馬斯科 (MAS) 2002 Q4 法說會逐字稿

Good morning, ladies and gentleman. Welcome to the Masco Corporation 2002 fourth quarter and year end conference call. The press release and additional information issued this morning is available on the Masco Corporation Web site at www.masco.com. As a reminder, today's call is being recorded and simultaneously webcasted. After a brief discussion by management, the call will be open for analyst questions. If we aren't able to get your question during this 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. Actual results may vary materially because of external factors such as interest rate fluctuations and change in customer spending and other factors of which management has no control. Additional information about Masco's products, our (ph) [Inaudible] which could effect future performance is included in the company's filing with the Securities and Exchange Commission.

I would now like to turn the call over to Mr. Richard Manoogian, Chairman and Chief Executive Officer for Masco. Mr. Manoogian, please go ahead.

Thank you, operator. Operator, you were breaking up a little bit on my extension, can you hear me all right?

Yes, I can.

OK, thank you. Unfortunately, I have to begin today's conference call on a sad note. As you may know, Ray Kennedy, Masco's President and Chief Operating Officer passed away suddenly last week from a heart attack. Ray was truly a unique individual who was admired and respected by all who know him, and I know many of you have worked with Ray over the years. While no one could ever replace, Ray, I am sure he would want us to remind everyone that we have a strong management team, many of whom he personally recruited and trained, and I can assure you that the transition in management changes will be smooth and we should have an announcement within a few weeks.

All of us here at Masco share Ray's values, and we remain committed to continuing his philosophy of providing value-added products and exceptional service to our customers. But Ray will be truly missed. Ray would be very pleased with the numbers we are reporting this morning. Net sales for the year 2002, aided by acquisitions, increased 14 percent to a record 9.4 billion, compared with 8.3 billion for the year 2001. North American sales increased 13 percent, and international sales increased 15 percent.

And as a reminder, if you have not received our press release and supplemental information, it is available on our web site.

Excluding acquisitions and divestitures, 2002 consolidated net sales were up eight percent, compared with 2001 sales. North American sales increased nine percent, and international sales increased five percent. In local currencies, international sales were flat compared with 2001.

For the full year 2002, we reported net income of $590 million, and earnings per common share of $1.15. Excluding the effect of unusual items, net income for the year 2002 was 780 million, or $1.52 per common share.

Our fourth quarter 2002 net sales were two and a half billion, a 19 percent increase over last year. Stronger sales to non-retail customers, sales of acquired companies, and the favorable impact of foreign currencies more than offset slower sales growth with some of the company's retail customers. December sales were particularly good, exceeding the prior year's results by more than 20 percent.

Excluding acquisitions and divestitures, worldwide net sales from internal growth increased eight percent in the fourth quarter. Our internal sales growth has remained relatively consistent over the year, and is within our historic average and our long-term internal growth goal of six to ten percent, and well above the performance of most of our peer group. New product development and market share gains continue to be the major drivers of our internal sales growth.

Masco's North American sales for the fourth quarter, aided by acquisitions, were up 18 percent in the quarter. North American sales from internal growth were up seven percent. International sales were up 23 percent in the fourth quarter, and excluding acquisitions, international sales were up 11 percent, and in local currencies, international sales were again flat compared with last year.

Net income in the fourth quarter was $195 million, or 37 cents per common share, at the higher end of the previously provided earnings guidance.

We're pleased with the progress that we made in 2002 toward our goal of improved financial performance. Gross margins were 30.5 percent in the fourth quarter, compared with 29.3 percent last year. Operating profit margins before goodwill amortization and general corporate expense were 15.9 percent in the quarter, compared with 13.8 percent in last year's fourth quarter.

We are particularly please that for the year our operating profit margins before goodwill amortization and general corporate expense, and excluding the Behr litigation charge, improved 190 basis points, and we're 16.7 percent compared with 14.8 percent in 2001.

Total SG&A expenses in the quarter as a percent of sales, including general corporate expense, decreased to 16.2 percent from 16.7 percent. Our general corporate expense was 1% of sales compared with 1.1% last year. Segment sales for the quarter cabinets and related products increased 9%, plumbing products increased 23%. Installation and other service sales increased 42%. Decorative architecture product sales creased 6% and other specialty products sales increased 16%. Combined sales to Home Depot, Lowe's and Wal--Mart, our 3 largest retail customers, increased approximately 12% for the full year. Our sales growth with other key retailers increased at an even more rapid rate and total key retailer sales for the full year 2002 were approximate 3.2 billion, or an increase of approximately 13% over last year's 2.9 billion.

Our fourth quarter key retailer sales slowed to an increase of approximately 3% compared with a much stronger increase of 19% in the third quarter of 2002. This was the slowest rate of key retailer growth we have achieved in many quarters. Combined sales to Home Depot, Lowe's, and Wal--Mart in the fourth quarter of last year also increased by approximately 3% compared with a relatively strong 2001 fourth quarter. One of the benefits of our corporate strategy covering all of the major price points for our products and the various distribution channels is that when one product pricing segment or one channel of distribution slows down, that slow down is often offset by an improvement in other channels of distribution and that was the case in this last year's fourth quarter.

Capital expenditures for last year were 285 million or 3% of sales compared with 274 million or 3.3% of sales in 2001. Depreciation amortization for 2002 was 220 million compared with 269 million the previous year. The company's tax rate was 35% in the fourth quarter of 2002 as compare with 33.4% in last years fourth quarter. The higher tax rate negatively impacted our earnings per common share by approximately 1 cent per share in the fourth quarter. The company's tax rate 2002, for the year was 33.8% compared with 34% last year. The rate increase in the fourth quarter is principally the result of acquisitions increasing the proportion of domestic income, which is taxed at higher rates than foreign income. We anticipate that our tax rate for 2003 will continue to approximate the higher percent. For 2002 we repurchased a total of approximately 9 million common shares of which 4 million shares were repurchased in the fourth quarter. A portion of these shares was used for our employee long term stock incentive programs. In January of 2003 the company repurchased an additional nearly 4 million shares. The company currently has over 44 million shares remaining under our share repurchase authorization.

