reflects the end markets in the UK, which is down substantially, and that's primarily related to new home construction. As well as in our ready-to-assemble business in Denmark, with Denmark being one of their major markets. Denmark officially is currently in a recession with two quarters of negative GDP.

So, again, a pretty tough quarter for the cabinet group. Operating profit was down from 13% to 6.1%. And again reflects the lower sales volume, and the under absorption of fixed costs, the product mix we talked about and the lower results of international operations.

If you move to slide 13. Segment sales for plumbing were down 2% in the quarter. In North America, plumbing sales decreased as a result of lower sales volume at retail and wholesale, partially offset by increased selling prices. And we did have the continued strong performance by our subsidiary in Europe, Hansgrohe, which continues to penetrate all the Eastern European markets as well as Asia and other foreign markets, had an excellent quarter again. So, we did see some benefit there.

On the profit side we continue to show improvement in terms of margin performance. Margins increased from 10.9% to 12.5%, and I think this is the third consecutive quarter where we've had a favorable comparison from the profit standpoint.

We obviously had been more timely and aggressive with the price increases to offset material costs. Although, we still have some catch up to do there. We've had some benefits from the business rationalization in terms of rationalizing facilities and products, headcount reductions and continued focus on the supply chain. So, again in plumbing, very pleased with that performance again in a tough environment.

On slide 14, installation and other services. That segment was down 27% and as you recall, that's 100% new home construction with maybe just a little bit of commercial business. But again down 27%.

And in terms of profitability, the first quarter we were negative from a profit standpoint. We were able to turn that around in the second quarter. We made $4 million in profit. We also had about $4 million of cost related to severance ERP system implementation, as well as branch closures in the quarter. So again, it was good to see that segment get back in the block.

On slide 15, decorative architectural products. Our sales declined in the quarter 11%. And that's again as a result of lower retail sales volumes of paint and stains as well as builder's hardware. Operating profit decreased from 21.5% to 18.7% and that reflects the decline in sales volume as well as increased material cost during the quarter.

Slide 16, we have other specialty product segment and they're sales were down 22%. And that's really impacted fairly significantly by our window business both in North America, Milgard on the West Coast, which has a heavy concentration in new home construction. As well as declines in our window business in the United Kingdom. And again, that economy is very tough.

Operating profit was down from 16.4%.to 6.7%, again reflecting the lower sales volume, the under absorption of fixed cost and increase in material and energy related to cost and the lower performance of our international operations.

On slide 17, I want to talk a little bit about our guidance, before we move into the Q&A. And obviously forecasting in this environment continues to be a significant challenge. We continue to believe that housing starts this year will range between 900,000 and 1 million units versus 1.3 million in 2007.

We also continue to believe that consumer spending and our European operation results, we're not really looking for any significant improvement there compared to the first half of the year, at this point in time.

Our guidance also reflects increasingly competitive market conditions for our services and products. Increasing costs for freight and logistics and other materials including commodities impacted by energy related cost.

As a result, we continue to estimate that our sales will be down low double to mid-teens in terms of the full year. At the half year we're down 14% on a year-to-date basis. We continue to estimate that our earnings per share will fall in a range of $0.50 to $0.65 per common share. And again, that's no... there's no change to that from our last quarter.

In our earnings per share, we have the implications or the results of the increase in our tax rate, which we anticipate on a full year basis will be approximately 48% to 49%. And again that increase in rate relates to our anticipation that we'll be repatriating foreign earnings from our international operations to use foreign tax credits which expire at the end of this year. And when you compare the 48%, 49% to our normalized tax rate of approximately 36% that will reduce earnings by $0.17 on a full year basis.

We do expect in 2009, absent any other unusual transactions or tax planning issues to be back at a more normalized rate of approximately 36%.

In addition, to the $0.17 related to the tax rate increase, we also incurred in the first half of the year $0.05 related to financial investment impairments and $0.03 related to currency losses. And when you take the tax rate, the impairment charges and the currency losses, those aggregate about $0.25 a share on a full year basis.

We also are reconfirming our guidance relative to free cash flow. We mentioned at the last conference call that we estimated that free cash would approximate $640 million in 2008 and that's before dividends. And we continue to anticipate that we'll have a relatively strong year of cash flow generation, not withstanding the fact that it's certainly a challenging year from an operating stand point.

