馬斯科 (MAS) 2002 Q3 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to the Masco Corporation 2002 third quarter earnings call. Additional information is available on Masco Corporation's website at www.Masco.com.

As a reminder, today's conference is being recorded and simultaneously webcast. After a brief discussion by management, the call will be opened for analysts' questions. If we are unable to get to your question during the call, please call the Masco Corporation Investor Relations office at 313-792-6646. Statements in the following discussion may include certain forward-looking statements related to Masco's future sales, earnings growth potential and other developments.

Additional information about Masco's products, markets and conditions which could affect future performance is contained in the company's feelings with the Securities and Exchange Commission. I would now like to turn the call over to Mr. Richard Manoogian, Chairman and Chief Executive Officer of Masco. Please go ahead, sir.

Thank you, Jessica. We are pleased to report that the positive business trends that we experienced in the first half of 2002 have continued thus far in the second half. Aided by acquisitions, third quarter 2002 net sales increased 13% to a new quarterly record of $2.5 billion compared with 2.2 billion in the third quarter of last year. Net sales from our North American operations were up 12% and international sales increased 18%.

[INAUDIBLE] acquisitions and divestitures, worldwide net sales from internal growth increased 10% for the quarter, significantly higher than most other companies in our industry. Largely as a result of new products and continued market share gains. North American internal sales increased 10% and international sales increased 11%. International internal sales in local currencies for the quarter were up 2% compared with the third quarter of last year. North American internal growth comparisons were aided somewhat due to the negative impact on our sales last year in the second half of September from the 9/11 tragedy.

Normalizing last year's September, we estimate that internal sales growth in the third quarter would still have approximated a relatively strong 8 to 9%. Operating profit for the quarter, excluding the Bear litigation settlement charge, increased 25% to 422 million, also a record for any quarter, as compared with 337 million before goodwill amortization in 2001. The company reported net income of 123 million, or 24 cents per common share.

Excluding unusual charges in both the 2002 and the 2001 third quarters, the Bear litigation settlement charge in 2002 and the write down of certain long-term investments, principally securities of furnishings international in 2001 and excluding goodwill amortization in 2001, net income for the third quarter increased to a record $227 million, or 44 cents per common share compared with 181 million, or 37 cents per common share, for the 2001 third quarter.

The 44 cents per common share was at the high end of the quarterly guidance that we had previously announced. Third quarter 2002 earnings per common share were reduced by approximately 3 cents from losses related to interest rate lock, economic hedging transactions in anticipation of the company issuing debt at fixed rates in the third quarter of 2002, which cost us two cents per common share, and an increased in contingent shares for earnings per share calculation purposes related to acquisition share price guarantees resulting from the decline in our stock price, which cost us one cent per common share. The cost of the interest rate lock will be more than recovered over the life of the issued long-term notes through lower interest rates.

Excluding these two items, third quarter earnings would have been even stronger at 47 cents per common share compared with last year's 37 cents before goodwill amortization. In the third quarter we recorded a $166 million pretax charge for the preliminary settlements to resolve all class action lawsuits pending in the U states against -- United States against the company and its subsidiary Bear Process Corporation related to exterior wood coating products formerly manufactured by Bear. The lawsuits involved claims of excessive mildew on wood surfaces to which the products were applied. Under the terms of the settlements, all claims relating to these Bear products would be dismissed without any admission of liability or wrongdoing. The settlements require final court approval before they can be fully implemented, and as is true in all class action settlements, there can be no absolute assurance until this is accomplished.

The company expects final court approval within the next several months after required notices, hearings and opportunity for class members to individually opt out or object to the terms of the settlements. We estimate that the ultimate aggregate cost of the settlements will be in a raining of 1616 -- range of 166 million to 200 million. In this circumstance, under accounting rules, the company is required to record a charge only at the lower end of the estimated range of liabilities, or 166 million.