We continue to show improvement in our working capital ratios and balance sheet. Year end inventory days improved to 76 compared with 88 in the year 2001. Accounts receivable at year end were 54 days, compared with 55 days a year ago, despite the extension of payment terms with a major retail customer. Accounts payable days at year-end improved to 33 days from 24 days a year ago. Working capital, defined as accounts receivable and inventories, less accounts payable, was 20.1 percent of annualized sales at year-end, compared with 21.5 percent a year ago. Our cash flow for the year exceeded our expectations and the company's liquidity at year end was very strong with over $1 billion in cash, $400 million of marketable securities and unused bank lines of $2 billion. Debt, as a percent of total capital, at year-end was 47 percent, compared with 49 percent at the end of 2001.

During the fourth quarter, we increased our quarterly dividend to 14 cents per common share from 13 1/2 cents per quarter. This marks the 44th consecutive year in which dividends have been increased, a record matches by very few companies in this country and reflects the company's favorable long term outlook.

During December 2002, we increased our ownership of Hans grohe from 27 percent to approximately 64 percent. Hans grohe is a leading German manufacturer of kitchen and bath faucets, handheld and fixed showers, luxury shower systems and whirlpool tubs which are sold throughout Europe, Asia and the United States. In addition, early this year, we acquired PowerShot Tool Company, a leading manufacturer of fastening products, including staple guns, glue guns, hammer tackers and riveting products headquartered in New Jersey. Combined annualized sales for Hansgrohe and PowerShot approximate $400 million. Total considerations for both transactions approximate at 190 million, including cash and assumed debt, and 1.6 million shares of Masco common stock. The combined transaction will be modestly accretive to earnings per common share.

Now in terms of the current outlook, in developing our 2003 earnings guidance, the company believes that in the present uncertain economic environment it is prudent to be conservative in forecasting for business planning purposes and to anticipate a possible slowdown in housing starts and a possible moderation of consumer spending, this years earnings guidance also includes the company's expectations that operating expenses for the year will increase in 2003, particularly for such items as energy, insurance, and pension costs. In the first quarter of 2003, a major new product launch and certain items -- other items, will impact our earnings by approximately 2 cents per share and the accelerated vesting of deferred compensation programs, due to the untimely passing of Masco's president Ray Kennedy, and I might mention that our stock award programs typically vest 10 percent a year over a 10 year period but when someone passes away, all 10 years of stock awards vest immediately and the impact of that, in Ray Kennedy's passing, will reduce our earnings by 3 cents per common share in the first quarter.

So, combined, those two items will impact our earnings by about five points per share in the first quarter, which is also seasonally one of the, the company's lowest quarter in terms of earnings per share. Consequently, the company anticipates that its earnings per share in the first quarter may be in the range of 30-32 cents per share. Favorable company sales performance has continued in early 2003, and based on current business trends, we are guardedly optimistic that we will achieve record sales and earnings for this year, even with the impact I mentioned earlier of the five cents of items that will impact first quarter earnings, we expect full year earnings per common share to be at an all time record of $1.65 to $1.70 per share.

Thus far, the year has started out strong. Aided by acquisitions, sales in January increased by approximately 25 percent and excluding the Hans grohe transaction, sales in January would have increased by 20 percent, led by cabinets, faucets and installation services. Excluding all acquistions, internal sales growth in January increased in the high single digits, and in the mid single digits excluding the effect of stronger European currencies.

Now, operator, I'd be happy to throw the meeting open to questions.

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question, you may signal us by pressing the star key followed by the number 1 on your telephone. We will proceed in the order you signal us and take as many questions as time permits. If you are using a speaker phone for today's conference, we ask that you turn off your mute button to allow your signal to reach our equipment. Once again, if you do have a question, please press star 1 and we'll pause for a moment.

And our first question will come from Margaret Wong with UBS.

Good morning Richard.

Good morning Margaret.

A couple of things. The first thing, would you just remind us in cabinets and faucets, the line review you had with Home Depot, I know you lost (ph) [Inaudible] business and then you gained from Delta business. What was the timing on that?

In terms of cabinets, You are correct that Home Depot is transferring the supplier from ourselves and Fortune Graham (ph) , excuse me, from ourselves and American Woodmart (ph) of Thomasville to Fortune Graham (ph) . But in return for our losing the Thomasville product line, we've been giving additional regions for our Craftmade product line, particularly New England, which is a major area, as well as the taking of our Premier line nation from Mills Pride (ph) . We believe that the two new additiona product lines that we have will greatly outweigh the loss of Thomasville. That change is still transitioning and I would expect it will continue to transition probably for the next six months or so.

OK. And then with the faucets?

Faucets in terms of any changes that have taken place, I can only tell you that again I don't want to be too customer specific in terms of sales, but I would say if you take our total faucet sales at retail in home centers, we are continuing to show significant increases in sales at retail.

OK. Then you mentioned the current trend is OK but not great. It seems like you're being overly conservative, maybe. Could you just give us an idea of what's been going on for the last six-seven weeks?

Well, what I think that thus far our sales have continued to be very good with sales internal growth in the high single digits and 20 percent plus otherwise, our concern is just in the present economic environment, may there be a moderation of consumer spending, or sometime during the course of the year may there be some modest fall off in housing starts, so we're taking that into consideration as a possibility in the forecast that we've delivered.

OK. And just in terms of the inventory that you're carrying, can you give us an idea how much of that is finished goods, and if you took any downtime in the plans in the fourth quarter?

No, I don't believe our finished good inventories have built up anything unusual. And by the same token, I would say that I don't think we have high inventories in the field with customers. If anything, I would say they might be modestly on the low side. I think anything you might show in finished inventory picking up probably reflects acquisitions as much as anything else.

OK. That's if for me. Glad to see you guys are in there buying back the stock. That's good news.

Yeah, thank you.

Thanks.

Our next question Budd Bugatch with Raymond James.

Hi, Richard. Good morning.

Yeah. Hey, Budd.

And my condolences on Ray's passing, too.

Thank you.