And with that we will open up the lines for Q&A. And I will remind you that I am joined by Richard Manoogian, our Executive Chairman; as well as Donny DeMarie, our Executive Vice President and Chief Operating Officer.

Question And Answer

Operator

[Operator Instructions]. And we will go first to Michael Rehaut with JP Morgan.

Michael Rehaut - JP Morgan

Hi. Good morning everyone.

Timothy Wadhams - President and Chief Executive Officer

Hi Mike.

Unidentified Company Representative

Good morning.

Michael Rehaut - JP Morgan

The first question relates to your operating margins and certainly the macro conditions, the higher raw material costs, to name just a couple, are kind of really impacting the numbers this year. At the same time, I am sure perhaps the extent of how much they've come down, perhaps is not or has not necessarily been in the game plan maybe as you looked out a couple of years ago into what a trough might be or it's to the extent we're at or near a trough.

I was wondering if you could help me particularly with the cabinet installation services and other specialty. If you could give me a sense of... if there's a plan in place over the next couple of years to kind of get those margins back to a double-digit level or whatever level that your plan might call for. If you could kind of share that with us, if there are... and as part of that if there are restructuring actions or sort of incremental actions that you haven't already taken that would allow those units to return to a greater level of profitability? That's my first.

Timothy Wadhams - President and Chief Executive Officer

Okay, thanks Mike. Before I have Donny comment on some of the things that we're doing in those segments, I guess what I would say is that... part of your comment was that, we may not have anticipated margins this low and this kind of a trough. And I guess one thing I would say as I'm not sure that anybody would have anticipated this kind of a trough.

If you look at our business overall and go back to 2006, for example, and if you go to the mid-point of our guidance for this year, sales roughly from 2006 would be down 20% plus and that equates to about $2.5 billion. And on an operating profit basis when you look at contribution margin as we've said in the past which kind of range between 30% and 35%, we've had a substantial decline. And obviously, we worked really hard to offset them. I think we have done some pretty good things to mitigate that.

Having said that... so I guess what I would say is I am not sure that anybody would have anticipated that kind of volume decline, number one. And number two, we continue to believe that when we get back into more normalized environment from a business standpoint, that we can give the margins back into the mid to low teens kind of area. But having said that maybe Donny can talk a little bit share with you that some of things we're doing on the cabinet side and the contracting service side to really kind of look at the footprints as we look at our capacity management.

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

Thanks Tim. Mike, we're really across all of the businesses. We're continuing to reduce our cost structure. We're really driving lean manufacturing principles. We're in the process of evaluating all of our facilities, really with the focus on achieving what we're calling flexible, but also scalable manufacturing capability and supply chain.

The one constant is change. And what we need to learn, we need to be able to maximize our returns at both lower volumes without compromising our ability to serve a more robust demand whether that comes from the macro environment or increases in market share.

One specific example, if you look at our cabinet facilities, we are adopting common box architecture. We believe we'll do with a better box but allows us to produce any box at any plant which makes our capacity much easier for me to flex up and flex down without adding some of the fixed costs penalties though we had today in the supply chain.

If I switch over and deal more specifically with the installation questions. Really we've done a nice job on the installation side of continuing to reduce our cost. And really the next phase of that for us is really optimizing our product portfolio. And what we're focused on there is what's really emphasize those products where installation... where those products accretive to the overall results of the installation segment.

So, we'll be getting out of some products, but we don't believe that the installation of those product is a value-add. And we'll be optimizing the products and really growing at a more focused and accelerated rate. Those products were... our margins tend to be better. We'll be moving the dedicated cabinet facilities back to the builder cabinet group. We believe that gives them opportunity to focus more on the actual cabinet installation as it relates to their other channels to market.

And paint is another product that... we've mentioned earlier that given the economy we're going to stop the rollout. And what we've really challenged the paint people to think about is, how do we expand that to include more of the existing pro-contractors and really a broader effort to leverage the existing channel with what we believe is a better product for the pro-painter as well as a better homeowner solution. So, as we look at our business design, there is all kinds of things we can do. But those are a couple of examples in two of the categories you mentioned?

Timothy Wadhams - President and Chief Executive Officer

The other thing I would add, Mike and you were asking more segment specific. But, as we indicated in the slide presentation, we've taken out another 6,000 heads, this year. And again just in terms of trying to react to and right size as quickly as we can response to the environment.

One thing I would mention is that in addition to the some of the business shoot into the activities that Donny talked about, we have done some things at the corporate office level.