This charge, 20 cents per common share after tax, does not reflect any offsetting amounts that the company and Bear expect to recover from liability insurers or other third parties which the company anticipates will be significant. Recoveries from liability insurers or other third parties will be recorded at such time as they are agreed to or otherwise received. Gross margins were 31.8% in the third quarter compared with 30.5% last year. Operating margins before goodwill amortization, general corporate expense and the charge for the litigation settlement increased to a strong 17.7% compared with 16.2% last year. Margins were aided by relatively high incremental margins on internal sales growth, profit improvement programs and product mix.

We are pleased that our operating margins for the first nine months of 17.1%, again exclude being the litigation settlement charge, have increased by approximately 190 basis points, well above the 75 to 100 basis points improvement that we had originally forecast at the beginning of the year. SG&A expense as a percent of sales, excluding the charge for litigation settlement, was 15.1% compared with 15.4% last year. Our general corporate expense decreased to 1% of sales from 1.1% last year.

Our segment sales for the quarter were cabinets and related product sales were up 8% year-over-year to 738 million and up 13% excluding acquisitions and divestitures. Plumbing product sales were at 535 million, up 18% from last year, and up 9% excluding acquisitions. Installation and other services sales were up 17% to 489 million, excluding acquisitions and a divestiture, sales were up 3%. Insulation material costs were lower during the third quarter, which resulted in lower selling prices. Excluding this impact, sales would have increased in the high single digits.

Non-insulation revenue increased at a double digit rate. Decorative architectural product sales increased 13% to 439 million, and other specialty product sales increased 12% to 317 million, excluding acquisition divestitures, sales of specialty products increased 13%. Total sales of the company's products continued strong in the third quarter with double digit increases in the combined sales, internal sales, of assembled cabinets, faucets and architectural coatings.

Key retailer sales for the third quarter also continued positive with combined sales to Home Depot, Lowes and Wal-Mart increasing by approximately 19% in the quarter. At the end of the third quarter we had a strong balance sheet with a cash position of $600 million and unused bank lines in excess of $2 billion. Debt as a percent of total capitalization was reduced from 48% at the ends of last year to 44% at September 30, or approximately 41% assuming that excess cash is applied to reduce debt. We have traditionally issued long-term debt ahead of funding requirements during periods of low interest rates.

To take advantage of historically low long-term rates, the company in August issued 300 million of 30-year notes and 300 million of five-year floats. Last month we issued an additional $350 million of 10-year notes. We have $700 million of long-term debt coming due during the next two years plus the possibility that $800 million of our zero coupon convertible debentures could also be put to us. So, effectively we have prefunded these debt obligations which are coming due over the next two years.

While this prefunding program will have a modest cost due to the negative cash carry, the positive result is our locking up interest rates on intermediate funding requirements at historically low levels. During the quarter we repurchased approximately 3 million common shares, a portion of which will be used for employee incentive programs. While we consider the current price of our shares to be attractive for repurchase, we continue to be committed to improving our balance sheet as we previously stated and have as a goal to achieve a credit rating upgrade within the next two years.

This goal will limit share buybacks somewhat from what we might otherwise do. Working capital, defined as accounts receivable and inventories less accounts payable, approximated 21.6% of annualized sales at September 30, a significant improvement over the 24% of a year earlier. Accounts receivable at the end of the third quarter were 57 days compared with 52 days a year ago, primarily as a result of extended terms with a major retail customer. Inventories improved to 75 days compared with 95 days a year ago, and accounts payable were extended to 32 days from 21 days. Internal growth, margin improvement and working capital management all contributed to significant improvement in operating profit return on net operating assets before litigation settlement charge. Excluding goodwill, annualized return on net operating assets improved to 389% from 30% -- 38% from 30%. Including goodwill, operating return on net assets improved to 19.3% from 17.3% in September of last year.

We're very pleased with the continued progress in this important area of focus. One reason for the acceleration in our earnings growth this year is the contribution being made by acquisitions completed several years ago. We have often stated that the real benefit of acquisitions that we make comes several years after a company joins Masco, when their internal growth can make a significant contribution to our bottom line. I believe that our acquisition program over the last few years is beginning to make a more positive contribution to our current earnings and will add significantly to our earnings growth over the next several years.