A couple of things. Can you, on looking on the outlook, can you quantify for us, maybe, what you think the expenses might be for energy, insurance and pension -- maybe each one of those individually?

Yeah, I can't give you a number for energy -- and frankly, I should have remembered to mention in answer to Margaret's question -- one reason why we're being conservative and cautious in our estimates for the year, I recall in 2000 when energy prices shot up, and at yearend 2002 when the heating oil and natural gas prices shot up, the impact it had on consumer spending. And we, along with a lot of other people, saw a significant falloff in consumer spending, particularly at the home center level.

So, the biggest impact we see affecting our businesses on the energy side is in taking dollars away from consumers and reducing their demand for oil products, and particularly consumer deferrable expenditures.

In terms of energy costs to us, the biggest impact on us is in our shipping costs, surcharges on shipping, as well as process costs related to natural gas and energy costs, and also resin costs related to plastic-related products.

Thus far, the impact has been fairly small, but we are factoring in that that probably will increase as the year progresses.

Insurance costs -- we're expecting a $40 million increase in insurance costs, and I think one of the things you might find interesting, of that 40 million, only 10 million is healthcare related. So, we're expecting about -- I'm sorry, about 25 million of that would be healthcare related, and about 15 million to 20 million of that would come from general insurance cost increases. And I think that's something that virtually all companies are gonna experience.

On the pension side, we're looking for about a $10 million increase in pension costs -- not too bad. Our pension cost situation is not as bad as many companies; one reason being that we have a relatively young workforce, we have relatively few retirees, and virtually all of our retirees and our retirement programs do not include healthcare or cost escalators. So, we don't have some of the ballooning pension costs that some other companies have.

And so, in clarifying your guidance of $1.65, $1.70, you didn't have a dollar number for energy that you were ...

We don't have a specific number, but we assumed that energy would have an impact on our business, both on the sales level as well as on the cost level.

Do you want to give us an order of magnitude, or?

Yeah, I'd rather not unless you can give me an absolute number for energy for the rest of the year.

I was gonna say, if it stayed where it is today. I mean, that would be the only way to do that.

I think if it stays where it is today, it would be relatively modest. If it goes up much higher, then it would start having a bigger impact.

OK. And the second question I've got -- there's two parts to this one -- are the revenue side of the equation for 2003. You've given us a feel for where the first quarter is, what is the revenue guidance that underlies your 2003 outlook for the year, maybe you can give it to us internal and external? We kind of know what the external is already and you said you are going to be relatively modest going forward on, what acquisitions at least for the near term and also can you give little bit of a clue as to what maybe this product launch looks like in Q1 or talk about it as much about that as you can?

We, in terms of our assumptions for the forecast that we have made, we have assumed that this internal growth for the year would be in the mid to high single digits, sort of continuing the trend that we saw last year, again with some possible small moderation. In terms of the major new product launch, I can't discuss that, but we are expecting to roll out a major new product line probably in March of this quarter.

The one other thing that I neglected to mention earlier, too, that impacts our first quarter costs and costs for the rest of the year for that matter. We are already rolling out a major new display program with Home Depot on color centers for the paint department. They have even discussed this themselves on their conference all as being a program they think is going to enhance their paint sales going forward. This is a program that is going to cost us 10s of millions of dollars over the next year, amortizing that over the next 3 years so there is significant start up costs in implementing that program in the first quarter of this year, but we do expect that as those displays get out, they will generate additional revenue that will more than offset the cost of the displays going forward.

So, I'm a little confused on that. The capital cost will be about how much, amortized over three year it will be?

It will be in the 10s of millions of dollars.

10, 20.

I would read 10s of millions as being more than 20. vugach: OK, thank you, Richard. operator: Our next request will come from Jason Putman with Credit Suisse First Boston. putnam: Hi, good morning Richard. First I'm not sure if I understood what you were saying in response to Bud's question, but as far as our earnings guidance that you have given so far, what type of internal sales growth does that correspond to for the year? manoogian: Well, it would correspond to internal sales growth to the mid to high single digits. putnam: Second question relates to the key retailer sales. Now, so far in the first six weeks of the year, have you seen change in that, or is that still in the 3% range since your, it seems like your normal internal growth rate has remained relatively steady. manoogian: As you probably know, our customers don't want us to discuss how their business is going to any extent, but I would just tell you that the trend that we saw in the fourth quarter is continuing into the first quarter. Although I would also mention that January, we had a pretty good January, even though the weather in January was pretty tough in terms of cold and inclement weather around the country. putnam: OK, fair enough. And next question relates the cap ex. Looks like your capital spending for the fourth quarter really jumped up quite a bit. And maybe it's just due to timing, so could you just give us a little bit color there and also what your projections are for '03.

Yes, I think that was more a timing function than it was any change. We are projecting around 3 hundred million dollars in capital expenditures this year, which is pretty much in line with last year when you factor in we have had some additional acquisitions, about 3% of even less than that sales this year and depreciation and amortization ought to be around 245 million up from about 220 million last year. putnam: Okay. And also on the acquisition of Hans grohe, when did you begin to consolidate the results? Was it in late December when you actually took it up to them? manoogian: No, we picked up Hans grohe on the balance sheet at year end but we picked up no sales in December. So their sales contribution would begin impacting us on January 1 and I should mentioned, by the way, just to clarify the accounting treatment of that. We increased our ownership from 27 percent to 64 percent. Once you go over 50 percent, you have to consolidate the balance sheet and the total sales of the company and then effectively only pick up 64 percent of the earnings by having a minority interest deduction that I believe flows through other income. So going forward we'll be reporting all of the Hans grohe sales and the net impact on us will be -- will increasing our pro rate (ph) of share of their earnings to 64 percent of earnings.

Is there an expectation to increase the ownership percentage to 100 percent or is that not really an option?

From the balance -- the balance of the ownership is largely held by management and their family members, which we consider to be a positive and I think, you know, somewhere down the road we may increase our ownership further but that really -- it would be something that we would be deciding with the family.