Over the course of the last couple of years and more recently here just at the end of April, we've reduced about 80 positions. We have instituted a wage fee here at the corporate level and also we've done some restructuring of executive compensation. That includes reduced base pay and with more emphasis on variable compensation tied to performance, which we certainly think is a positive step and one that will help us manage this corporate cost structure.

And our estimate is that over the course of the last couple of years, given the actions that we've taken that we've either been able to reduce or avoid about $40 million of cost. So we're really trying to look at everything across the board, across the company as aggressively as we possibly can and obviously with the velocity of the sales change that we're dealing with, that certainly is a challenge.

I would mention that just as a data point for folks, we did see a significant decline in general corporate expense this quarter. There is some severance in there but the other thing that we benefited from was a reduction in stock-based compensation. So I thought I'd point that out just so folks are aware. That's tied to our stock price and really reflects Phantom shares and or stock appreciation rights that effectively get marked-to-market at the end of each quarter.

Michael Rehaut - JP Morgan

So, I appreciate all that detail, Donny and Tim, I just guess before I ask my second question just so I understand, some of the incremental cost savings and actions that you've done this year like the 6,000 employee headcount and I'm sure some of the facilities that you've closed, occurred this year. Can you give us a number in terms of what the incremental benefit might be in '09 because I assume that it has happened throughout this year and on an annualized number it's different than what might we have seen in the numbers this year?

Timothy Wadhams - President and Chief Executive Officer

Yes there would be a difference Mike. But other than what I could give you relative to the Corporate Office, I don't think we have any quantification of that at this point in time.

Michael Rehaut - JP Morgan

Okay. Second question is just on balance sheet and a lot of focus, a lot of questions that we've got have been surrounding the dividend and you addressed that in your comments. But just wanted to get a sense of where you're comfortable on a net debt-to-cap ratio. In the second quarter you're at 45%, which is actually slightly below where you were a year ago, but certainly cash inflow continues to be under near term pressures. So is there a number that you don't want to go above and would you shift your priorities more towards that reduction in near term given the continued tough conditions?

Timothy Wadhams - President and Chief Executive Officer

Well Mike, gross debt-to-cap is about 51%. And I think that's flat with the last year and pretty much in a range that we've been running over the last several quarters. A couple of things on debt, we do have $100 million of debt due in September of this year, which we plan to pay out of corporate funds or cash flow if you will. The next debt requirement that we have is 2010, when we have about 300 million of floating rate, rate that due, which we'll probably refinance. The only significant debt we have due is not until 2012, and that's about $850 million.

So I think, I think we did a pretty good job of taking advantage of market conditions and timings in terms of issuing some of debt that we issued over the last three or four years and I would attribute that to luck as opposed to anything else. But having said that, we've got it spread out pretty good and we've got relatively favorable interest rates. I think our average interest is about 6%. We wouldn't anticipate leveraging up at all.

I think that we're relatively okay with the 51%. Our rating is important to us. We're currently BB plus. So, I think in terms of going forward or BBB plus excuse me, but I think going forward we probably would, would want to stay relatively in that range. And as we've mentioned many times, we're not real capital intense. Over the course of the last five calendar years, we invested about $1.5 billion in CapEx, another $300 million roughly in displays and as we've said many times, we think that our capacity is structured at this point where we can very effectively serve a market that it would be in a 1.5 to 1.8 kind of range in terms of housing starts and a market that might show a 4% growth in home improvement related expenditures which has been sort of the traditional growth rate over time.

So we don't see a lot of major capital required going forward. So, I think from the balance sheet perspective, we're pretty comfortable with where we are at this point of time; we don't really see any issues going forward.

Michael Rehaut - JP Morgan

Alright. Thank you.

Timothy Wadhams - President and Chief Executive Officer

Thank you, Mike.

Operator

And we will go next to Budd Bugatch with Raymond James.

Budd Bugatch - Raymond James

Good morning, Tim. Good morning, Richard. Good morning, Donny. Yes on Friday when you talked a little bit about gross margin and the loss leverage of sales volume and the increasing material energy cost etcetera. Could you parch that any way Tim, for us as to what were the more important factors and being down $300 million, year-over-year on gross margins... gross profits under the $192 million in this quarter?

Timothy Wadhams - President and Chief Executive Officer

Yes, I think Budd, the major issue there is the overhead side of things and in particularly the fixed over head side.

