馬斯科 (MAS) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2003 second quarter earnings conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received the press release and supplemental information they are available on Masco's website at www.masco.com.

Statements in the following discussion may include certain forward looking statements regarding 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 changes in consumer spending and other factors over which management has no control.

Additional information about Masco's products, markets and conditions which could affect future performance is contained in the company's filing with the Securities and Exchange Commission. The financial and statistical data referred on this call is included in the investor packet distributed prior to the conference call and posted on the company's website at www.masco.com under the investor relations section.

In addition, we may refer in this call to non-GAAP financial measures as defined by the S.E.C.'s Regulation G accordingly. A reconciliation of the differences between such measures and the most directly comparable financial measures calculated in the accordance with GAAP is included in the investor package.

After a brief discussion by management, the call will be open for analysts questions. If we're unable to get to your questions during this call, please call the Masco Corporation investor relations office at 313-792-6646.

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

Thank you, operator. This morning, we released our 2003 second quarter earnings. We are pleased to report that sales and earnings for the second quarter were the highest for any quarter in the company's history.

Net sales, aided by acquisitions, increased 20% to a record $2.8 billion compared with $2.3 billion for the second quarter of 2002. Our North American sales increased 15% and international sales increased 54%.

Excluding acquisitions and divestitures, second quarter 2003 consolidated net sales increased 7% compared with the second quarter of 2002. North American sales increased 5% and international sales increased 18%. In local currencies, international sales decreased 1% compared with last year.

Given the economic challenges in the second quarter, including adverse weather conditions and certain markets and higher energy costs reducing consumer disposable income, we are pleased with the company's internal growth rate of 7% during the quarter. This rate of organic growth compares favorably with most of our peer groups.

We reported net income of $230 million or 46 cents per common share above the company's previously forecast earnings guidance of 43 to 45 cents per share.

In the second quarter of 2003, the company recorded a noncash, pretax charge which reduced operating profit by approximately $23 million or 3 cents per common share after tax with respect to a European business operation in our decorative, architectural products segment. The charge resulted from system failures at the operation during efforts to convert to a new business system in 2001and 2002 and the units' management inadequate response to the problem.

The failures primarily impacted the accurate recognition of cost of sales of the operations over 20,000 sku's of product manufactured and supplied by its subsidiaries and third parties in Asia with a corresponding misstatement of certain balance sheet accounts. We have implemented corrective action to prevent this situation from occurring at this unit in the future including replacement of members of its senior management. We are also implementing corporate procedures to reduce the possibility of this type of situation occurring at other locations.

While this unit remains profitable, the company is continuing to analyze the operations profitability and cash flows to determine if any impairment of assets exist including a portion of the goodwill. This 3 cents second quarter noncash charge was partially offset by a net gain of 2 cents per common shares from the sale of marketable securities and other investments in the second quarter.

Gross margins were 30.6% in the second quarter compared with 33% last year. Operating profit margins decreased to 14% compared with 17.1% in the second quarter of 2002. Excluding the pretax charge related to the European business unit, gross margins would have been 31.4% and operating margins would have been 14.8%.

Second quarter gross margins and operating margins were adversely affected by reduced sales caused by weather conditions in certain markets and increased energy, insurance and pension costs, higher promotion display costs, higher foreign currencies resulting in increased international sales with lower margins, product mix and relatively higher sales in product segments with somewhat lower margins and recently acquired companies with lower operating margins. We do expect significantly better operating margins in the second half of this year.

Total SG&A expense in the quarter, as a percentage of sales, was 16.7% compared with 16% last year, reflecting increased promotional selling expenses and increased pension and insurance costs. Our general corporate expense was 1% of sales in the second quarter, the same as last year.

Our segment sales for the quarter were; cabinets and related product sales were up 9%, plumbing product sales were up 31%, installation and other services sales were up 47%, decorative architectural product sales were up 7% and other specialty product sales increased 14%. Particularly strong product sales during the quarter included assembled cabinets at retail, installed sales of non insulation products, paints and stains and vinyl windows.