OK and then really just lastly, the share -- the acquisition guarantees in the share count. Can you just go over that and really talk about maybe, you know, for every dollar change in the stock price, how that's going to effect your share count.

I'm glad you asked that because that is a little confusing. We have presently 35 million shares that we have issued in past acquisitions that have a guaranteed tie to them. At year end, when you stock was a little above $20 a share, the aggregate additional guarantee we had subject to those guarantees totaled $400 million. So under accounting rules, what we have to do is we have to assume all of that $400 million is met by issuing stock. So, in that example, the $400 million translated into 20 million shares of Masco stock, which was added to our shares outstanding at year-end and, obviously, diluted our earnings per share. The 35 million shares that are contingently guaranteed, effectively the $400 million goes up and down $35 million which each dollar change in our stock price.

So if our stock price goes down $2, the 400 goes up 70 million. If our stock price goes up $2, it goes down 70 million and the number of shares is adjusted accordingly. Now in the real world, in all these transactions, virtually all these transactions, we have the choice of whether to pay cash or stock to fill that obligation. At current share prices, we would, obviously, or I think very clearly issue cash instead of stock for these transactions and that dilution would go away. The cash that we pay out does not go through the income statement, does not effect earnings per share and just becomes added purchase price. So the only negative to Masco is the loss of interest on the cash, which these days is only 1 or 2 percent on the cash.

So, as an example, the closest guarantee we have that expires is in the spring of this year and it's also, I believe, our largest guarantee, in aggregate's about $120 million at present prices. We would expect to pay that guarantee, assuming our stock stays where it is today approximately, we would pay that in 120 million in cash, instead of stock, and that would eliminate $6 million shares from our share count and, therefore, you can take 6 million shares times whatever earnings forecast you have for the year. Let's say you pick $1.70 as a number, that would be $10 million of earnings that would be added back effectively, in terms of earnings per share, and it would add about 2 cents a share to our projection for the year.

We have not factored into our projections any payments against the guarantees in terms of those contingent shares being removed. The rest of the guarantees, the next largest guarantee is in the mid 20s in terms of share price, late this year, and most of the balance of the guarantees are in 2004 and 2005, so we still have significant opportunity hopefully to get our share price higher and have some of those guarantees go away or dramatically reduce.

OK, great, thanks Richard. Appreciate it.

Our next question will come from Stephen Kim with Salomon Smith Barney.

Thanks very much. Just a quick follow up on that. So, at the end of the day, for your guidance for '03, the full year, what kind of a share count are you assuming?

We assume that the share count that we had at year end would stay in effect for the full year, so it doesn't take into account the retirement of any shares because of paying them off in cash, and it also does not take into account any share buyback program.

Or movement in the stock price?

Or movement in the stock price, that's correct.

Great, and, OK, next question. The slowdown in starts that you're sort of cautioning that we may see, have you factored that into your numbers? What kind of a slowdown in starts are you talking about here?

We've done our budgeting internally and planning internally for about a five percent decline in housing starts this year compared to last year. We did the same thing last year and we were wrong so I'm hoping we'll be wrong this year as well.

That sounds reasonable though. The two acquisitions you've made, you indicated both would be quote modestly accretive. Could you give us an indication of together, are we talking less than five cents?

I think you're talking very small accretion. Perhaps a penny. The reason for that is, remember that we already own 27 percent of Hans grohe so all we've really done is increased that ownership from 27 percent to 64 percent, so we're only taking up a portion of their earnings.

Great. And, with respect to the new color pallette launce at Home Depot, this is, we have heard you guys talking about this a year ago or so out at Behr, the indication was at that point that that was going to be something that was going to significantly improve your sales through the home centers, could you give us an indication of what specifically about the color pallette will necessarily drive increased traffic or sales and quantify that in some way?

Well these are major displays that are going to include, we're producing the displays and resonsible for getting them to Home Depot, but they would obviously include all of the different paint lines that Home Depot might carry. But I could mention that they obviously display our products even more so than anybody else's and have a lot of features to them, including computerized matching capabilities that you can match the sample that you bring in to the home center. But I think that they're going to make the whole paint department much more attractive. These are very big dramatic displays, and after we train the sales forces to work with these displays it should enhance the overall sales of the paint department and particularly the Behr products.

Great, and then lastly, it seems like it many areas you're sort of baking in (ph) a pretty high degree of conservatism, I mean your estimates, but when you talk about the revenue growth internally in the mid-high single digits, that's pretty much what we're seeing in January, is it not, and that we sort of got the impression that January was a pretty, was kind of a surprisingly good month, so I just want to make sure I understood. Is there somebody (ph) coming on that you think, all things equal would have given you a boost above the current level of sales?

Well, I think January was good month in sales, although in terms of internal growth, it was sort of in line with what I mentioned. But, I think economically, January's a very slow month for our types of business, and the weather wasn't that good, so I'm assuming that January might have been a little understated from what it might have been under normal circumstances.

But there wasn't, like, a shipping days, or something ...

No, no. It was apples to apples.

OK. Great. Thank you very much.

Our next question will come from Frank Donnell with Adage Capital.

Yeah, I have just a couple of questions and a couple of comments. The first comment was I'd like to congratulate you on making all these advances on your working capital. That's really good.

Thank you.

And the first question is, what is the secrecy around this new product launch? I mean, why can't we talk about whatever it is we're launching here?

Well, because we haven't announced it yet, or introduced it yet.

Oh.

So, from the standpoint of marketing and commitments, the product's gonna have a major launch, but we're not prepared to announce it.

So, I think that that's pretty quick between whatever announcement and launch dates. Whatever it is, you're ready to go on the day you announce it or something?

We're already cranked up and producing the product.

OK.

And I guess I -- you know, we wouldn't say it was major unless we thought it was gonna result in tens of millions of sales on an annual basis.

So, are any of those sales baked into whatever your forecast is?

Those are in our projections.

OK. And I guess on the Hans grohe and the PowerShot -- at least, you mentioned at one point six million shares of Masco stock?

That's right. And 190 million in cash and assumed debt.

OK. About what price were we pricing these 1.6 million shares out at?

I believe when they were issued, the stock was trading in around the 20 or a little above, and that would have been the price that was used.

OK. And are there any guarantees on that then?

No.

OK. And one last comment: anything you can do to make shopping for paint at Home Depot a better experience would be greatly appreciated by the consumer.

Well, you know, we do have now nearly 300 people -- Masco people, Masco sales and training people -- doing nothing but working with that department to train their personnel to try to improve the service to the customers. And hopefully these new displays will also accomplish some of that goal.

One of the things I didn't mention, by the way, too, is that Home Depot is coming out with a line of Walt Disney paint that will also be prominently displayed on these new displays, and Masco will be producing that product, as well.

All right. It's just my personal experience going in there; I can never find whatever I want. And then trying to find somebody who can find it for me is not an easy thing, either.

You may want to be on the next Home Depot call.

All right. Thanks. That's it.

Our next question will come from Joseph Sroka with Merrill Lynch.

Good morning, Richard.

In the cap ex numbers that you discussed, does that include Nogard (ph) opening the east coast plant? And that's what we saw announced in some of the trade magazines. Is that the extent of where you're taking Nogard (ph) east at this point? Or, is there some additional capacity to ramp-up for '03?

That would be included. You're correct. And I believe Nogard (ph) is doing some additional expansion and activity in the first quarter of this year, and some of the additional costs we're incurring are partly that, too. And I don't want to overemphasize unusual costs, because some of these costs are costs that typically you'll have at various times as you expand your business. So, we really only wanted to highlight the ones we thought were really unusual; the vesting of all the stock awards related to Ray Kennedy's passing, and the major introduction of a new product and new displays are really two major programs that are not typical for something we would normally do.

OK. And then, to get a feel for where the level of concern is that may be expressed in the press release, would you be more cautious on housing, or more cautious on home improvement and the consumer? Where is your level of comfort?

I think I'd be a bit, in terms of probability, I'd be a little bit more concerned about housing dropping off 5% but my hesitation on the consumer is largely energy driven. If energy prices stay where they are or increase significantly, I think that will have some additional impact on consumer spending across the board and as I said, we saw that hit back in 2000 and 2001. Now those energy prices were much higher back then.

As I recall, energy shot up to 40 dollars or more a barrel. Natural gas prices, I recall, went to 8 or 10 dollars per million cubic feet, whereas right now, we are only around 5 dollars or 6 dollars so we are substantially higher. But if we see that kind of impact for whatever reason, then I think there will be another fall in consumer spending.

Okay and I think also maybe simultaneously when that was happening, some of your key retailers were cutting back inventories but you alluded earlier that you thought that channel inventories were probably normal or maybe even slightly low so is that something you might not be as certain about? shirker: No, it was the perfect storm last time.

I don't think that would be the case this time because I think a lot of retailers were caught unprepared when that happened, whereas I think they have been running with fairly tight inventories during most of 2002 and where we have point of sale information, if anything, our point of sales are exceeding our sales to the customers so that tells me that inventory maybe coming down rather than going up.

Okay and then just lastly, the follow up on those issues with what you are and are not assuming in the share count for 2003. When you said you assumed it would be what it was at the end of the year do you mean what your fourth quarter average was? Or a number slightly lower than that to account for the repurchase activity in December?

No, we assume the same fourth quarter; I believe it was 528 million shares.

Right, the fourth quarter average is what you are saying you----

Right. shirker: Okay. Excellent, thanks.

And that again, does not include, frankly, any buy back, even as of January 1 and obviously we bought back some shares since then.

Okay. So you are accretive already?

That's right.

OK.

From Barbara Allen from Natexis Bleichroeder our next question.

Thank you. Richard, could you bring us up to date on what your capital structure goal is for the end of '03 and maybe '04, what you are aiming at?

Yes. And I think as I've said a number of times, one of our goals is to see a credit rating upgrade on Masco we're presently triple b plus and we have said that we want to see an upgrade to either A-- or A within the next two years and that's been a bit of a retardant in terms of how many shares we repurchase from a balance sheet planning standpoint.

I think though, that we have been pleased with the cash flow that we have had in the past year and with the balance sheet management that we have been able to do, working capital and otherwise and therefore, I think in this environment, we can afford to be more aggressive on share buy back and still aim at meeting that goal of a credit rating upgrade and to achieve that, bottom line, I think we have to get our debt equity ratio, debt as a percent of capital, down into something like the mid 30s from the present 46, 47% that we are at.

Now I should mention that the 46, 47% does not reflect in any way the company's liquidity and we do have, as I mentioned, a billion dollars in cash, substantial marketable securities on top that, so that really, you could argue that our real debt is perhaps lower than the number we are showing.

And then I wondered if you could clarify for me, in your comment on key resales going into '03, you mentioned it was essentially like the fourth quarter but, are we talking about the strong December that you referred to or were you talking about the full quarter and did the key retailers also have a strong December?

Well, again, you obviously know that one of the major retailers is a major customer of ours and our customers do not like our saying to much that might reflect on what their business is or isn't currently. So what I was referring to is that the drop that we had from 19 percent growth in the third quarter to 3 percent growth in the fourth quarter, you know, that kind of a change has continued into the first quarter of this year and not really making any additional amplification on whether customers are doing a little better or a little worse than last year but I would just say that the trend that we ended up with at year end is the trend that has continued into the first quarter.

Have you -- where do you stand on price increases? I know normally you institute some in your faucet business at the beginning of the year. Did anything happen?

We did have a modest increase to some customers in faucets at beginning of the year and, again, I would say, if you take on average for all of last year, all of our products, we feel we were relatively flat to perhaps up 1 percent and that would compare, again, with most of our peer groups showing negative pricing comparisons and I would expect we would be probably relatively flat on a comparable basis for '03 in pricing against '02.

OK. I wondered if you could amplify a bit on the comment you had about stronger sales to non-retail customers in the fourth quarter. Who are they and what's driving and if there's anything in particular?

The point I was trying to make, which I might not have done it that well is, that what we try to do is have our products in all channels of distribution. So if a customer goes to one particular retailer and does not buy it at another retailer, hopefully we're covering our products in all the retailers or conversely, if a customer decides not to go to a retailer but wants to go to a kitchen distributor or a plumber or anywhere else in the channels of distribution, again, we would cover the product through those channels. So what might happen in any one channel or any one customer does not always reflect what's happening in the market place.

Conversely, the other thing to think about is that, some of the major home centers have grown dramatically at the expense of other customers, other channels of distribution and in periods when a home center is not growing as rapidly, that probably means that we're not losing as much business in other channels as we used to when that retailer was taking it away from those channels. So you can't look at any one customer or channel and translate that into Masco because we have much more of a balancing impact on our business from being in all these different channels.

I think that's a very good point. Thank you.

Thank you, Barbara.

Armando Lopez with Morgan Stanley has our next question.

Hi. Good morning, Richard. Most of my questions have been answered. Just a quick one. In terms of FX (ph) , I missed, how much did that impact sales and profits in the quarter?

Foreign exchange?

Yes.

I believe the blend of currencies that we would deal with, Germany's our most important currency, the euro, and the pound, English pound, would be the -- or UK pound would be the second one and if you take a blend of those currencies, they were up about 10 percent approximately from a year ago. So if you take our total sales and say total sales are up about -- international sales are about 15 percent of the total and that's up 10 percent, then, in effect, that would add about 1 1/2 percent to our total sales growth because of the effect of currency.

OK. And then, in terms of the working capital, you guys have done a great job at improving it there. How much more opportunity do you feel there? Like what do you think you can get that to as a percent of sales?

Well, we think there's still room for improvement. I think one of the things that is particularly noteable on the progress we made last year was that we did that while absorbing a major increase in terms from one of our major customers that went from 30 days to 60 day payment terms. That one customer alone cost us $150 million of additional accounts-receivable, and even with that we showed an improvement in working capital. So we think there's still significant room we can go, particularly on payables, and also in Europe, we have major programs underway in Europe to also improve their working capital in our European operations. So we still expect some nice improvement during the course of 2003.

OK. Alright, thank you.

David Jerow with T. Rowe Price has our next question.

Hi, congratulations on a good quarter.

Thank you.

Just a couple of question. You announced how the cash flow was. Could you just talk a little about what the operating cash flow was or what the free cash flow for the year, as well as, what is the Euro assumption behind the earnings outlook for 2003?

What was your last question David?

The Euro assumption?

Oh, Euro assumption. On your first question, I don't have the numbers right in front of me but you may remember that we originally projected that we'd have about 600 million of cash flow for dividends in 2002, and our final number really is coming in at 200 million or more than that, now in fairness, some of that is one time in that we had charges last year, such as the Behr litigation, where we reduced earnings but we didn't make the payments. And those payments would be made in future periods.

But, having said that, we still look for additional substantial cash flow this year probably in excess of 700 million dollars, again, for dividends. In terms of the currencies, for our budgeting and planning purposes, we're using pretty close to about a dollar for the Euro, which is, frankly, about seven percent below where the Euro is today. The Euro has had a big run-up from 85 cents to about $1.08. I think there's a good chance the Euro is going higher, but again, for our budgeting purposes, we've used a lower than prwesent number.

One follow-up question, Richard. I see you were very aggressive in Q4 and by my q stocks (ph) been very aggressive in January. The stock price has sort of come under pressure here. Given the fact that you have 1.4 billion dollars sort of cash in markable (ph) securities, cash has been very strong, is there any reason to believe, or do you de-accelerate the rate of share purchase activity going forward?

Well, I would think that one of the things that we've said in past calls is that, particularly in the last call, that we've done a lot of acquisitions over the last four or five years since 1996 to make ourselves stronger in terms of serving the markets that we serve. This partially offset the building of strength of both the service and offset the strength of consolidation of our customers at home builders and at home centers. We think we've accomplished a major part of that. There are still interesting companies, still interesting opportunities, and I'm sure we'll continue to make acquisitions, but all things being equal I would be surprised if our rate of acquisitions growth in the next few years is not less than it has been in the last few years. That results in a lot of our cash flow being even more available, and with the strong balance sheet we have now and with our share price such that we can buy our own shares at less than we would buy acquisitions at, I think you would just make an assumption that a lot more of our cash flow would flow into buyback than would have done historically.

OK, that's great, Richard. Thank you very much.

Our next question will come from Stephen East with AG Edwards.

Hi. Good morning, Richard.

Good morning.

Just a couple of last questions here. On your installation business, your core growth was about three percent; a little bit weaker, I guess, than I was expecting, given your focus on really trying to partner up with the large builders. Can you give us an update there and tell us why you think it was the rate that it was? And what do you think in '03?

That's a good question, and it was around three percent internal growth. It was up substantially, including acquisitions. But, that was about the same growth rate we've been showing for the past quarter or two. And as we've said before, the primary reason for the low number is that there has been a significant reduction in cost of material over the last few quarters, and we have passed that reduction on to customers. So, the unit increases would be much higher than the three percent that we're showing.

In addition, I might add, that we now get over 20 percent of our sales -- approaching 30 percent, I believe -- coming from non-insulation products. And the sales increase of those products and services was up double digits in the fourth quarter, as it's been in previous quarters.

So, I think we're continuing to do very well in that business, and the small increase is a little misleading.

OK. When do you think you started annualizing those debt price deflation?

It really partly depends on what the suppliers are doing. There's been some preliminary price increases suggested by customers -- or suppliers, rather -- in recent weeks. So, I'll be very surprised if by the end of this quarter you don't see that -- whatever the impact of that is -- being anniveraried.

OK. And then, do you think you're seeing a meaningful change in your per house content on installation associated with the large builders?

Yes, it's going up. As you may remember, we now have 12,000 Masco full-time people in the field doing service and installation work out of 400 branches. We have teams working on over 60 percent of all the homes built, single family homes built in this country. If you take the major builders, our average with those builders is actually below our national average. And we see a lot of opportunity and have already had some success and are working on some additional agreements to increase what we're doing with the major builders as they consolidate. So, that should be a positive for us.

OK. And just a different subject. You said that the POS data appeared to be trending ahead of your shipping date.

Right. From the customers that we get that data. We don't get it from all of our customers.

OK, OK. Meaningfully different, and if so, historically, how long have you seen those dichotomies exist there?

I would say that usually if in 30 to 60 days, whatever's happening on inventory levels within the store versus out the door sales, if at the end of 30 or 60 days they usually compensate and get them back on track. So, if some of our customers weren't doing well in the last month or two, I would think that the bulk of that impact would be behind us by January, February.

OK. Thanks a lot.

Our next question will come from Dennis McGill (ph) with Credit Suisse First Boston Investment Bank.

Actually, it's Ivy Zelman. I guess Dennis dialed for me. Hi, guys, and my deepest condolences with Ray's passing.

Thank you, Ivy.

You know, I think that you've really done a great job, Richard, in talking about the current environment, and I think that, you know, some of the things that come to mind after listening to everyone and all the questions -- a few just small items. I think with respect to the channels of distribution, you know, I think I have it, but if you can just give us at the end of 2002, what percent would be new construction, sort of break it down and assumingly, it hasn't changed much, but just an update please.

I don't have that in front of me, Ivey, but I would say that with the recent acquisitions we have had, new construction is probably up around 40% of our total sales, retail, all retail would probably be in the 25% range and the balance would be represented by other channels of distribution.

OK. Two step wholesalers?

They would be in that second category.

They would be in all retail?

No, that would is non-retail, that would be in the other balance of the percentage.

OK. There has been some concern out in the, I guess, in the investment community that Bear Paint and Home Depot is getting some pressure from Home Depot on pricing. Can you tell us if that rumor is not true?

Well, I can't comment on our pricing activities, you know, with any customer but I have to tell you that's the first of heard of it.

OK. I guess one of the things that's talked about a lot right now is how much product is sold from inventory?

I would just qualify that with we do periodically do promotions, as you know, with our customers on specific product lines and in the past, we have done a number, as a matter of fact, I think we have done quite a few more promotions in the last year or so with Bear, with Home Depot, so at any given time, we might be doing a promotion. We don't see that as a price decrease, the reason being that typically the promotions have generated incremental volume which has more than paid for the cost to have the promotion and so we have lined up with higher sales and earnings by having the promotion.

Okay. Inventory. Realizing a lot of your products are sold, made to order, craft made, for example. Do you have any idea, maybe you can tell me at a later time, if you can't answer it, but what percentage of the portfolio of the products that you sell are really sold from inventory as opposed to made to order? Any ballpark on that?

My quick recollection is I think cabinets are only thing that we would really produce to order. Now what we have done is tried to automate some of our operations like faucets to where we might only be semi--finishing products so when an order comes in, depending on a style or finish, we can finish the order, but the product has already largely been manufactured so I don't think there are too many other products than cabinets that we literally produce to order.

And what we percent today of your manufacturing is outsourced from low cost countries, do you think?

We are increasing that. We have a team now that works now on nothing by outsource, particularly in China, we are expanding some of our Chinese operations. We have a faucet manufacturing plant in China so we do have extensive capabilities both to produce as well as to outsource or produce components but, frankly I don't even have a percentage, but it is an increasing percentage and I think we are working at that pretty hard to keep our costs down at a competitive level.

Do you think that there are opportunities right now with major customers like Home Depot, Loew's, Wal--Mart looking do more direct business overseas an low cost countries in the far east----

Well I think the threats for all manufacturing companies is that as part of the consolidation process that's going on, if your customers get big enough, sometimes they can go direct and buy their product offshore. Now, then it really depend on the emphasis they are putting on brands versus house brands and that varies by major customer. But part of the our philosophy has always been, that if a product can totally be made offshore and brought into this country, sooner or later your customers will go and buy it and bring it in directly and, therefore, do you really bring value to that product and in some cases the answer to that is yes but in many cases it's no and so our philosophy has always been to try to stay with products that for one reason or another that's less likely to happen and that's been part of our basic strategy because otherwise I think you would see a continued deterioration of margins.

As an example, something like cabinets, where there are so many SKU's and where delivery and installation become such an important part of the equation, it would be difficult for a customer to import that product directly. On the other hand, we see a lot of finished products in retailers that are imported directly and in those I think domestic manufacturers would have very little profit margin left because sooner or later that customer might go direct and it's something we work at a lot and think about a lot.

Do you think that there are opportunities, like you're doing the Walt Disney brand for Home Depot, that you see more opportunities to actually be the manufacturer for house brands?

I would say that . . .

[Inaudible] growing opportunity.

I would say that in many of our product areas we have offered house brands and in more cases than not, they wanted to stay with our well-known brands. Now as an example in our faucet case, we've offered house brands to most of the major retailers and very few of them want to go to a house brand, they'd rather keep the brand that's known to the trade and is well recognized by the consumer in the trade.

Yeah but that's not, I mean . . .

In the case of Behr, you could argue that Behr is a house brand because that brand is only available to that one customer.

Right but in your own example of faucets, it's not as if they're going to, you know, completely eliminate a Delta but Glacier Bay has taken square feet in the faucet isle. Why can't you be the manufacturer for Glacier Bay? Are you just not in a cost position to manufacture it as cheep as Glacier Bay's offering it?

Well, as a matter of fact, we have some faucet lines that we import and offer to our customers as house brands. So we are doing some of that. We are not doing a lot of it, primarily because it's just not that attractive to us in terms of the margins that we can earn and I have to separate us from other companies. Our goal is to have well above average margins, double the average company. So that may appeal to somebody with low margins but if our goal is to have high margins, high return on investment capital, we have to continually look for products where that's less app to happen, where we can maintain those margins but we are doing some of that and I would imagine we'll probably do even more of it in the future.

Thank you, Richard, for that. You know everyone talked about sales and, you know, earnings guidance for '03. No one asked about margins. Can you give us an expectation of what you've built in for '03?

I would say -- I would say that the guidance that we've given has relatively flat margins as part of that guidance. Now in fairness, part of that is because of product mix. As our sales of cabinets and installation go up, as a percentage of sales, those typically are mid teens products as opposed to high teens and, secondly, we made a major acquisition late last year, which has relatively lower margins than our corporate margins. So when you factor all that in, those would normally bring our margins down, not on an operation by operation basis but just in terms of aggregate and even when you factor that in, we're looking for probably relatively flat margins which means that a number of margins would be increasing internally.

What about installation services? What margins and where do they fall in the mix?

Well I think -- I think you're focusing on return on sales and, obviously, that's been an important number for us. We are increasingly focusing on return on invested capital and return on assets. Our return on assets now and installation is running around 70, 80 percent of working capital and actual operating assets, excluding good will. Our corporate average for all return on assets excluding goodwill last year went up to around 39 percent, which I think is a tremendous number, so we're really focussing on where do we get the maximum return on our investment, and sometimes that results in high returns on sales, and sometimes we're a bit lower returns on sales, depending on the assets involved.

Richard, I'll ask only one more question for time. But, no offense, Richard, but people don't exclude goodwill in the calculation, and I think it's a big sore point in the investment community, number one, that you exclude that in the calculation, because, realizing, compared to your peers, you have the lowest return on capital because of all this goodwill on the balance sheet?

Yeah, that's very fair Ivy, we put the numbers out both ways, and the only reason...

What is the board, what is the board and what is the board and what do you and management tend to do about, I don't know if there's an answer, but looking at all that goodwill, are there going to be write-offs associated with that goodwill, you've got lots of contingent liabilities if you include those liabilities, I mean, it's pretty ugly relative to your peers, and this is a big issue I think with where the stock is trading.

Well, you know, that's a fair comment. We look at our good will every year, we just looked at it again at fourth quarter, and we didn't find anything that needed to be written down in terms of goodwill write-downs. But that is the price we paid for going from a two billion dollar company to a $10 billion in terms of making all those acquisitions, and our feeling is that we will show a payoff for that because of what has net-resulted in the company that we are. Having said all of that, I agree with you, we now have to translate all that time and effort and all that investment into returns more along the lines you're talking about, and that's where I think you'll start seeing this year, and the next few years, the kinds of returns you would expect for all that investment, including goodwill, and that's our goal.

I hope so. Hans grohe and Power, I'm sorry I forget the...

PowerShot

was there a lot of goodwill associated with those acquisitions?

I think there would be, but again, you're not talking about a major investment in terms of aggregate investment from the standpoint of our overall company.

OK, but you our focused on returns and realizing you do look at it including goodwill and that's a big opportunity right now.

Absolutely.

And you expect it to improve?

Absolutely, that's our goal for the next few years.

Alright Richard, great, thank you.

We, in the material we put out, we show that operating profit improved to 19.7 including goodwill from 17.4, so we do put that in a lot of our data we put out.

But are you amortizing goodwill still?

No. We are not amortizing goodwill, and if you would amortize goodwill that would have reduced our earnings by probably around 14 15 cents a share, approximately.

OK, thank you.

OK, operator, we have time for maybe one more question.

OK, and that question will come from Charon Kahan with Wellington Management.

Hi Richard, how are you?

Good, how are you?

Good thanks. I guess some of my questions have been answered, but I just want to go back on the share buyback issue, and I guess as a shareholder I'm frustrated, because I think you've made your numbers, and the working capital seems to be improving, and that's good news, but I guess what's frustrating is just the constant flood of new equity in terms of acquisitions that you've done, even at the $20 level, which I think is surprising, because on the one hand you're saying your stock is undervalued and then we continue to see more equity being issued, and I'm just wondering if you move forward, I think that these...

I'd just like to mention that I think that you're referring to the 1.6 million shares? We had to do that for certain tax reasons related to the sellers in the transaction, and as I say, our goal was to quickly buy those shares back in terms of buyback. So that was more of a mechanical thing that had to be done.

But Richard, even in terms of other acquisitions, these share price guarantees seem to cause a fair amount of confusion. And I guess the lower your stock goes, you know, it causes more concern, even though, you know, frankly, it's not a huge amount. And I'm just wondering, in the future, you know, when you're doing acquisitions, why not just pay a price in cash, and then, you know, just walk away, rather than issue so much stock and give these guarantees which cause confusion later?

Well, I think the primary -- and that's a fair question, because I think the primary reason we did that was that we wanted to maintain a certain balance sheet as we were doing these many billions of dollars of acquisitions. And if we had done all cash, today our balance sheet would be so debt heavy that you probably wouldn't want to buy the stock, and we wouldn't be able to do any share buybacks. So, you know, there was a balance that we had to undertake.

So, what is the plan in terms of acquisitions in '03? I mean, are we gonna look at, you know -- can you give us a round number in terms of, you know, how much we should expect in acquisitions this year?

Well, it's very hard to give a set number on acquisitions because, obviously, they are opportunistic-driven. But, what we have said on previous calls is that if our long-term goal was to grow between five and ten percent a year on incremental sales through acquisitions -- and we've averaged the 10 percent or more the last few years -- I've said that I would expect we'd be closer to the lower end of that range for the next few years, all things being equal.

OK. And just one question on the working capital. You know, I see that, you know, your working capital is based on annualized sales for the quarter. And I may be a little bit ignorant here, and maybe you can help me out, but shouldn't we be looking at, you know, inventory levels and receivables, and then, you know, basing that off of that trailing fourth quarter sales, rather than annualizing the latest quarter?

Yeah, I think we do do that. I think we do do that in the calculation.

OK. So, you're looking ...

I'm not certain of that, but I think the reason that we try to annualize it is to take out seasonal factors that also come into play in an individual quarter. But, if you called in later, we'll get that specific information for you.

OK. Thank you, Richard, and everyone else.

OK.

Yeah, operator, I would just say we appreciate everybody for taking all the extra time to be on the call. And we look forward to hopefully reporting very strong earnings as the year progresses in 2003. Thank you very much.

Thank you. That concludes today's conference. We thank you for your participation.