Budd Bugatch - Raymond James

So that's the--

Timothy Wadhams - President and Chief Executive Officer

A little bit in terms of freight and logistics from a distribution standpoint. But the biggest issue we face at this point is really on the fixed overhead side.

Budd Bugatch - Raymond James

But that's all revenue based, right?

Timothy Wadhams - President and Chief Executive Officer

In terms of the decline and volume?

Budd Bugatch - Raymond James

Yes, the leveraging. Yes.

Timothy Wadhams - President and Chief Executive Officer

That increase cost absolutely.

Budd Bugatch - Raymond James

Yes, okay. And are you behind or ahead in pricing versus costing.. cost now?

Timothy Wadhams - President and Chief Executive Officer

I think at this point and if you forget the early period when we, as we said many times you go back to 2005, when we got the first wave of commodity costs and probably didn't react as quickly as we should have. I think at this point we're in reasonably decent shape. We've got a little bit of catch up to do in certain areas but we're certainly pursuing that. And given this last wave of commodity cost increases, which we've seen, which would relate to particle board for example. Finishing related costs as it relates to cabinets hardware, brass to a certain extent, installation, we certainly... components driven by petroleum that might go into paint and/or windows, resins, glass, those types of things.

Obviously we've got that certainly in the cross areas at this point in time. And we'll be working to offset those through working with our suppliers, price increases productivity. So, I think we're in relatively good shape, little bit to catch up. But that's not anything that I would say that's abnormal anyhow there is always a little bit of a lag when cost bump up.

Budd Bugatch - Raymond James

Sure.

Timothy Wadhams - President and Chief Executive Officer

I think we're in pretty good shape there.

Budd Bugatch - Raymond James

Okay. And related to that fixed cost issue by taking the outlook for the charges up to $0.8 to $0.9 somewhere where that is after tax, what's the geography of that and what additional actions might you see to account for that rationalization charges?

Timothy Wadhams - President and Chief Executive Officer

As I mentioned relates to severance ERP implementation as well as plant closures, and most of the increase would be on the severance plant closure side that supposed to the ERP implementation side.

Budd Bugatch - Raymond James

So some additional of rationalization of manufacturing footprints.

Timothy Wadhams - President and Chief Executive Officer

Yes, for example in the quarter for example, in the quarter we had about a $5 million severance at the corporate office and that was into anticipated when we gave the initial guidance back in February where we taught would be $0.6 to $0.7 and again That's kind of tough to estimate but what we were really trying to give you a heads up on is the fact we would be up may be a Penney or two.

Budd Bugatch - Raymond James

What is the pre-tax Tim, number on that tenure if you have got back to on that?

Timothy Wadhams - President and Chief Executive Officer

Well $0.8 would be approximately, $48 million for the full year number and were about $24 million at the six months period.

Budd Bugatch - Raymond James

So that's the pre-tax side as the $48 million.

Timothy Wadhams - President and Chief Executive Officer

That would equate to $0.8 roughly.

Budd Bugatch - Raymond James

Just to other quick questions your free cash flow you also finding that is cash from operations minus CapEx or is it cash from investing which would include the --?

Timothy Wadhams - President and Chief Executive Officer

That's cash from operations less capital expenditures.

Budd Bugatch - Raymond James

So, the CapEx for the year is what now?

Timothy Wadhams - President and Chief Executive Officer

We originally read 230 but it's now down to $210 million [ph]. And we originally add depreciation and amortization at approximately $260 million [ph] and that number is now down to around $250. So, there's been a little bit of movement within the components but not a lot.

Budd Bugatch - Raymond James

So, that would imply cash from operations of somewhere about $850 million to get to that $640 million [ph] number?

Timothy Wadhams - President and Chief Executive Officer

Yes.

Budd Bugatch - Raymond James

And my last question is, you mentioned that stock-based compensation for general corporate expense that number of $35 million before charges or after charges that's a pretty severe reduction. What's the continuing number for general corporate expense going forward or does that stock-based compensation issue continue?

Timothy Wadhams - President and Chief Executive Officer

No, I wouldn't expect that would necessarily continue but it depends on what happens to the market price of our stock. If stock goes up, there could be a little additional cost in there. If it goes down, there could be a little bit of a reduction but I'm thinking that number is about $160 million roughly on a full year basis.

Budd Bugatch - Raymond James

For the GCE. Excluding stock based comp.