During the third quarter we completed the acquisition of four companies -- completed the acquisition of four companies previously announced with annualized sales in excess of 650 million. These new acquisitions are expected to be modestly [INAUDIBLE] to Masco's earnings per common share in 2002. Even though we have had additional acquisitions this year and we are a much longer company, we estimate that full year capital expenditures will still approximate the formerly projected $280 million compared with 274 million last year. We expect depreciation and amortization for 2002 to be approximately $220 million. Our tax rate for the first nine months of 2002 was 33.4%.

We anticipate that our tax rate in the fourth quarter will increase to 35%, or approximately 35%, due to recent acquisitions in the U.S. where the company has a higher tax rate, reducing earnings for the fourth quarter by approximately one cent per common share. We are pleased with our performance in the third quarter. The positive trends in sales and incoming orders have continued into October and early November. October sales increased at a rate in excess of 15% over last year and internal growth has continued at approximately 8 to 9%, again well above industry trends, largely due to new products and continued gains in market share. We have made progress on improving operating margins through the high contribution margins achieved with our internal growth, or incremental growth, as well as cost containment programs. We have also implemented a number of programs aimed at improving our return on assets and cash flow, and we anticipate significant future gains in both of these areas. We continue to expect cash flow before dividends to approximate or exceed $600 million in 2002 and exceed $700 million in 2003.

Assuming that present business conditions continue for the remainder of the fourth quarter, seasonally one of year's lowest quarters for Masco, we believe that our fourth quarter earnings should approximate 34 to 37 cents per common share. These fourth quarter earnings, when added to the $1.17 that we earned for the first nine months, excluding unusual charges, would result in the full year 2002 earnings of $1.51 to $1.54 per common share. This fourth quarter guidance includes the negative, non-operating impact of approximately 2 cents a share as a result of the higher tax rate, greater shares outstanding and the negative carry costs of our excess cash that I discussed earlier. Now, operator, I'd be happy to answer any questions that anyone might have.

Thank you, sir. Today's question and answer session will be conducted electronically. To ask a question, please press the star key followed by the digit 1 on your touch tone telephone. If you're currently on a speakerphone, please disengage your mute button to allow your signal to reach our' KIm. We'll take our first question from Joseph Stroka with Merrill Lynch.

On the cabinet sales, it looks like they're up 13% on an internal basis. Is that mostly all traffic you're seeing through the big home center customers, or are you really seeing a pickup in the cabinet business through the specialty stores or elsewhere?

No, I think that's been pretty strong across the board. And we are particularly pleased with the strength that we've seen at the retail level.

Cabinets are a relatively high tickets item, and one of the things that's been pleasing to us is that in a difficult economic environment that we've had this past year, spending on higher ticket items such as cabinets and kitchen renovation and remodeling has remained at a high level. So, it's been about very encouraging. And again, I think we probably picket picked up market share in the process.

Okay. And then on plumbing, can you contrast the comment that faucet sales were at double digit increase, yet plumbing margins liked like they were flat to down. Are you giving up margins in non-faucet?

You're probably referring to margins being down a little bit from the second quarter to the third quarter.

I'm even looking --

Or was it against last year?

Well, that directs the goodwill.

They're down from the second quarter. And the primary reason is a combination of product mix and also we have a significant amount of plumbing operations in Europe that have lower margins than our domestic operations. And with the improvement in the value of the Euro, our European sales went up faster than U.S. sales, which then meant that they contributed a lower margin rate to the combined total. So, part of that is just really the strength of the Euro dollar affecting the impact on margins.

Okay. Great. Just lastly, on the Bear litigation settlement, I know by accounting treatment you reserve for the 166. When would we know if you had to increase the reserve? Is that something that happens within the next quarter, or is that something that may not happen over the course of several quarters? And then if you feel like it, or can you put some parameters around what a significant recovery would be?