Our key retailer sales growth continued to show sequential improvement in the second quarter. Our sales growth with key retailers increased 6% in the second quarter compared with 4% in the first quarter of this year and 3% in the 4th quarter of 2002. Combined sales to Home Depot, Lowe's and Wal-Mart, our three largest retail customers, increased by approximately 6% in the 2003 second quarter compared with 3% increase in the first quarter of 2003 and an 11% increase in the year ago second quarter.

Our tax rate was 34.8% in the second quarter compared with 34% last year. The rate increase is principally the result of recent acquisitions increasing the proportion of domestic income which is generally taxed at higher rates than foreign income. We anticipate that our tax rate for 2003 will continue to approximate 35%.

Inventory days improved to 58 days at June 30 compared with 60 days a year ago. Accounts receivable days at the end of the second quarter improved to 53 days compared with 57 days a year ago and accounts payable days at the end of the second quarter improved to 32 days from 26 days a year ago as we continue to negotiate more favorable supplier terms. Working capital at June 30, defined as accounts receivable and inventories less accounts payable, improved to 22% of the last 12 months of sales from 23.4% a year earlier.

For the 12 months ended June 30, return on invested capital as reconciled increased to 11.1% compared with 10.8% for the period through June 30, 2002. We are putting much greater emphasis on return on invested capital. Our goal is to increase our return on invested capital from the current approximate 11% rate to 15% within the next three to five years which would put us in the top quartile for all manufacturing companies. Our Board of Directors has recently adopted return on invested capital performance as an added metric to determine management's compensation.

Our cash flow and balance sheet continue to be strong with approximately $1.1 billion of cash and marketable securities and $2 billion in unused bank lines at the end of the quarter. Debt as a percent of total capitalization was 47% at both June 30, 2003 and the end of the first quarter.

During the quarter, we completed the sale of our 42% equity interest in Emco Limited for cash proceeds of approximately $75 million. The sale resulted in a pretax gain of approximately $5 million.

The company repurchased approximately 9 million common shares during the second quarter of 2003. During the first six months, approximately 23 million shares have been repurchased this year including approximately 2 million shares for long-term incentive compensation plans.

Since the end of the second quarter, we have continued our share buy back program and in July repurchased an additional approximate 2 million shares. We currently have approximately 26 million shares remaining under the existing share repurchase authorization.

We also announced today that the Board of Directors has expressed its intent increase the quarterly dividend in the fourth quarter by 14%, a larger increase than in recent years, from 14 cents to 16 cents per common share. The new quarterly dividend reflects the company's favorable long-term outlook, strong balance sheet and cash flow and recent tax law changes and would make this the 45th consecutive year in which dividends have been increased.

In early July, we announced that Masco had signed a letter of intent providing for the purchase by the Black & Decker Corporation of our Baldwin Hardware and Weiser Lock businesses. Baldwin and Weiser had combined 2002 net sales of approximately $250 million. This transaction is expected to close in late 2003 and is subject to final negotiations of a definitive purchase agreement, necessary regulatory clearances and approval from the Board of Directors of both companies. We expect to realize a gain on this transaction.

Our favorable sales performance has continued early in the third quarter with July sales up approximately 18% and internal sales growth in the high single digits. July double-digit sales growth occurred in paint, windows and assembled cabinets and I might add that this strong trend is continuing in August. This Monday, Craftmade, our cabinet division, had the largest single order day in the company's history.

Based on these current trends, the company anticipates that its earnings per common share for the third quarter of 2003 some approximate 48 to 51 cents per share. We continue to expect to achieve record sales earnings for the full year with full year earnings in a range of $1.68 to $1.72 per common share, modestly higher than our previous guidance.

As I mentioned at our recent investor's conference, during the past six years Masco has invested over $10 billion in acquisitions, capital expenditures and new product development to build the unique critical mass that we considered important to give us a strong position in the market place and increase Masco's importance to our customers. We now have a range of products and services that we believe are unmatched by any other company in our industry. Our focus on acquiring and building leadership companies has resulted in 90% of our sales being represented by products and services that we believe are number one in their respective market niches.

Now, we are intensifying our focus on leveraging the critical mass that we have achieved to build greater value for our shareholders. Going forward, we will have a more balanced growth strategy of internal growth, share repurchases and a slower pace of acquisitions with increased emphasis on cash flow and return on invested capital. We are determined to do everything possible to accomplish our long-term strategic goals which we believe will translate into improved returns for our shareholders.

Now, operator I would be happy to answer any questions that people might have.

Thank you, sir. If you would like to ask a question, you may signal by pressing the star key followed by the digit 1. We will proceed in the order that you signal us and take as many questions as time permits. Once again, that is star one to ask a question. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will take our first question from Bud Bugatch with Raymond James.

Good morning, Richard.

Good morning, Bud.

Cabinet margins were just terrific in the quarter, I think 15.2%, up well over what they were in the first quarter and above last year. I recognize with Craftmade having such outstanding performance, where can those margins go?

A couple things I would mention, first of all, in the first quarter we did have plant relocation costs that lowered margins somewhat but having said that we continue to gain efficiencies, cost reductions from some of the plant consolidations we have done in the past and I think we are very pleased with our current level of margins.

Having said that, I think we have historically said that having margins in the mid teens is probably an outstanding performance for the cabinet group and I wouldn't assume that those margins go significantly higher than that number.

Alternatively, even excluding the you European issue, the decorative and architectural margins were dropped and, I guess, probably because of those promotional rollouts you have got with two major retailers. When will we see some margin improvement, when do those margins start to return to what they have historically been which have also been eye popping?

Referring to the decorative products margins, particularly part of the margin decline in the second quarter, as you did mention, was impacted by the fact that we had major roll out of displays in the first quarter and then we encouraged some going forward cost related to. But probably the biggest single factor in that quarter was also the fact that weather, particularly affected our paint sales, particularly in the beginning of the quarter.

Second quarter is normally a high exterior paint quarter and because of the rain, particularly in the east, we lost some of the exterior paint business that might be deferred until next year, some of that we'll pick up during the course of the year but a fair portion will be delayed until next year and the incremental margins we lost on that business would have affected our profit margins.

I should add that our current business is very strong, our paint business in July and June were both up double-digits. I might just add that this week "Consumer Report" magazine is coming out with an article on interior paint and they do rate Behr number one in the country in terms of overall performance and quality. So, given that, we are very pleased with the current position of Behr and I think our July sales were up over 20%.

So, we are very encouraged with current business but I think that did have negative affect during that quarter.

Well, comparing to last year's third and fourth quarter where you do get seasonal drop off in margins, can you get back to the same margin levels of last year or with additional expenses that not likely?

In terms of the overall company, we did see a margin decline for a variety of reasons including the unusual items you mentioned as to the European situation and the charges we took on Ray Kennedy's passing in the first quarter but we are looking for a significant pick up in second half margins compared to the first half.

For the year as a whole, we are looking for margins to be down a little over a hundred basis points which would be better than we experienced in the first half. If you look at some of the items we mentioned in the past, we have said that we are looking at energy costs as if they stay at present levels to cost us about $50 million directly and indirectly, insurance and pension costs are up $50 million and, if you add to that, some of the acquisitions we have made at lower margins, as well as the fact that with higher foreign currencies we are picking up higher foreign sales at lower margins, all of that alone represents about 120 basis points decline in margins for the year.

So, those few items alone would represent virtually all the margin decline. We are not experiencing margin decline overall due to pricing pressures or cost pressures beyond normal, besides energy. So it is a margin decline but I think there is good reasons for it and we would expect to recover some of that in future years.

Finally for me, when will you finish evaluating the European issue and what do you think the ultimate impact could be on your assets or goodwill?

We have about $150 million of net assets in that operation. That operation, by the way, has annual sales of a little less than $100 million.

One reason for the large assets is that the company has over 20,000 sku's and literally thousands of customers, so that typically they have some more assets than the average company might and we are taking a hard look at all of those assets and I would guess in the next several months, we'll make a judgment as to whether there is any evaluation questions on any of the remaining assets including goodwill.

How much is the goodwill?

The goodwill would represent about 90 million of the 150 million.

Okay.

I might just also mention, though, that if we do have any noncash charges related to that operation remaining related to assets, there is also some expectation that we will probably have some on noncash or rather some offsetting benefits.

We do expect additional insurance recoveries in the last half of this year related to the Behr litigation and if the Baldwin transaction takes place, we do expect a significant gain on that transaction.

Okay. Thank you, Richard.

Thank you. Moving on we will hear from Ivy Zelman with Credit Suisse First Boston.

Good morning, Richard.

Good morning, Ivy.

Just to elaborate a little bit on Bud's question where he is indicating margins and expectations, are you saying that if it wasn't for that 150 basis points that we're beyond your control of forces that year over year margins would actually be higher or would they be roughly flat?

Well, if you just take the items I mentioned which were energy, insurance and pension, acquisitions and the foreign currency impact on foreign sales, our margins would have been flat. But on top of that, you know, we have incurred some other special costs such as our rollout of displays and promotions, now that I would consider to be more normal on going businesses. If we hadn't incurred some of those, then margins might have actually been up for the year. So, you are correct in your analysis.

Okay. And also, just simply, are you actually getting in aggregate price increases on an annualized basis?

Our best judgment on a consolidated basis throughout the company, is that we are continuing to run at about a zero to plus 1% net pricing change across the company. Again, probably better than our peer group which typically have negative numbers and I think that reflects the strength of our brand names, our market position, our strong position with customers as well as our market share gains.

Can you elaborate just a little bit on that point in terms of which segments where you would see the best pricing power within the various business units that you are in?

Well, pricing power to me means you might be able to raise prices and I don't want to mislead you by saying we are raising prices. I think we are holding our own on prices and I should have also probably mentioned that new products also help us because we are rolling out a significant number of new products and often you are able to put a price increase on new products, it is a little easier than on existing products.

I would say that that pricing strength is pretty much across the board in virtually all of our major product lines.

So, would that imply that you are not raising prices, but are getting price increases on new products?

Typically, if we roll additional value or features into new products we are often able to price the new products at a higher price than the product it is replacing and effectively get a price increase that way.

Right, but I'm saying that is how you are zero to 1 because of the new products in.

My zero to 1 would have very little impact from the new products in because I think we are holding our own pretty much on products even without the benefit of new products.

Okay, then I'm trying to understand, so, you are holding your own, you are not raising prices but how do you get zero to 1 then, if it is not coming from new products?

Well, we have had some individual price increases in various places within the company.

IE, where, for example?

I would rather not say specifically because of certain customers.

Okay. Moving on, question with respect to goodwill, goodwill increased 160 million and realizing that you haven't had an acquisition, what does that relate to?

The biggest item of increase in goodwill, I think we mentioned previously that we did make a $140 million payment in our Tvilum acquisition and about $100 million of that in the second quarter, about $100 million of that payment related to an earn out provision and, under accounting rules, that earn out provision we have to book when we make the payment. It doesn't affect our profit and loss statement but it did add to the goodwill related to that operation.

Realizing that the contingent liabilities are still out there...

And we also probably had some small installation acquisition, branch acquisitions during the course of the quarter and, also, I believe when we have goodwill in foreign countries we have to adjust that for currency, so if currencies went up during the course of the year, we would adjust the goodwill on our balance sheet related to those foreign operations to reflect the higher currency.

Okay. If we move on we'll move on with respect to insulation services, roughly today, you know, you improved the mix to other than insulation, you said roughly 30, 35% today. Where do you think that number would be on the new insulated-type services, let's say in the next 12 to 24 months?.

The total installed sales of services have been going very well all year but you are right, we have been increasing, proportionally, our sales of non insulation products; that would include products like kitchen cabinets, fireplaces, gutters and a variety of other products, including windows.

That non insulation portion of installed sales is now up to about 35% of our total services businesses. We see that segment increasing at double-digit growth rates for at least the next 3 to 5 years, as far out as we can see, just with existing products as we roll those products into more and more branches because the majority of branches still don't carry most of those products.

So, that third of our business we see growing at double-digit rates whereas we see our insulation business probably growing at mid to low single digits rates going forward. So, when you do the math on that, you will see the proportion of sales of non insulation products will grow significantly over the years and approach 40 to 50% of our sales within a few years.

Okay, Richard, just to follow-up on that point, related to installation of insulation, you know, low single digit growth, what happens if housing starts to go down 5%, what would happen to your growth in the traditional insulation business?

A couple of things: One, I would point out this margins would not be as negatively impacted as you might think, primarily because we have high variable costs in our service businesses, our workers work on a piece rate basis, if we don't have work, then basically we don't have a lot of labor costs.

Secondly, we are experiencing significant market share gains in the insulation businesses, our agreement with Pulte would be a reflection of that. So, if we had a modest decline in housing, I think our insulation sales would still be relatively flat to up a little bit. On the other hand, our non insulation sales would continue to probably grow at a pretty good rate.

If you take our company as a whole, what we have said in the past is that given our high incremental margins, every 1% swing in housing starts affects us by about 2 cents per share on an annual basis. So, if were you project a 5% decline in housing starts, all other things being equal and we don't expect they would be equal in terms of market share gains and other things, a 5% decline in housing would cost us about 10 cents a share in earnings.

Great, thanks, Richard.

Moving on, we'll hear from Michael Rehad with J.P. Morgan.

Good morning. Just a couple of questions. First on the segment data, I was wondering if you could give as you feel on how that, I guess, that 6% internal growth for North America, how about which divisions were above that number, which divisions were below that number?

Well, unfortunately we don't put that information out by segments any longer for a couple reasons: One, our competition doesn't do it and secondly for customer and other reasons, we don't provide it and under the new S.E.C. accounting rules, if I give that information then we have to provide extensive reconciliation statements to confirm any information I give you. So, I apologize, but I can't help on you that one.

You can't even give a range or something?

I think I would have a problem if I did that. But I would just say that we are seeing significant growth virtually all of our major segments.

Okay. And also in terms of the costs in the quarter, you know, you mentioned energy, pension, insurance costs and a couple of the others just wondering if you could give a little more in terms of numbers what each of those are doing to the quarter and when you expect those to alleviate?

Sure. The energy costs we're estimating at current levels of crude oil prices and natural gas prices which impact us both on raw materials, on fuel costs, a lot of shipping surcharges, on operating our truck fleet, our installation business alone has something like 8,000 vehicles on the road, as well as the indirect costs in resin materials and other raw material costs, we are estimating at current levels it is probably a run rate of about $50 million a year. So, you could take 1/4 of that into the second quarter.

We have previously said that insurance costs were going up $40 million annually and pension costs going up $10 million, so again you can divide that by 1/4 and then the balance was more of a product mix or a division mix based on acquisitions that affected our margins.

You also mentioned affects from foreign currency in the quarter, if you could just again go over a little more detail there?

Well, what I said was that we do about 20% of our sales in foreign countries, particularly in Europe, and mostly in German or Euro related markets. And since our sales went up 18 to 20% in Europe because of currencies, given that Europe is our lower margin location, we averaged about 10% margins in Europe, the fact that those sales went up 20% because of currencies, you are increasing your sales of 20% in 10% margin businesses which brings your average down.

Right. Okay. Thanks a lot.

Okay.

Moving on we hear from Stephen Kim with Smith Barney.

Thanks very much. Rich, I was wondering if you could sort of delve into the other net line a little for us. I guess in particular the trajectory we saw moving from 7.7 to, you know, 30 or so this quarter I thought the 7.7 number was a little on the higher side last quarter but you had about $8 million of gains from the sale of marketable securities, you were actually at a level higher than that this quarter. My question is, what can we expect in that line item going forward for the remainder of the year, first off?

Steve, you are right, we did have some extra income in that line. We did have $5 million from the sale of Emco that I mentioned earlier pretaxed and we picked up $10 million of marketable securities gains pretax in that quarter as well and then some dividend income which would expected to continue. So, I would say and then we had about $5 million of income from my recollection in Masco Capital.

If you have a long memory you may remember that in the old days, Masco Capital used to contribute about $10 million every quarter on average to our other income line. We have been getting virtually very small returns from that operation in the last couple years because of the capital markets but we are beginning to see that recover.

So, if you take the dividend income and some income from Masco Capital, I would expect you could assume that line might continue in the 10 to 15 million dollar range for the next quarter or 2 and that would be less than the 30 million we had in the second quarter.

And that is probably a pretty good run rate, about 10 million a quarter and that what is baked into your guidance?

Again, we can't control that number, it can go up and down 5 or 10 million a quarter but I would say that is not a bad estimate.

And that what you have in your guidance?

We would have that in our guidance or a little less.

Okay. Great. And with respect to the guidance again, I'm just going to make sure, I would assume you are not including Baldwin and Weiser in there in the gain?

No, that is a good point. The guidance we have given does not include any insurance recovery on the Behr litigation and does not include any gain on the Baldwin transaction and, as we have said previously, the guidance assumes energy costs stay at present levels for the balance of the year and it also assumes that consumer spending does not accelerate from present levels and those latter two, energy and consumer spending I think are relatively conservative but I have said that for the last two quarters and I haven't been right yet. So, we have assumed no improvement in either of those for the balance of the year.

Got it and how about the Ray Kennedy $5 million impact? I would assume that is limited to this quarter. That won't happen again?

It could fluctuate a little each quarter until the obligation is completed. My recollection is that obligation will be completed in the next few months.

That has to do with some stock he purchased under our executive stock program that we have assumed the obligation for and as our share price goes up and down, that can be a few million dollars in any given quarter but from the first quarter to second quarter we had a very large movement in our stock price. So, I don't think it would be anything like the $5 million in the third quarter in either direction.

Got it. and the $10.8 billion sales guidance for the year, is that still okay?

We are still very comfortable with that.

Okay and then you talked about the fact that paint, windows and cabinets were up double-digits, I assume you meant in July. You also had reasonably good sales growth this quarter I would assume in all three of those.

How much of the strength there can you attribute directly to the installation services and, you know, do you get the sense that there is significant strength outside of that for windows and cabinets?.

Very little of the window sales would have come from our installation group. At the present time they are doing a small percentage of their volume in windows.

Great. So, small but rapidly growing?

Right.

Got it. And lastly on the paint reformulation, my recollection was when we visited Behr about a year ago you ranked quite low on "Consumer Reports" on that. Is that number one, what is that number one compare against?

You are correct, although I wouldn't call it very low. we ranked significantly lower in the "Consumer Reports" magazine. I think we have mentioned that we have added significant additional materials to our product line at a cost, at a significant cost in terms of product upgrade with the goal of becoming number one in those ratings and we are just very pleased that all that time and effort and cost and the efforts on the part of the Behr people have enabled them to get that number one rating.

I would just say that is a significant plus to consumers and sales going forward. Now, in fairness, we should be number one and we consider that to always be our goal but we weren't achieving that in recent years and I am very pleased we have reachieved that stature.

Great. If I could sneak one last question in, there return on capital, you mentioned being incorporated in the bonus scheme going forward. Could you be a little more specific in terms of how you're driving that through your organization's compensation?

Yes the case of senior management, we have up to a maximum of 100% stock award that vests over a 10 year period of base salary opportunity and the Board has determined 40% of the stock award, 100% of that stock award will be based on performance on return on invested capital. So it is a significant added criteria in incentive in terms of senior management compensation.

Great. Thanks very much.

Once again, that is star 1 to ask a question. We will now hear from Chelsea Beonito, with Merrill Lynch.

Thank you very much. Good morning. Richard, I wanted to ask you what, if any, was the amount of the expensing stock options in the second quarter and what you would expect that to be for the year?

Yes, we had virtually zero -- we are, as you know, we are expensing stock options beginning this year and we had very little expense in the first quarter and I believe in the second quarter was about $100,000. So, what we have said going forward is we expect it to average about 1 cent each year depending on future stock grants, cumulatively so that it would be 1 cent this year and maybe less that that, but one cent this year and if it adds one cent every year, at the end of four or five years, the total cost could be four or five cents a year.

We have traditionally given out less stock options than most companies in our industry or most companies on average, frankly and we put greater emphasis on restricted stock awards and on restricted stock awards, we have always vested in expense as they vested, so, those costs we have picked up.

Okay. Great. Is the 498 share count is that what we should be using going forward or a lower share count?

Well, the 498 was what we had out standing at the end of the quarter based on a weighted average for the shares we repurchased during the quarter. So, at the end of the second quarter including all of the shares we repurchased we would have 494 million shares out.

So, you could assume we are starting the third quarter at a 494 rate and, again, that would be changed with any change in additional share repurchases that would lower the number or swings in our contingent shares which are about 8 million shares at the end of the second quarter up or down. So, we are hoping to continue to bring that share count down on a long-term basis.

Okay. And can you discuss about the [Kiel's] rollout at Wal-Mart and how many stores -- maybe on a percentage basis you think you are in and when you expect it to be complete?

We have rolled out to 15, 1,600 Wal-Mart stores and I believe by the end of the second quarter we were in all those stores.

Okay. So, if you could put it in terms of maybe contribution to that line to architectural, how much of growth do you think you saw incremental from this line?

Given the fact we are just rolling the product line out during the first half, it added relatively small amounts to the second quarter or first half results. What we have said in the past is that we were hopeful that that new product line would add in the tens of millions of dollars of sales on an annual basis going forward.

Okay. Well, we have been hearing it has been doing exceptionally well. So, congratulations on that matter.

Thank you.

And then if we could just tap into a little of your economic insight which you do a great job of providing. Can you comment a little on what your thoughts are on the impacted demand on the industry and also on Masco in relation to refinancing activity? We have seen a back up in rates and a lot of people have pulled away from that. Can you comment a little about what you think the end market and demand will really see from that, and are you including that in your expectations? I know you discussed consumer spending already.

As you know, we have seen a lot of refinancing activity over the past year or two. The latest data that we have seen would indicate that a disproportional amount hasn't been spent compared to previous periods. Historically, about a third of refinancing money goes into renovation remodeling, the best data we have says it has been running closer to 20%.

Having said all that, I would just say that our historic experience has been that our biggest driver in our overall sales, particularly on the remodeling renovation retail side has been consumer confidence and low-levels of unemployment. So, that the real driver to us is if consumer are doing well, if unemployment is down, if confidence is up, frankly, that a bigger driver for our retail sales than refinancing activity is by itself and that where the key is going to be, whether consumer confidence builds up which I think most of us hope that it will over the next 6 to 12 months.

We have seen some modest pick up in consumer activity. Generally in the markets we serve in recent weeks, but still relatively modest. My own feeling is that I think a major portion of that is still driven, in addition to some of the uncertainties in the economy, by high energy prices. I think oil above 30 and natural gas close to $5 still takes significant dollars out of the consumer that might have been spent on a variety of things that home centers and other outlets and I think all of us are paying the price for the higher energy prices.

So on a proportional basis, you will focus more on the energy costs to decrease consumer spending as opposed to maybe slow down in refinancing?

Well, that's right. In addition I should mention earlier when I said energy costs us $50 million a year, that is our actual operational cost. It also costs us because consumers have less disposable income and we lose sales in addition to that. So, we really get a double hit from high energy costs and I think it would be important to the economy, let alone Masco, if energy prices do come down some in the future.

I think even with interest rates backing up and even with refinancing activity slows down part of that is driven by the fact the economy picks up, the reaction that has on consumers should be a net plus to us in terms of consumer spending impacting our total sales.

In agreement. Definitely.

And then just lastly, overall, I guess with the comments on installation services and your gross so significant in that, do you expect your mix of new construction and remodeling to change at all going forward?

We're currently around 40% of our total sales directly/indirectly ends up in new housing. I would think that, I would expect that the proportion to stay about the same for the next year or two, based on everything as far as we can see.

Great., okay. Thank you very much, Richard.

Operator, maybe we have time for one more question.

And we'll take our last question from Margaret Wahlen with UBS.

Good morning, Richard.

Good morning, Margaret.

I have got three short ones. If you listen to everything you have said in terms of the earning guidance, the math really does not work. Is there anything that we might be looking for as a negative surprise like this charge with the European business?

No, there is nothing we are aware of in terms of the negatives so I'm surprised your math doesn't work. If you give as you call, maybe we will work with you on that.

Okay. Perfect. Thanks.

Secondly you did a terrific job of managing the working capital during the quarter. Some of your peers have been reporting the second quarter have talked about a disconnect between point of sales data they are getting from some customers versus the order rate. Can you comment about that maybe over the last 6 weeks?

That is a good point. I think the fact we are able to bring inventories down and manage receivables as well as we did is a tribute to a lot of our operating units because, if anything, some of our customers experience sales a little slower than they had expected three, six months ago. That probably resulted in some back up in inventories in retail and during the second quarter we did see some inventory reduction on the part of some customers, I think most of that is probably behind us at this point and we had a good quarter even given that. So, given that there is inventory cutting going on, I think the fact that we were able to bring our inventories down was a positive.

Most definitely. In terms of the tone over the last five or six weeks, does that inventory cutting still going on, or when do sales and order data come back in?

From what I hear in our operations that most, if not all of that cutting is behind us as of the end of July or early August.

Okay. That is good news. And finally, how many operating units do you have now, 68 or 70?

We have about 60, a little over 60 operating units.

Okay. And you talked about return on capital in the focus by the Board in terms of compensation. As you look at each of the different units, how do you, you know, how do you break it out for them in terms of the margin versus the corporate average versus what each can do, what each can do relative to their specific businesses?

We have a very flexible program so that we can design it and gear it for whatever the needs are of a particular operation but by in large, one of the real drivers is return on assets. Return on invested capital, we feel, is something we control at the corporate level because you are controlling your overall asset mix whether it is share buyback debt and a lot of other factors that go into that calculation.

Whereas in the operation what's they rally control is capital expenditures, inventory receivables income. So the key drivers in an operation for us would be return on assets, operating income and growth, those are the key things that we compensate our operating units on.

And do you -- does the Board or do you set guidelines relative to the businesses they are in, or is it a corporate average?

No, we sit down with each operation at the beginning of the year when we budgeting their operations for the coming year and we may have significant incentives for a particular operation. If an operation hasn't been as successful in cutting inventories, we may gear part of their compensation towards that metric. So, it is a flexible system but it is largely driven by growth, operating income and the return on assets.

Okay. And just finally, just in terms of the assets, do you think maybe you would be doing more plant close downs or consolidations over the next couple years?

We are continuing to look at cost reductions throughout the organization. As you know in this world have you to continuedly be world class when it comes to cost effectiveness, so we are always looking at operations as to where we can reduce costs, so that may or may not include plant closures.

Okay. Thanks very much.

Thank you.

Operator, I think that concludes the call. I just wanted to take this opportunity to thank everybody for taking the time to be with us today and it has been a difficult year or two but I think we're pleased with the progress we are making and, very honestly, I am excited about our growth opportunities for the rest of this year and looking into next year and the next couple years. So, thank you very much.

That does conclude today's conference. We thank you for your participation.