Timothy Wadhams - President and Chief Executive Officer

That would include stock based comp.

Budd Bugatch - Raymond James

And, can you quantify, with the stock based comp impact was in the quarter?

Timothy Wadhams - President and Chief Executive Officer

It seems like few but I don't, I think it was about $14 million.

Budd Bugatch - Raymond James

We'll get it when the queue comes out. Thanks, Tim.

Timothy Wadhams - President and Chief Executive Officer

13 million or $14 million, yes, it's in the queue.

Budd Bugatch - Raymond James

Thank you, Sir.

Operator

And, will go next to Peter Lisnic with Robert W. Baird.

Unidentified Analyst

Hi, good morning it's actually John for Pete.

Timothy Wadhams - President and Chief Executive Officer

Hi, John

Unidentified Analyst

Just looking at I mean It sounds like the biggest thing hand driving margins right now, the overhead absorption but the commodity cost picture if you look at where people were forecasting things in April when you gave your guidance we'll have to know [Ph]. Commodity costs have come up a bit and you guys kind of reiterate at your guidance. Just what is the positive offset or is it just kind of the increases in margin are enough to make you change your range right now?

Timothy Wadhams - President and Chief Executive Officer

Well I think in part we anticipated, for example, oil was trending up at that point in time. It is back now probably to a level where it was back in late March and April. But I think we anticipated a little bit of an uptake and we also anticipate that we'll be able to offset that with either through working with our suppliers, productivity, or working with our customers in terms of price.

Unidentified Analyst

Okay. And then I guess switching gears for the second one. Just the comments or two you had in your, the presentation about kind of price concessions, is that largely within installation or is that in other segments as well?

Timothy Wadhams - President and Chief Executive Officer

Yes, I'll let Donny talk a little bit about that. But that's primarily in the installation area.

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

Yes, that primarily in fact all of our businesses' tied to new home construction which would be our installation businesses, our windows business and builder cabinet group. We also are seeing in the form of price concessions, we're seeing higher promotional costs at retail. So, the fact is really our retail cabinet margins we're seeing higher promotional activities that are really being used by the key retailers to try to drive store traffic.

Unidentified Analyst

Okay. And it's more on the retailer level. It's more of the actual retailer's driving it as opposed to competitors coming in and trying to get volume for their plants, so to speak?

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

We're seeing increased promotional activity of which I think the source is somewhat undefined. I would think at some point its competitors offering promotional activities that we have to meet for competitive reasons and on the other hand it's working with our partners to really figure out ways in which we both can increase store traffic and potentially raise our revenue.

Unidentified Analyst

Okay. Thank you. I'll get back in the queue?

Operator

And we'll go next to Ivy Zelman with Zelman and Associates.

Ivy Zelman - Zelman & Associates

Hi, good morning, everybody.

Timothy Wadhams - President and Chief Executive Officer

Hi Ivy.

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

Hi Ivy.

Ivy Zelman - Zelman & Associates

Tim, you mentioned you think there is going to be a slight up take and other obviously on the cost side initiatives, working with the suppliers, etcetera. Can you elaborate? I know you mentioned that you're using starts $902 million I think you said for the back half of the year. Can you also, I know you mentioned Europe, maybe help us more specifically on your outlook for Europe?

And then sort of a contingency plan assuming that the market weakness is actually unfortunately worst. And what the impact you think would be with respect to it, any change and expectations on cash flow and on dividends or do you feel like there is, little if I could erode your opportunities or your I guess change in guidance going forward?

Timothy Wadhams - President and Chief Executive Officer

Okay. In first part I think of your question was raw materials. And yes, we have seen a little bit of a tick-up, as we mentioned. And again it's kind of across the board. Particle board for example, plywood, a little bit of an increase there, finishing cost as it relates to cabinets, hardware as it relates to cabinets, all of those have ticked up a little bit. Insulation--

Ivy Zelman - Zelman & Associates

Actually Tim, I am sorry, I thought you were--

Timothy Wadhams - President and Chief Executive Officer

I'm sorry.

Ivy Zelman - Zelman & Associates

I thought you were saying that... you thought... I apologize, when you said tick-up I thought tick-up in the market getting better. I apologize.

Timothy Wadhams - President and Chief Executive Officer

No, no. I meant in terms of increasing costs.

Ivy Zelman - Zelman & Associates

Okay.