We expect the settlement agreement to be approved by the courts sometime in the first quarter of 2003. Once that's approved, then individuals around the country under the parameters of the settlement can make their claims. And until we see what the claims are we can't determine a final amount of the obligation that we might have, which is why we have a range of numbers. Having said that, a major part of the settlement includes a cap on our exposure with some limited exceptions so that it's highly unlikely that no matter what claims we have, the total obligation would exceed the 200 million. There's a number that we probably wouldn't know until late in 2003 when we see what claims come to the company through the settlement process. In terms of the insurance recovery, we are in negotiations with a number of parties related to insurance recovery and other items, and I think I can only comment that we do expect a significant portion of our liability and loss to be recovered through those third parties.

Fair enough.

Our next question comes from Jason Putnam with Credit Suisse First Boston. Please go ahead.

The first question relates to the guidance. I want to make sure that I'm clear on the fourth quarter. Does the range of 34 to 37 assume an internal growth rate in the 8 to 9% range, and then also obviously take into account the three items that you mentioned with the share count and the negative and such?

Right. We didn't necessarily make a forecast in internal growth for the quarter. But we just said if present sales trends continue for the quarter, the earnings should fall in that range. And that's after a negative two cents coming from non-operating factors that you mentioned.

Okay. But they are tracking right now, like you said, in October --

That's right. We are on track for that range.

Okay. And just a follow-up on Joe's question, a little more detail on the Bear litigation. I want to make sure that I understand maybe a little bit more in detail about the number of law firms that might be involved, because one of the uncertainties at this point is how many, or if any law firms might choose to opt out of this settlement. Can you just maybe put some parameters around is that a likely possibility or is there may be a couple of major firms that are representing a manatee of the complaints?

We have most of the plaintiffs' attorneys participating in the agreement. We do have one group of plaintiffs' counsel in one state that up to this point have not agreed to the settlement. But we expects that there will be a national agreement from all the parties shortly. And we think there's a very high probability of that in the near future.

Okay. What would be the result if let's just assume that a couple of firms choose 20 to opt out? How would that be handled?

Well, ultimately the Court decides on the national settlement. The only thing that could really disrupt that is if a state court somewhere else intervenes and tries to take charge of the national settlement. And we think that's highly unlikely. The opting out really is for individuals. If a court approves a national class settlement, any individual has the opportunity to opt out. But at that point that individual can only make a claim for themselves. They cannot start a new class action. So, if you feel you've been damaged in your home and you want to start a lawsuit for $500 and you opt out of the national settlement, all available to you is to make a claim on your own personal damages. And we think that's highly unlikely because the dollars would be very small.

Okay. I see. And then in terms of the cap, I just wants to again make sure that I'm clear on the circumstances here. With the proposed settlement that you have right now, there's a $200 million cap. So, that means once the complaints start coming in and there's enough to reach that sort of $200 million number, that would be it and this would be no claims after that?

With very minor exceptions. We have caps that should limit the total liability to $200 million. And in all probability the total liability should be less than $200 million.

Okay. And then, so once this is complete, do you have, you know, any sorts of time frame on when the actual costs of the charge, the cash going out, I should say, would be completed?

The claims all have to be submitted during 2003. So, it's likely that any payments that are made are probably in late 2003. And we should know at the ends of 2003 the total cost of the liability.

Okay. So, after 2003 there should be very -- there shouldn't be much cash --

There is a time period. I can't remember the exact date, but it is one year or a little less from the date of approval of the court that all claims have to be submitted.

Okay. Great. Thanks a lot, Richard.

Operator: We have a question from Steven Kang with submit Barney.

Not to belabor the issue, but we want to make sure that there's no loopholes that people can slip through. And I think that's clearly what clients are trying to get comfortable with. So, just to follow up on Jason's question there, I think specifically what he was getting at was let's say that the number of filings or people submitting claims is far in excess of what you might feel is likely or reasonable or even possible. You know, is there like a certain dollar amount that they are guaranteed to get or they are expecting to get, such as if you get a lot more claims, there is a possibility that it could be higher than 2,000, or is there going to be a group of people that get cut off, or does everybody just get less money if there's more people?

The agreements that we have basically put a cap of 200 million. There's very small exception toss that that don't amount to significant dollars. So, if the claims turn out much larger than anybody expects in terms of number or dollar amount, then they're prorated down in terms of what any individual receives. So, that wouldn't come out of our pocket at that point.

Great. And you used the word "national." Can you just give us some comforts that Canada is not a big number here?

Canada is not included in the settlement, but Canada really, as we look at it, is not a material concern. Our Canadian sales were only 5% of our U.S. sales, and in Canada really the court process is different. We have a judge that rules on actions in Canada other than a jury. So, our feeling is that once we make a Canadian settlement, there won't be any significant dollars involved in that in any way compared to the U.S. settlement.

Okay. Great. Let's move on to more pleasant things. The cabinet number that you cited, I just wanted to make sure. You've had some market -- you had some changes there related to Premier and so forth. I just wanted to get a sense, have you been seeing growth within each brand in your cabinet assortment, or have there been certain brands that have really been standouts here?

I think we've seen growth across the board in our cab nest. I think Craftmade. Has been particularly strong. Your eye comparing against last year. We may have had a little slowdown in the second half of September a year ago on cabinet sales in terms of comparisons, but we've been very pleased with our cabinet growth. And if anything, that growth has been accelerating as the year progressed. And some of the changes that you mentioned in terms of those additional brands that we're going to be getting we haven't really rolled out yet in a meaningful way. I think one reason that cabinets have been a strong selling feature for some of the home centers particularly or even some of the remodelers is that when they sell kitchen cabinets, there's a lot of additional products that are sold by that retailer so that the dollars that they generate in additional products filling out an entire kitchen, you know, are significant over and above the cabinets. So, it's an area they like to promote and merchandise.

Great, sure. Moving onto your insulation services division, just wondering if you could give us an update on how successful you have been in migrating your platform to other products and was hoping that you could also address the recent move by one of your peers, let's call it, to move into the installation of flooring products. I was wondering if you could give us some color. Is that a segment that would have interested you, or is it different in some way, or do you see that that strategy is in any way different from yours?

In terms of expanding our service capability beyond just insulation installation, we continue to make good progress on that. It's growing at a double digit rate, and I believe we're now up to 25% or more of our told sales are in non-insulation products. So, we continue to make good penetration with that effort. One of our major customers has recently acquired some flooring installing -- installation companies. That's not an area that we have any plans to enter into. And I would just remind you that one of the keys for us is to bring purchasing power of products to our installation package. And in the case of flooring, the particular company that acquired those flooring installation companies is a major buyer of flooring products. So, they are bringing a lot of synergy to that acquisition because of the fact they're able to buy flooring at a very attractive pricing. You know, we wouldn't have had that capability. So, that I don't think would be a logical area for us to expand into in the future.

Mm-hmm. Okay. Great. And if you could talk a little bit about the share price guarantee that you -- that you alluded to in the quarter, can you just give us some understanding of sort of how those have all -- how commonplace they are for you and how you expect them to affect you going forward?

Sure. And I might add that at our June investor meeting, Tim Wadhams, our Chief Financial Officer, spent quite a bit of time outlining all the contingencies, balance sheet questions and share guarantee questions that we had. So, if anybody wants a copy of that presentation, we could still sell it to you. But of our total outstanding shares related to acquisitions, we have currently approximately 35 million shares that have a guarantee connected to them. And those guarantees run out over the course of the next three to four years.

At the ends of June we allocated an additional seven million shares to our share count to reflect additional shares we might have to issue to meet those share Guerin fees. Because of our -- guarantees. Because of our stock price declining from 25 to 21 during the third quarter, that seven million of shares to make up that guarantee increased to 15 million shares. Now, under accounting rules, you have to use the assumption that you will issue stock to make the guarantee payments. In the real world in all likelihood we would issue cash and the earnings per share impact of cash would be far less than issuing the shares would be in terms of dilution.