Timothy Wadhams - President and Chief Executive Officer

Yes, That's what I meant, I'm sorry. Just in terms of--

Ivy Zelman - Zelman & Associates

But do you, do you have a view on the second half of the year if its going be sequentially equal to the first half or it will be worse in kind of just a more specific outlook and then a contingency plan if it gets a lot worse from whatever your outlook is?

Timothy Wadhams - President and Chief Executive Officer

In terms of the raw materials? Or just in terms for the business in general?

Ivy Zelman - Zelman & Associates

No, overall. Yes business total, forget raw materials, sorry.

Timothy Wadhams - President and Chief Executive Officer

I apologize. Yes, no I think in the second half that, it's been tough in the first half and I think our feeling is that where we're at relative to guidance, mid or low double to mid teens is probably where we are going to end up. I don't see it getting a whole lot worse in the second half at this point. I think potentially some of the stimulus that the government is trying ought to have a little bit of favorable impact but again that's really hard to say.

I think it's worse right now than a lot of people think. But I think our feeling is that it ought to probably stay about the same but Richard may have a comment on that in terms of his view.

Richard Manoogian - Executive Chairman

I think Ivy our general feeling is that business conditions in our markets are worse than most people feel and if anything continues to deteriorate further and we put into our guidance an assumption we don't see any significant improvement in those markets in the next six months and there might even be some further modest deterioration.

Timothy Wadhams - President and Chief Executive Officer

Europe, Ivy, as probably you did mention Europe in your opening question and Europe is probably the one area that is may be a little more uncertain than anything else because we've seen some just very dramatic declines just in the last couple of months there.

Ivy Zelman - Zelman & Associates

So if I hear you guys correctly, it's possible if you get sequentially worse but sort of factoring in pretty much of similar, sort of same type of environment but not materially worse, I guess if that is correct, Richard maybe you can comment assuming your stark forecast is off by 20%. Does it change your thoughts about being, I guess aggressive with cash and buying back stock or any thoughts the dividend or cash flow and would it, in a contingency scenario would it change or not relatively to --?

Richard Manoogian - Executive Chairman

I think it won't have a dramatic effect on our perception of the cash flow balance sheet for the rest of this year. One reason that even if housing starts took another lag down, there is a lag effect before that translates into our business of one to two quarters. So, I think the bigger question Mark is that '09, and is '09 possibly going to be worse than '08. And there are some people, you might be one of them who feel the risks are on the downside in '09.

And I would say to you that right now all things being equal, I would agree with that but I think if other actions aren't taken the risks are greater on the downside than the upside for even '09 and we're planning all of our cash flow strategies and our dividend policies and other things, on the assumption there might be some further deterioration in '09.

Having said that my own philosophy is also that I think things are going to be so bad that we will see more positive action taken by the government and that might require a new President and new administration but talking to people in Congress and other people, I'll be very surprised that things deteriorate that we don't see much more positive action in '09 and a lot of that directed to specifically to the housing industry, as one of the key areas that need help and one of the areas that could stimulate the economy near term. In my own mind I think '09 could improve from '08 but it's going to take new actions to make that happen and we haven't factored that into your planning.

Ivy Zelman - Zelman & Associates

And, one last question just to sneak in because you brought it up Richard. Maybe you Tim want to comment on the current stimulus package that the President is supposed to sign in days. Is any thought if you think that will have a positive impact or more negligible could hard the market?

Richard Manoogian - Executive Chairman

I think the current housing bill has a limited impact in terms of changing the outlook for '09 or even the balance of '08. I think the one thing it does do is probably prevents a greater disaster from happening related to the GSEs. But in terms of stimulus, I think it's more than disaster prevention than significant stimulus. I think it's going to take I think it's going to take significantly more action to really cause a stimulus.

Timothy Wadhams - President and Chief Executive Officer

On whether I know or might it has a positive impact on consumer confidence in terms of any action they take which might give the consumer may be reengaged a little bit but I think that the tough call.

Ivy Zelman - Zelman & Associates

Right thanks guys.

Timothy Wadhams - President and Chief Executive Officer

Thank you Ivy.

Operator

And we will go next to Susan McClary with UBS.

Susan McClary - UBS

Good morning.

Timothy Wadhams - President and Chief Executive Officer

Hi, Susan.

Susan McClary - UBS

I was wondering if you could just give us some color on what just being in terms of the financial help us some where you build your customers.