And one of the things I would want to point out is that in all of the guarantees, other than the loss of the money or the dilution of the shares, there's no earnings per share impact from the guarantees. If we have to issue additional payments, that's considered to be additional purchase price and goes into the purchase price accounting. It doesn't flow through the income statement. So, basically we had at the ends of September about $350 million of obligations under guarantees and about 100 million of that is above $30 a share. So, the bulk of it really is between 20 and 30 dollars a share. So, if our stock went up even relatively modestly over the next two to three years into the high 20s or up to 30, most of that obligation would go away without any payments.

Great. Fair enough. And last question related to your stock maybe going to the high 20s or 30, you recently upped your shelf or restored your shelf. And I know it is there's a question that's out there in the marketplace that, you know, you might choose to be opportunistic again. Can you give some insight on what your view is towards coming to the markets with another offering, whether or not in your view you have any, you know, potential use of proceeds that woo necessitate that?

No, I wouldn't read anything into the shelf filing. We always take our shelf back up to a full shelf filing as we've done historically. And the only reason we'd done that was because we had utilized so much of that shelf, and all we did was restore what we had used. But we have absolutely no plans for any offerings other than what might be used in a future acquisition. So, there's no message there. And we think we're in pretty good shape now in terms of having sold a significant amount of dent covering a lot of our debts requirements for the necessary next two to three years, as well.

Okay. Great. Thanks very much, Rich.

We'll now go to Larry Horan with Parker Hunter. Please go ahead.

I don't want to beat a dead horse, but I think for a lot of us concerned about tort actions, et cetera, would you go through, you know, the sort of calculus you did in terms of fighting versus, you know, just sorts of caving into this sort of legal extortion when you obviously believe you don't have any real problem with your product? And number 2, what you've done going forward so that people in the future using the product, you know, won't claim they got mildew from if and start up a whole new situation for you?

In terms of the latter question, this related to products that we discontinued selling, I think it was two years ago. And so, the new formulation that is are being used have not come into question or have not been challenged in terms of product liabilities. In terms of settling versus pursuing all the legal actions, that's always a very tough question for companies to make.

And I would say a factor that came into that decision was the fact that by settling we also expect to recover a significant portion of the settlement from our insurance carriers and others. And so, when we look at the anticipated net amount of the cost of the settlement plus eliminating all the uncertainty that went with it as well as the time and effort from the standpoint of management, we just thought it was the prudent thing to do from a company standpoint.

One thing, or a couple things I might just mention because we've had some questions on this from investors as to how we handled this matter, and unfortunately, we weren't really able to have a conference call or more -- conference call or more in-depth discussion with investors as to what was happening because we were working with trying to settle the lawsuit.

And if you have too much of a discussion, obviously plaintiff attorneys participate in that discussion. And we thought that would be more counterproductive than helpful. But I might just add a couple of comments because I think it's important in terms of future acquisitions that we make. I do think that we have a relatively strong and in-depth due diligence process in the company. And when we acquired Bear or worked on the acquisition of Bear, we were told of this lawsuit. We looked at it. We didn't think it was serious. Bear didn't think it was serious. We hired one of the top law firms in the country to specially look at this lawsuit, and they didn't think it was serious. And obviously we were all wrong.

And having said that, we've also been raised questions of why we didn't have representations and warranties covering this matter from selling shareholders. We did have Republicans and warranties. But -- Republicans and warranties. But Bear was a pooling of interest transaction.

And under accounting rules for pooling transactions, any rep and warranty cannot exceed 10% of the purchase price and any rep and warranty cannot be outstanding for more than one year from the date of acquisition. And you have to have an absolute and definable liability to claim during that one year. So, we looked at the lawsuit. We had reps and warranties. But the net effects, it was just an unfortunate experience, and it's something that all companies, or a lot of companies run into, and we're just happy to see it behind us.

Your bottom line is that it was cheaper and that basically it wouldn't drag berries image through the papers, as so often happens in these cases?

Well, I think there's always the question of how much might you -- if you're wrong in the lawsuit, you end up losing lawsuits. Your losses could be greater than the settlement. There's the time and effort involved. These the publicity involved. These the impact on the company. There's the impact on the share price. So, it affects you in a lot of different ways. So, it was just a combined judgment we made it was better to get it behind us.

Okay. Thanks, Richard, for your comments.

Our next question comes from Armando Lopez with Morgan Stanley. Please go ahead.

Yeah, hi. Good morning. Just two quick questions. One on the organic sales growth. You had mentioned that it's a function of share gain and new product introduction. Do you have an estimate of how much of the organic growth is from introducing new products compared to market share gains?

I don't -- I don't have that, but I know in the old days we used to think maybe about a third comes from market share, a third from new products, and a third from new customers and other things. So, it's probably a cross-section of all of those, but we don't have that in detail. And frankly, it's he a little hard to track.

Okay. And second, I was wondering could you just comment on what you're seeing in the pricing environment on the faucet line?

In terms of pricing, nothing unusual in terms of pricing any given customer. Sometimes there's always negotiation as to whether, particularly with a large buyer, particularly a home builder, whether there's a special rebate or pricing discount. But I would say on average there's nothing unusual going on in pricing now versus six months or a year ago.

Okay. And then one just last one. In terms of thinking about capital spending growing forward, what do you estimate is like maintenance Cap Ex?

I think we're going to spend about $280 million this year. Our early reading on next year is maybe close to that number, maybe a little over $300 when you factor in additional acquisitions. And I would guess that we'd probably consider a a maintenance expenditure , maybe 1 hundred, 150 million of that.

Okay. Thank you.

We'll take our next question from Frank Donnel with Attage Capital.

I don't want to get complicated, but back to the issuance of shares, you said this is under GAAP. There's no way under GAAP you can take like an option pricing model and say this is the value of the options we've given these people?

No, we have to do it the way we do it, which is to assume that any commitment is met by issuing additional shares to meet that commitment.

And let me just understand one -- let's say your stock were to go up to $25 or something buy the end of the year.

Well, let me just say that when we were at $25 at the end of second quarter --

Right.

-- we only had seven million shares in our share count related to guarantees.

Right, right. So, if it goes back to 25 by, let's say, the end of the fourth quarter, does the number go down again?

Pardon me?

Does the number go down again?

Yes. It would go back down and we would pick up a half cent or whatever the number is for the fourth quarter.

okay, so, this is a number that's going to float up and down with the stock price?

It is going to float up and down. But again, one percent is a big swing. It's not going to be affecting earnings by four and five cents in a quarter. It's going to be a half percentage or a penny.

I understand. Let me just nurse one other thing. If you take the quarterly earnings they don't add up to the annual numbers because of the issued shares as the year went on?

That's correct.

Okay. Especially when we're issuing shares in the weaker part of the year, theoretically we got lower?

Well, it's because you have additional shares outstanding, and also you're picking up these additional shares we issued under the guarantee. Again, some of that may go away in the fourth quarter.

All right. I think I understand all this.

If you need any more detail, give us a call.

I don't know. These just so much I can take in one day. All right. Thanks.

We'll now go to Bud Buggage with Raymond James.

Sam on behalf of Bud. You mentioned Europe was up about 2% in local currencies. We've been hearing that in October in certain businesses, programs not with Masco, that Europe's demand trends have fallen somewhat precipitously. Can you help us with what you're seeing in October in local currencies in Europe?

I don't want to mislead you that that plus 2% indicates that we were seeing a pickup in business. We continue to see Europe as being fairly slow. Some of the key countries in Europe, such as Germany, have really been in a six-year housing recession. Housing starts? Germany have declined for six consecutive years now, including this year. So, they've been at a relatively lower level right along. But on the other side of that is I don't think we've seen any deterioration in October. We're still holding at that bottom level that we've had the last few quarters.

Okay. Second question. What was the, if you can recall, the specific timing of the major customers' extension of terms?

We did that I think in the end of the first quarter.

So, from the second quarter to the third quarter, there really was no effect sequentially from that that extension of terms?