Timothy Wadhams - President and Chief Executive Officer

Yes on the builder side, sure we had I think in the quarter about $4 million of bad debt expense. And that was I think on top of about two in the first quarter. So year-to-date were at about 6 million, we have... $9 million, so were at about 9 million... I guess we have six in the first quarter and three in the second quarter.

So we're at about $9 million year-to-date. That's about half of what we anticipated in our planning for the full year. Last year, you might remember in the fourth quarter we had $12 million or $13 million and ended the year of $22 million of bad debt expense. This year in the forecast we had as we indicated earlier about 20. So we're about halfway there. And Don and Johnny, Donny and John, got it mixed up. John's our CFO are doing a good job by staying on top of the builder's segment, reviewing the receivables and an ongoing basis. Don, you might want to comment on that a little bit.

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

Yes, sure. John and I spent a lot of time really looking at our top 100 builder customers and really to help in those accounts and managing that receivable. The business units are really good and I got here as the receivable but we are relatively start receivable days and as a receivable turn that credit gets through evaluated on a continual basis. So we are not continuing to extend credit where the customer is no longer credit worthy. So, although it's a difficult environment I wonder that we really have to spend a lot of time on. And we believe that that it's not going to get any worse than what we projected at the beginning of the year related to our exposure.

Timothy Wadhams - President and Chief Executive Officer

Yes, we don't have a lot of concentration, Susan with any one builder. We've got a pretty diverse spread, if you will, relative to the receivables.

Susan McClary - UBS

Sure. Are you seeing anything now in terms of some of the smaller private guys and any kind of incremental business, may be over the last few quarters?

Timothy Wadhams - President and Chief Executive Officer

I think if anything, credit is a little bit of a challenge for them, but Donny may have little more additional perspective.

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

Yes, I think they're struggling to get credit, an access to credit. But then we certainly haven't seen any uptake. We are seeing bank up these [Ph] but it --- I can't tell you that there has been any real consistency whether the size has not been a consistent factor. So I haven't seen any worse than what we have seen probably, a trend back for two or three quarters now. And I can't really give you a common threat because it just doesn't exist.

Susan McClary - UBS

Okay. Thank you.

Timothy Wadhams - President and Chief Executive Officer

: Yes. And any exposure there would be very minimal given the size of the builders you're talking about.

Susan McClary - UBS

Right, okay. Thanks.

Timothy Wadhams - President and Chief Executive Officer

Thank you.

Operator

And we will go next to Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank Securities

Thanks. Hello everyone.

Timothy Wadhams - President and Chief Executive Officer

Hi, Nishu.

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

Hi.

Nishu Sood - Deutsche Bank Securities

I wanted to ask first Tim, you were talking earlier about being scaled for say in the U.S. from $1.5 million to $1.8 million starts or so, with the reductions, the 30% reduction in your North American work force, the 11 plant closures, I would have thought that by now your capacity would have been for a much lower level of starts, say in the low ones. So I just wanted to dig down into what you mean by that when you're saying you are scaled for 1.5 to 1.8. Is that just a case of there's that latent capacity and maybe how Donny was talking about you can scale up easily. What exactly do you mean by that?

Timothy Wadhams - President and Chief Executive Officer

By what we... I think if you go back, we had about a $2 million start year like back in '05-ish and obviously we had to address the market place of that point in time and had capacity and we were stressed a little bit at that point particularly on that cabinet side. What I was really referring to is that we have the capacity in place and again as you know we're operating relatively inefficiently Donny talked a little bit about the cabinet business and some of the things that we're looking at there to scale down.

But a lot of what we've done is, we've taken shifts out and in order to try to meet the decline in environment that we're in today, what I am really referring to is that, we don't have to handle a lot of brick and mortar, when the market gets back up to a level of 1.5 to 1.8. Again, we are not exactly sure when that is. But we think we can handle it and what I was really trying to get across is the point that we don't need a lot of capital to do that.

Nishu Sood - Deutsche Bank Securities

Alright. So if it you are not too focused, too much on a downside but if it, it takes a long time to get back up to that 1.5 to 1.8. Are there, what additional incremental action does that imply that you would need to take beyond work force reductions and 11 plant closures you have already done?

Timothy Wadhams - President and Chief Executive Officer

Well, I hear it gets back to some of the comments Donny made a little earlier in terms of trying to work some flexibility into our business model and the new construction site, Donny, if you want to maybe?