No, if you take the major customers' extension of terms out of our receivables, the number of dales of receivables we had at the end of the thirds quarter was comparable to last year's number.

I'm just looking sequentially ''cause it looks like your receivables, if I did my math right, were up.

Another thing you have to watch out for, as an example, we had a major acquisition in September. So, we would have picked up all the receivables of that acquisition at the end much September and only picked up one month of their sales.

Gotcha.

So, that would have distorted the numbers a little bit. But there's no deterioration in receivables other than the additional terms we gave to that customer. But that customer we think is highly creditworthy, so we're not concerned about it.

Last quick question for you. Inventories look to be --

And I should say we gave some of those additional terms commitments, we received some incentives back from that customer, as well. So, it wasn't a one-way street.

I would imagine you did, yes. Inventories seem to be in great shape. Is this a sustainable issue? Is it a unique situation? Or did it perhaps hurt your margins a bit in the third quarter with the lower fixed costs absorption.

I think inventories have come down. I can't tell you that we're going to see significant additional cuts in inventories in terms of numbers a day, but there's nothing in there that's not sustainable.

Very good. Thank you, Richard.

Let's take our next question from Steve Hawkins from Lehman Brothers. Please go ahead.

I think this question was -- this is actually Kyle Hambrey in for Steve. Could you comment agents bid about sell-in versus sell-through at the big box retailers?

Yes. I would say that in terms of recent weeks, the point of sale information that we have from those customers that we can get that information, if anything, has been exceeding our sales to those customers. So, we certainly don't see any buildup of inventory that's taking place in chance. And if anything, it may be coming down a little bit. So, at least on the information that we have, we're encouraged with what we're seeing at point of sales.

Okay. Thank you.

We'll now go to Roger Mendel with Northern Trust.

Good morning, Richard.

Good morning.

You'll be happy to know I don't have any further questions on Bear today.

I'm looking forward to the call where there won't be any.

I do have questions on your comments on share repurchases, just kind of how you view share repurchases now with your share price so depressed versus acquisitions. I imagine it's hard to find a better acquisition than Masco shares right now. And then just some clarification on -- you said you have some room for share repurchases and still a single A credit rating. Just any clarification on that point about how much room of have and so forth?

That's a bit of a complex question. What we've said in past calls is we have a triple B-plus rating currently. And would of our goals is to get to A or A-minus within the next two years because we think that's a very important thing to do in the environment that we live in today and the credit concern that a lot of people have that they didn't used to have in previous years.

So, we make projections as to, you know, how we can accomplish that goal. And obviously that depends on earnings, depends on acquisitions and other activities. But we always trade that off with opportunity.

And you will note that in October we did repurchase 3 million shares of our stock because we thought -- not in October. Excuse me. In the third quarter. Most of which I think was in September. We repurchased 3 million shares of our common stock.

So, I wouldn't want to say we're not going to continue to do re- -- share repurchasing, but we have to weigh that opportunity with the goal of getting our ratings improved.

I would just say as an additional comment, because I know a number of people have raised questions that we've done a lot of financing and do we have major transactions in the works at any given time we're looking at acquisitions. We have one medium-sized plumbing company that we're working with in Europe. And some small acquisitions.

But all things being equal, based on what we see at the present time, I wouldn't be surprised if our pace of acquisitions in the next few years was a little lower as a percentage of sales than in the previous few years. And if that's the case, if we continue to generate nice positive cash flow, then we ought to have an opportunity to be able to do both share repurchasing and get our ratings improved, as well.

Sounds good. And I guess from my viewpoint, just one last comment, I think the acquisition, repurchase of Masco shares looks like a very attractive acquisition for you guys right now.

Well, we agree with you.

All right. Thanks for your comments.

There are no further questions in the queue. Mr. Richard Manoogian, I'll turn the call back over to you for any closing or additional remarks.

I can just add we've been pleased with the third quarter results and thusfar what we've seen in the fourth quarter. And we look forward to talking with everybody again in the near future. Thank you for participating.

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