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

That's exactly right. We have to have flexible solutions that are both scalable up and down but not only within our factory but also our supply chain. And we really have challenged everyone to think about capacity differently. Let's not plan to a start number. Let's really plan for the fact that starts are going to be cyclical and we're going to have years around a million housing starts and we are also going to have years around 2 million. And how do we think about our capacity from a standpoint of? How do we flex up and flex down? You know, what we don't want to do is save a dollar today and then ultimately spend $2 or $3 a couple of years from now bringing capacity back up.

So I really ask them to think it about it almost from a whole different paradigm. It' really driven some great, really some great initiatives and we talked about a little bit earlier about the cabinet side. I think it' important we talked about what we are going to do but I also think it's important to talk about what we are not going to do. Because they haven't had a chance to talk about us. What's really sacred and one of the things we're not going to do is we're not going to limit our investment in innovation.

We're going to continue to invest heavily in innovation. We've got a great pipeline full of exciting new products. We're introducing our diamond fuel technology from delta faucets, which is really an innovative no-lead solution that we think will be a game changer in the category. And our bird lighting control system, our radio frequency, energy harvesting lighting system that we'll bring it out, introduce their PCBC, we're also investing heavily in our brands.

We have the premier brands in our category and we're in step up our investment in our brands that now to continue to drive our market share and we're expanding internationally. We have BEHR Paints in China through The Home Depot and Hansgrohe who has built a repeatable and successful process totally new and emerging markets. So there is lots of things we can do on the way down but we are really excited about the things that we have gone that really lead us to believe in very bright future and excited about all the initiatives and opportunities going forward.

Nishu Sood - Deutsche Bank Securities

Go it. And just a follow-up question on your key retailer sales the trends there over the last two quarters seem to have deviated from the sales of the retailers themselves being little bit worst at negative 10 I think in negative 30 this past quarter. Show me then get [indiscernible] why that might be a sudden and inventory issue is that perhaps those the categories that you are selling being hit harder then just the sales overall that this retailers what's driving that.

Timothy Wadhams - President and Chief Executive Officer

I think is broad based in terms of categories and I think it related to consumer components there could be a little bit of inventory balancing there that might be impacting also a little bit we don't usually get hit with that as much as other people do. But I think it is just really the consumer pulling back at all price points including some of the lower ticket items.

Donald DeMarie Jr. - Executive Vice President, President and Chief Operating Officer

Yes, I think there is a mix issue on the cabinet side. We really have increased sales in our, in fact, assembled product but that's been more than offset by sales in our premium product line, our special order premium product line. So have a little bit of a mix issue there that effects the overall retail sales as well.

Nishu Sood - Deutsche Bank Securities

Okay. Thanks a lot.

Timothy Wadhams - President and Chief Executive Officer

Nicole, I think we will cut the questions off here and I do have a couple of closing remarks I would like to make.

Operator

Okay go ahead.

Timothy Wadhams - President and Chief Executive Officer

Again I would like to thank all of you for joining us today and as we mentioned we continue to aggressively manage our cost structure and we worked hard over the past several quarters to offset the impact with the current economic environment on our business.

While these actions have been and continually very difficult we expected additionally actions to address current market conditions will be even more challenging as we balance what we can do to mitigate the impact of the current market conditions on our near term results and the implications these actions may have our long-term performance, although the company expects to next several quarters to be very challenging the company is confident that the long-term fundamental through the new home construction and home improvements markets are positive.

In these challenging times we are extremely proud of the Masco team world wide as they focused on driving solutions for our customers and value for our shareholders we continued to invest in innovations product developments and expansion in the geographies technology upgrade and process improvements pushing hard to take advantage of this cycle. We are putting particular efforts to strengthening in our all rate powerful brands we will leverage our environments reliving program and focus on sustainability in green solutions in our products and service offerings there is a of excitement in Masco, and we'd like to share that with you at the 2009 international builders show in Las Vegas. Our both will showcase our brand supported by new products and innovative customer solutions.

On Wednesday January 21, we will host an investor even which will include management presentation. In addition we are partnered with professional builder magazine to design and build a green show house, which will re-build to the highest level of our environment through living program, certified green. This home will feature many of Masco's brands and sustainable products in a smart system based approach from consumers aware of what is possible today Masco branded solutions. This is a green coming out party. More information to follow and we hope that many of you can join us. Thank you, again.

Operator

And that does conclude today's conference. We appreciate your participation. And you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts