馬斯科 (MAS) 2003 Q3 法說會逐字稿

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

Statements in the following discussion may include certain forward-looking statements regarding Masco's future sales, earning growth potential and other developments. Actual results may vary materially because of the external factors such as interest rate fluctuations, 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 filings with the Securities and Exchange Commission and is available on Masco's website at www.masco.com. Masco undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

The financial and statistical data referred to on this call is included in the investor packet distributed prior to conference call and posted on the company's Web site under the Investor Relations section. In addition, we may refer to this call to non-GAAP financial measures as defined by the SEC's Regulation G. Accordingly, a reconciliation of the differences between such measures and the most directly comparable financial measures calculated in accordance with GAAP is included in the investor package.

After a brief discussion by management, the call will be open for analyst questions. If we are unable to get 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. Please go ahead, sir.

Thank you, Jesse. This morning we released our 2003 third quarter earnings. We are pleased to report that sales and earnings for the third quarter were the highest for any quarter in the company's history. Net sales aided by acquisitions increased 19% to a record $2.9 billion compared with $2.4 billion, for the third quarter of 2002.

Our North American sales increased 16% and international sales benefiting sales benefiting from acquisitions and higher foreign currencies increased 36%. Stronger sales to retail customers, sales of acquired companies, and the favorable impact of foreign currencies impact of foreign currencies contributed to the sales growth in the third quarter.

Excluding acquisitions and divestitures, third quarter net sales increased 10% compared with last year. with last year. North American net sales increased a strong 10% and international sales increased. 11%. In local currencies, international sales excluding acquisitions and divestitures were flat compared with a year ago.

We reported net income of $318 million or 65 cents per common share. Included in the 65 cents per common share is 53 cents from continuing operations 12 cents related to discontinued operations.

The 12 cents is comprised of 1cent per common share related to cent per common share related to the third quarter 2003 operating results of businesses divested in the quarter and a gain of 11 cent per common share from such divestitures.

The 53 cents per common share is consistent with the company's previous guidance that earnings would be modestly above a range of 48 to 51 cent per common share, which had also included the operating ruts of the operating results of the divested businesses.

Included in the results for the results for the third quarter were charges aggregating 6 cents per common share, related to two business units in the United Kingdom. These charges pertained to accounting irregularities, asset impairments and a systems failure, which we disclosed in our second quarter report.

Additional information regarding these charges is included in the business and financial highlights, which were distributed this morning with our financial data and are available on our Web site. We are disappointed and embarrassed by these European situations.

As you may know, we have grown very rapidly in Europe in recent very rapidly in Europe in recent years through a number acquisitions and have 28 operating units in various countries, most of which are smaller than comparable U.S. operations.

We are implementing changes to our operational and financial structure in Europe which include reorganizing European business operations into product groups, adding group operating and financial personnel, additional training and evaluation related to internal controls, and the expansion of both external and internal audit involvement, all of which we believe will strengthen our financial control in Europe. We do not believe there are any other accounting issues in our other accounting issues in our European operations.

During the quarter, we completed a sale of our Baldwin Hardware and Wiser Lock businesses, Black & Decker Corporation. Baldwin and Wieser had 2002 combined net sales of approximately $250 million.

In a separate transaction we also completed a sale of our also completed the sale of our marvel group. Total proceeds from the sale of these businesses were $289 million including cash of $284 and notes receivable of $5 million. Under accounting rules, we are required to account for these businesses as discontinued businesses as operations.

Accordingly, their historic operating results have been retro actively excluded from our continuing operations results. These divestitures will further enable Masco to concentrate on businesses that are core to our growth strategies.

Third quarter income was positively impacted by net income of $58 million or 7 cents per common share after tax related to an adjustment of a litigation accrual related to the Behr process corporation and operating company in our decorative architectural products segment. The filing deadline for claims related to the national settlement was September 2, 2003 and we received a fraction of the previously projected claims and currently estimate the cost of such claims to approximate $8 million compared with the $66 million we had originally recorded in last year's third quarter.

Gross margins were 30.9% in the third quarter compared with 31.9% in 2002. Excluding the previously mentioned unusual charges in income, operating profit margins income, operating profit marches were 15.9% and 16.8% for the third quarters were 15.9% and 16.8% for the third quarters of 2003 and 2002 respectively.

Third quarter operating margins were the highest for any quarter thus far in 2003. While our overall operating results were favorable in the third quarter, margins continue to be negatively affected by increased energy, insurance, and pension costs, higher promotion and display costs, stronger foreign currencies resulting in increased international sales, which have lower margins relatively higher sales in segments with somewhat lower margins, and recently acquired companies with lower operating margins.

Total SG&A expense in the quarter as a percent of sales was 16.5% compared with 15.1% last year reflecting increased promotion and selling expenses and certain adjustments related to the to United Kingdom operations previously discussed. Our corporate general expense was 1% of sales in the third quarter of 2003, the same as of last year.

Our segment sales for the quarter were cabinet-related product sales of 9%, plumbing product sales of 28%, installation and other services sales were up 31%, decorative architecture product sales were up 17%, and other specialty products were up 13%. Particularly strong during the quarter, sales were included assembled cabinets, installed sales of non-insulation products, paints and stains, and vinyl windows.

Our key retailer sales continued to show improvement in the third quarter. Our sales growth with key retailers increased 8% in the third quarter compared with a 7% increase in the second quarter and a 5% increase in the first quarter.

Combined sales to Home Depot, Lowe's and Wal-Mart, our three largest retail customers, also increased by approximately 8% in the third quarter compared with a 6% increase in the second and a 4% increase in the first quarter.

Our tax rate for continuing operations was 37% in the third quarter compared with 31% for the comparable period of the prior year. Excluding the charge for litigation settlement, our tax rate for last years third quarter was 34%.

The rate increase reflects an increase in the proportion of domestic income, which is taxed higher rates than foreign income as a result of the impact of recent acquisitions and charges related to the United Kingdom operations mentioned earlier. We anticipate that our tax rate for 2003 will approximate 38% and based on current estimates our tax rate for 2004 will approximate 35%. Inventory days improved to 49 days at September 30, 2003, compared with 58 days a year ago.

Accounts receivable at the end of the third quarter improved to 53 days compared with 57 days a year ago and accounts payable at the end of the third quarter improved to 38 days from 32 days a year ago as we continued to negotiate more favorable supplier terms.

Working capital at the end of September defined as accounts receivable in inventories less accounts payable improved to 20.5% of the last 12-month sales from 24.5% a year earlier.

Our cash flow and balance sheet continue to be strong with cash and marketable securities in excess of 1.2 billion and $2 billion in unused bank lines at the end of the quarter. During the third quarter, we also retired approximately $300 million of our outstanding debt.

Debt as a percent of total capitalization was 45% at September 30 compared with 47% at both June 30 and March 31. We have retired an additional $100 million of debt thus far in the fourth quarter. The company repurchased approximately 5 million common shares during the third quarter. Through September 30, approximately 28 million shares have been repurchased in 2003 including approximately 2 million common shares for long-term incentive compensation plans.

Since the end of the third quarter, we have continued our share buyback program and in October we repurchased an additional approximate 2 million shares. At the end of October, we have approximately 20 million common shares remaining under the existing share repurchase authorization. We also increased our fourth quarter dividends by 14%, a larger percentage 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, cash flow and recent tax law changes and makes this the 45th consecutive year in which dividends have been increased.

Yesterday, we announced that our Board of Directors had been expanded from seven to nine members with the appointment of new directors, Professor David Johnston, President and Vice Chancellor of the university of Waterloo in Ontario, Canada and Jay Michael Losh, formerly Executive Vice President and Chief Financial Officer of General Motors. We are very fortunate to add these two experienced professionals to our board. Both of these men have enjoyed extensive professional career and understand the roles and responsibilities of public company directors.

In terms of the current outlook, our favorable sales performance has continued early in the fourth quarter. With October sales excluding acquisitions continuing the strong growth trend of the third quarter and quarter and internal sales growth actually growing even modestly better than the 10% of the third quarter. Sales of assembled cabinets, installed sales of non-insulation product, paints and stains and vinyl windows have continued to show good growth.

And faucets also grew at double digits during the month of October. Assuming that present business conditions continue for the remainder of the fourth quarter, seasonally one of the year's lowest quarters for Masco, we believe that we will achieve record sales and earnings for 2003 with full year earnings from continuing operations in the range of $1.68 to $1.70 per share. This new guidance represents an increase from the company's previous guidance of $1.68 to $1.72 per common share, which when adjusted to exclude the projected operating results of 4 cents per common share related to Baldwin, Wieser and Marvel would have been a forecast of $1.64 to $1.68 per common share.

We estimate that our fourth quarter earnings will be in the range of 38 to 48 cents per common share excluding any other -- any unusual items.

During the past six years, as we have said previously, Masco has invested over $10 billion in acquisition, capital expenditures and new product development to build the unique critical mass that we considered important to give us a strong position in the marketplace and increase Masco's importance to our customers.

We now have a range of products and services that is 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 services that we believe number one in their respective market niches. Now, we are intensifying our focus on leveraging the critical mass 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 slower pace of acquisitions with increased emphasis on cash flow and return on invested capital. We are determined to do everything possible accomplish our long-term strategic goals which we believe translate into improved returns for our shareholders.

Now, operator, I would be happy to throw the meeting open to any questions.

Today's question and answer session will be conducted electronically. You may signal us by pressing the star key followed by the digit 1 on your touch-tone telephone. For those of us joining us using a speakerphone, please release the mute function so your signal reaches our equipment. Again that is star, 1 if you like to ask a question.

We'll take our first question from Budd Bugatch with Raymond James.

Caller: Good morning, Richard.

Good morning, Budd.

Just make sure I understand, the restatement issue, you do you not restate any of the balance sheet items, is that correct?

No we don't restate the balance sheet items. Just to clarify that point, the accounting rules changed this changed this year where if divest a company, you have to restate back results sales and earnings results for all periods.

Prior to this year, the rule was that if you did a major divestiture such as an entire segment, then you'd restate your back numbers but not for individual transactions. So that is a change in accounting rules and the result of that is that is the 3 cents we earned in first nine months gets eliminated from our months results.

Gotcha. OK. I want to make sure that I understand what's going on in European margins. They looked particularly disappointing compared to a year ago. Can you kind of go over what's going on there? And how much of that maybe was the impact of the issues at the issues and -- at the U.K operations?

Yes. Virtually all of the margin decline was represented by the U.K. situations. We took a total charge I believe of $42 million that flowed through operating income. So you have to add back $42 million of profits in the quarter to our European results. And I think if you do that, you you'd end up with about 11% operating margin in Europe rather than the 3 or 4% that we reported.

OK.

And that would compare with about 14% a year before.

Got you. So still pressure in Europe, but not as bad as -

Although I think a major part of the differential from last year's rate to this year's rate is reflected in the acquisition Hans grow what which we made which has lower margins than our overall average of a year ago. So I would say Europe is pretty close to what it was the year before. Continue to see very little economic growth there. We do think that if we do get an economic pickup in Europe, will see that translate into margin improvement.

I see. OK. My last area is the 8% with home center growth, I recognize I think you said that's up from 6 in the second and 4 in the first but still slightly lower growth rate than the home centers themselves are growing. Is there anything going on that we need to worry about? Are you losing share or is just in the categories that you're selling that may not having the same growth rate that -

I don't think we're losing share. If anything, we're gaining market share in virtually all of our product areas and particularly our major products in the home centers, we're doing very well, the one exception to that, might be our RTA cabinets at Home Depot, which are down in sales from a year ago. But excluding that, we're doing very well.

The one reason why the sales may not be up quite as much is that when you look at total home center sales, first of all, that include appliance sales where they've achieved some pretty dramatic increases in sales compared to a year before.

And secondly, really almost have to eliminate a portion of the new store sales that come in place, because some of those new store sales are cannibalization of existing stores. So we think the 8% is a pretty good number when you look at comp store sales results of those companies during the first nine months. As I say, in most cases would represent an improvement in market share within the store.

Finally, did you say, I missed it if you did, how much of insulation -- installation at this point in time is installation to sales?

We didn't give that number, but we're currently running 35% or better of our sales of installed products being non-insulation. And we continue to believe that's growing at a double-digit rate and will grow at a double rate as far out as we can see as we're entering into a number of new agreements with major home builders and other customers to gradually expand the product capability and product offerings that we're installing for home builders.

Thank you very much. Congratulations.

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

Good morning, everyone. Richard, can you help us understand a little bit on the charges and what's continuing operations? This quarter you said you earned 53 cents, which would be difference between the 7 cents of gain minus the 6 cents of charges related to the UK operation giving you an incremental penny?

That's right. But remember we lost a penny because you take out the one-cent of earnings of Baldwin in the quarter. So if you put that together and I have to tell you it's coincidental, you end up with 7 cents offsetting seven cents.

OK. So you're not trying to tell us that we should add back 7 cents that you had previously told us that we shouldn't include when you're negatively impacted by that, correct?

I'm not sure if I follow you, Ivy.

You are not saying it's not ongoing with the gain. But one of the questions is the European charges.

Yes. European charges.

Shouldn't we consider that sort of a ongoing part of the business?

I would say you could argue that some of it related to earnings that we didn't have in past periods, which includes periods as far back as 2002. That could represent probably three or four cents of the 6 cents of write off. But those are basically, you know, one time items and we don't have those in the earnings going forward and they're not in our projection.

Not to belabor it, but last quarter you didn't it, I think you had any other charges related to the U.K. operation?

No, as a matter of fact, as you may remember what we said specifically was that we did have that systems failure, and we were looking at what other impairments there might be on goodwill or other assets. We were very clear on that, but I have to tell you that it turned out we had some more charges that we didn't anticipate. But I think we tried to be very candid saying that we weren't sure we identified all of them at second quarter.

That's fair. With respect to your breakdown of your businesses, you had just mentioned that faucets were up double digits in October and you also mentioned that you're seeing, I guess year over year declines in RTA. Could you kind elaborate on the RTA declines and what you think is going on then comment a little bit about what you see going on in the faucet aisle?

We have seen a decline in RTA cabinet sales now for several years in a row. And we're working with our customers to see if we can do some things to improve that some things to try to improve trend., but I think But I think basically, what's happened is happened is that the value of assembled cabinets has improved so dramatically and the relative price differential between RTA and assembled cabinets has narrowed to where we've had a where we've had a migrating of people up from lower priced RTA cabinets to higher priced assemble cabinets.

So I think it's a trend if you look at other RTA companies in the country, not only in cabinets but other RTA products RTA sales generally for the industry are down. So we're seeing what we can do to try to improve that trend, but you know, I think we're overly optimistic that we're going to we're going to show dramatic show dramatic improvement there.

On the other hand, we continue to do very well in the assembled cabinets where we're growing at a double digit rate, They retail we are increasing our share of each customer with our cabinets, so we're very pleased on the that end of the business.

Then faucets, You said you were up double digits. Anything different going on there?

I think its just a combination of a lot of things we're doing to try to improve our market position and their Sales have been picking up for several months now and accelerated in the recent months.

: Is it retail or combination of new construction and retail?

I think its across the board. I think also as we mentioned in the past, we have introduced a number of new products, and our faucet operations have come out with a number of faucet lines with new finishes on them as well as other products. So I think it's combination of a number of things that we're doing, gaining market share.

Great. Let me follow one more question, please, with respect to your impressive improvements, continued improvements an your working capital and obviously your balance sheet overall. I guess the one question with respect to your comments about operating margins, and year over year decline were to increase energy, insurance pension display costs, higher mix of international, just mix in display costs higher mix of general. International.

Just looking at in your fourth quarter and expectations going forward realizing you are showing again improvements in return but you're seeing margin pressure, And mentioned SG&A was up due promotional activity. Do you need that promotional activity to actually drive the 10% increase in sales? Is that way getting the strength of sales? What should we expect margins to look like look like going forward?

SG&A was up both because of promotional items as well as the UK situation. Some of the charges in the UK also flow through SG&A, and also one time items. The other large promotional pickup would have been related pickup would have been related to our Behr operation.

As you know, we installed a major new display major in all Home Depot stores in the first quarter of this year. I think we've said in the past that those displays cost us literally tens of millions of dollars, which we're amortizing over three years.

So that's resulting in very nice sales pickup and that will result in net increase in profits, not a reduction in margins when you factor all the items in. In terms of overall margins you may remember that one or two calls ago we made a forecast, we made a forecast that this year's aggregate operating profit margins if you take out all unusual items would be down about 120 basis points from last year.

Last year, you may remember we were up 180 basis points, but a major part of the 120 basis point decline this year is really a result of increased sales in certain categories that have lower margins, lower margins of some of the acquisitions we have made in the past year, lower margins in our European operations when you translate the higher value of sales because of the currency effect so that actual margins operation by operations have not declined anywhere near the amount of the 120 and it's really more a combination of factors that are non-operational or resulting in that.

Having said that, we have had cost increases as I mentioned earlier on insurance, pension, energy costs and other things, hopefully, some of those will be one-time things this year and if energy prices back off, we may recover some of that next year.

But the other point I would like to make is that we are de-emphasizing our focus on operating margins and putting greater focus on return on invested capital and return on assets and we think there are areas that we can accelerate our growth, improve our total aggregate profits, improve our return on invested capital and as you know, we've set a goal that we want to get return invested capital up to 15% in the next three to five years from current levels of 10 to 11%.

But the net effect of all that might be that we bring in some lower margin work to help achieve those goals and bring down our average margins.

So I think it could be a positive from a profit standpoint, but you may see margins deteriorating slightly in the next year or two.

Thanks, Richard.

Thanks, Ivy.

Moving on, we'll take our next question from Joseph Sroka with Merrill Lynch.

Good morning. The September 30 balance sheet that's in the release, does that include the proceeds from divestitures?

Yes, the proceeds were received at the end of September, so that would be in our cash position.

OK. And then can you just sort of walk us through, you know you talked about internal growth and share repurchase, but I mean do you have any specific plans for how you want to redeploy that capital that you brought back in?

I think we're particularly pleased that in the third quarter we bought back 5 million shares of stock and we retired $300 million of debt and still had our cash in marketable securities increase in the quarter.

So I think we're doing a good job in terms of asset management. I should probably just make one mention, we did see a nice significant drop in inventory in the third and we continue to work to bring inventories down, but we did have a very strong September and we may have shipped more goods than we anticipated in September which also resulted in inventory coming down.

So I would want to not take full credit for that inventory decline in the quarter. Some of that might be given back in the fourth quarter. But we will still be well down below a year-ago numbers. So we continue to just I think to do a good job in terms of asset management and try to free up assets to redeploy and we would expect to continue redeploying those assets in the combination of share buyback, debt reduction and to a lesser extent acquisitions.

OK. And then with respect to Behr, does the settlements closed if people if people are going to file, they filed already. Can you walk us through the dribs and drabs of the next quarter or two of just cash being paid out to the claimants and insurance coming back in and when can we declare it over?

Well, we expected, I think we had forecast something like 150,000 claims to come in or 180,000 claims to come in and we actually received 8,000 claims or 4,000 claims rather. So it was about $8 million of payments.

So, we will be making payments either in cash or in certificates, but only about $8 million over the next quarter or two.

And frankly, we may recover some of that from insurance proceeds in future periods. So there won't be much cash going out.

The Washington state settlement, however, is another situation and the claim period for that litigation doesn't run out until January. We have set aside I believe it about $55 million of reserves related to that litigation. That litigation has a different history to it.

The court awards were less favorable to us in terms of the amount of payments made to claimants and we're still going on the assumption that a major portion of that 55 if not all of it will be paid out some time during the course of '04. But again, then we'd expect a recovery portion of that from insurance proceeds as well.

So you still have cash moving in two directions probably until mid to late 2004?

That's right. In '04, we would lose some of the Washington state's settlements minus recovery from insurance. But we're getting down to lesser and lesser numbers.

OK. And then last question, as you've analyzed the business, you've said that about 90% of what you sell is sell is leading products. Should we draw anything from that maybe if the other 10% didn't become a leading percent they would also be divestiture candidates?

I wouldn't necessarily say that one follows another. We considered to Baldwin to be number one in its high-end builder hardware business. We still made a judgment that it wasn't a core business. So that could go both ways, but I would say that we're in an in depth strategic review of all of our businesses.

How can we maximize our value creation over the next few years and is that part of that process we're taking a hard look at what businesses would be core and not core. When we have something to announce on that, we would certainly make such an announcement.

But that's an ongoing process? It hasn't finished off -

That is definitely an ongoing are process, and I would be more announcements.

Fair enough, Richard, thank you.

Now we hear from Keith Hughes with Robinson Humphrey.

Thank you. In the notes financial statements you're talking about a strategic review, particularly the European operations. Where are you in the -- in that process?

Well, just as a follow-up to the previous question, we are taking a hard look at all of our businesses, Europe has I mentioned earlier has grown pretty dramatically, particularly in numbers of units.

And we do think there's a possibility to do some pruning of some of the operations, and I would expect that, you know, some time in the not too distant future we'd have additional announcements on that, but it would be inappropriate for me it say anything at this time.

Keith Hughes But in Europe, this is not an outgrowth of the problems we've had in the UK businesses?

No this is totally This is totally independent of that.

OK. In terms of the breakdowns of controls, have you reviewed all of your European operations to make sure there's not going to be any more of these?

Well, we have reviewed all the operations and as best we can determine. There's no indication of a problem at any other operations.

Thank you.

Moving on we hear from Margaret Whelan of UBS.

Thank you. I think you said you had 28 operating units in Europe? Is that correct?

That's correct. That would compare with 34 units that correct I believe in this country. And keep in mind that Europe is only about 20% the size of our total sales, so we have a disproportionate number of units in Europe given the size of those units.

That was going to be my point. Isn't that a bit redundant?

One of the reasons for that that is that the nature of is that the nature of Europe is such that you often need an operation in different countries.

As an example, if you're in the, if you're in the cabinet business in Europe, you might need a cabinet company in the U.K., you may need one in Spain, and one in Germany and other countries.

And that's what we've done historically. So as we integrate our management there, we're taking a hard look at which of those makes the most sense and which can we do some consolidation and pruning with and which are not strategic and core to our long-term growth plans. So we're very active in evaluating that.

OK, then just to be clear, you don't think any more charges related with the accounting?

See, the only thing we mentioned in the release was that we're taking a look at the goodwill of that one U.K. operation where we took a $7 million charge on and I should also add just that in the fourth quarter of every year, we take a look at all of all the goodwill related to all of our businesses see if there's anything that's impaired or needs to be written down. We haven't made any judgments on that but that's always a possibility in the fourth quarter.

OK. The second thing -- the second thing.

Those would automobile non-cash charges by the way.

And in terms of the '04 guidance, you're not you're not providing any as of yet, but maybe you give us your operating margin target by business unit over-dr.

I would rather give you margin target may be complete this year and talk about next year, which we probably will do when we report year-end results in February.

OK. Can you talk specifically then about the decorative coding? Because the margin there, with or without these charges has been on a slippery slope for the last four quarters.

I'm not sure you can tell that just looking at the segment because there are a lot of other products within that segment. And that also included Baldwin and Weiser where we've seen some margin decline over the last few years, so I wouldn't necessarily read something into that. But having said that, I think we have said on a number of occasions that we have gone to great lengths to upgrade the quality of our Behr product line.

You know that we got number one rating in the "Consumer Reports" magazines. That was a result of putting additional cost into the product to enhance the quality of the product. We have been spending additional money on promotions and marketing. So those things are cost you some money, but we think that -- in effect that will think that in effect that will increase our absolute profits because those changes result in higher sales even though they might be at somewhat lower margins.

I think if you take the -- just want to point out if, if you add back in the European charges to your decorative coding segment or decorative products segment, you would end up with margins this year of around 20% compared to 23% a year before. So again the bulk of those charges we talked about earlier flow through decorative products and you need to add that $40 million back to the results of that segment.

I did that. I just don't get the 20%, I get about 18.

Well maybe we'll talk to you later and give you more detail.

OK. Then kind of X the Baldwin and Weiser drag, would you assume we get back to that higher20% level in profit margin?

As I said, I think we're focusing less on margin and more on return. I would answer that differently and say that I expect our returns to improve on assets employed in all our segments going forward as we complete our strategic planning. This doesn't mean that margins on sales necessarily will improve.

But Richard, return of the function of inventory turns and margins. You can't have one without another.

Well, return on -- better utilization of assets is a different question. I think we can continue improving our return on assets in the sense of reducing inventory, receivable, improving payables. So assets employed I think we'll continue to improve.

The point I was trying to make is we have as an example some facilities that might be operating at 15% operating margins, and have excess capacity.

And, therefore, they walk away from 10% margin work because it doesn't meet the old criteria we had. If we go out and bring that 10% work in, we're improving our absolute returns, improving our return on assets, but the 15% margin might drop to 12 or 13%.

OK

We're saying that focus has change and may result in margins coming down but at the result will be higher absolute profits.

OK. I'll just follow up with you on that.

OK.

The last thing is the Pulte and Beazer, you have announced strategic alliances there over last six months. Can you give us some follow-up on that?

Well, as you know, we did announce an agreement with Pulte that 80% of their homes we will do the installation work of insulation and cabinets. We announced a similar agreement with Beazer. I can only tell you that we are working on similar agreements with additional major homebuilders and we are also working on agreements that cover other product areas.

So I think we're very excited about the opportunity to increase our absolute sales with the large homebuilders where if anything, we have been underrepresented on average. We have been doing typically more with smaller builders than we have done with the larger builders.

And secondly, we really see a great deal of opportunity of other non-insulation product opportunities with particularly these large builders and I think you will see additional announcements in those areas over coming months.

OK. Thank you.

Our next question come Frank Dunnhow (ph) with Adage Capital.

Yes. I just have a few questions. When people are comparing with last year in Europe did you restate the numbers or what all that stuff was -- the earnings we are looking at last year are overstated because they were sort of fibbing about the numbers?

There would have been some relatively small amount of earnings that applied to 2002 that once we uncovered them we took them in the 2003 period. So to get an apples to apples, you would have to make some restatement or adjustment of the year ago results.

We felt it was not material enough to make that restatement enough to make that restatement and I don't think it's a big number in terms of distorting your overall results. Other than the impact it had on this year's third quarter.

And have rising copper prices hit you yet or going to impact you?

You're right. Copper prices have risen. We do have some of our copper costs, but more importantly, our big purchase is brass. And brass, we generate a lot of our own brass by the scrap that we generate as we make a faucet as an example, whatever brass we use about two thirds of it becomes scrap that we can then convert back into brass bargain with only a conversion cost.

So we don't have a direct relationship in the short run between copper and some of our costs. But if the price keeps rising that would have some impact. I will only tell you thus far the current prices of copper are reflected in the forecast that we have made and we haven't changed our forecast.

Last thing, just an observation. Over the years I have been on too many of these call where people complain about you not focusing on the return of assets focusing too much on margins now and I listen to people complain that your margins aren't doing too good and you should be focusing on margins and not on return of assets, I think. I don't know. Sounds like you can't catch a break.

You are right. I want to emphasize that we continue to do what we can to improve margins in terms of cost reduction and consolidations But I think in the ultimate --you know, the message I think we've received is that the return on assets is going to on assets is going to generate the best return for shareholders in the long run and that's what we're focusing on

I'll agree with that. Thanks.

Now we hear from Barbara Allen with Natexis Bleichroeder Inc

Thank you. My questions have already been answered.

As a reminder if you have a question today, press star, 1. Now we'll hear from Steve Fockens with Lehman Brothers.

Hi, Richard. I guess to follow up on the other questions. Richard. In terms of the 15% long-term return on capital goal, is it fair to say that right now when you look at that achieving or getting close to that level is going to be more of a function of improvement on the asset side and not a case of really accelerating earnings?

No, I would say it would definitely be both.

I'm sorry, not to say you are not going to have earnings. But if you're talking about over the next few years, perhaps, margins coming down bit, obviously you increase the sales But is it fair to say that in that in terms of hitting that 15% you still will have to be diligent on preventing the capital base from creeping a lot?

Yes, that's clearly the case. I think it's a combination of the -- of the reduction of the assets. reduction of debt, reduction of capital employed, reducing our operating assets, all of that reduces our capital base, but on the other hand if we can achieve our internal growth targets that we have going forward, particularly without a major increase in the capital expenditures then effectively you're also increasing profits while reducing the assets while you're reducing the assets employed in achieving those goals.

On top of that, I would just remind you we have a lot of financial assets that aren't giving us a return yet of any consequence. So we have a billion two of cash and marketable securities that we're only earning 1 or 2% return on.

On top of that, we have some 7 or $800 million of other financial assets that we're only earning a modest return on. So as those assets get redeployed either into operating assets or into debt reduction or other earning assets that also would have a dramatic improvement in our return on capital.

Fair enough. Maybe put another way, this is just a look at magnitude and look at magnitude and less actual numbers, but you would foresee getting to that return on capital goal from you know on capital goal from, you know, call it 10% to 15% earnings growth and 0% to 5% asset growth as opposed to you know 20% to 25% earnings growth and 10% to 15% asset growth?

Yes, I can't tell you those specific numbers whether the specific numbers are right, but directionally right, but directionally you're right.

OK. Right.

The other thing I would point is that when we look at point out, too, is that when we look at return on assets, we return on assets we look at the back 12 months..

So as an example, we just for instance have retired $400 million of debt in the last few months, that would only be partially reflected when you look at the returns that we've achieved over the last 12 months but all of that would come into play in terms of looking at the next 12 months in the same thing would be true to certain extent by share buybacks. So our numbers will go up based on the things we have already done just by standing still and we don't expect to stand still.

OK. Fair enough and for what it's worth I would certainly second you guys focus far more on risks and uncertainties than just operating measure I think in the long term you're doing the right thing.

Thank you.

Thanks, much.

Now we'll hear from Steven Kim with Smith Barney

Hello, Richard. Stephen Kim from Smith Barney.

Hello, Stephen.

My first question is about your guidance. Looking at the guidance you gave for the full year 168 to 170. Now can you help me to reconcile that with the guidance you gave for the fourth quarter, the 38 reconcile for the 378 to 40?

Yes. Our old guidance for the year was $1.68 to $1.72 and then in fairness, in September we said that we expected the third quarter to modestly exceed our guidance. So you could also assume that 168 to 172, even though we didn't change that number we could have added a penny or two to it to reflect the higher third quarter third quarter.

Now the $1.68 to $1.72 that we gave included Baldwin and wiser for the entire. So if you take the elimination that we have to retroactively actively even though we earned that money over the first nine months, that would reduce the old guidance $1.68 to $1.72 to $1.64 to $1.68. And we are now raising that guidance to $1.68 to $1.70.

So effectively we're increasing the old guidance by at least 2 cents a share for the entire the year. Now you take the $1.30 that we have operationally for the nine months and you take $1.68 to $1.70 and deduct $1.30 from that, you come up with 38 to 40 that we have for the quarter.

So we're by no means lowering our forecast for the fourth quarter. We never gave a specific fourth quarter. quarter guidance but it was always built into our annual guidance.

And I think one of the problems that maybe we didn't point strongly enough to investors that they have to take that four cents out of Baldwin and Weiser, which has been in their full guidance right along since the beginning of the year because we have to take it out retroactively.

OK. If I look at it another way, if I take that $1.68 and $1.70 and I add back the discontinued effect of four cents I get about $1.72 of 4 cents, I get $1.72 to $1.74

That may be right.

Now if I deduct from that your actual earnings of 32 in the first quarter, 46 in the second quarter, and let's say 52 53 in the third quarter, I'm getting or somewhere around 42. Even if take away a cent of that for that from the discontinued operations in the fourth quarter, it's above the 38 to 40 cent range?

I would have to work with you on that number. Maybe you give us a call later and we will go through that in detail and see if we come out with the same number. I think you have to remember that the first nine months included discontinued operations You have to pull that out

OK. Yes, I'll call back a little bit later. Just one other follow-up question. On installation services, now --

Also, the other thing I point out too is the share count has been changing as the year progressed as well. And we have a lower share count today than we had in the quarters as we reported them.

And one of the things that changes is when we report our full year earnings we will base that on the shares that are outstanding at year end, outstanding at year end, particularly related to contingent shares and there may be some modest pickup in our full year earnings full year earnings per share based on newer share count. That is not in the guidance that I have given you currently.

Oh, I see. OK.

When we're all done, the four quarters will not add to the full year earnings per share. earnings per share. The full year earnings per share will actually be higher than our four quarters addition. But I haven't factored that in to our guidance.

OK And so on installation services, now that the acquisitions, the big acquisitions from the third quarter of '02 will begin to anniversary, what kind of organic sales growth do you organic sales growth do you think we could expect to see kind of going forward from the from the installation services division?

Well, I think what we've said in the past is that we in the past is that we expect installation to grow in the insulation to grow in the low single digit range because we already have a large 60% market share penetration in that category.

But we expect the non insulation products which now represent 35% of our sales and growing to grow double digits for less -- at least the next three to five years, as far out as we can see. So when you put those two together you should come up with about mid to upper single digit growth rate internal growth.

Recent trends have held up along those lines?

At least that well, yes.

OK. Great. Great. I think that was it for me.

Operator, we'll take one more question.

Our final question will come from Michael Rehat (ph) from J.P. Morgan.

Hello, its John Marlo (ph) for Mike. I was wondering if you can tell us what the internal sales growth was on a monthly basis during the quarter?

I would just say our results accelerated as the quarter progressed. September was a particularly strong month, and as I indicated I think in my earlier comments if anything our internal growth was even stronger than the third quarter in October. So we have been seeing -- you know a pickup in trend as we go.

Now one thing I would also point out is that we did say in the first and second quarter, that we did think that some new construction activity in the first and second quarter was first and second quarter was delayed by weather, snow and rain.

And it's possible we're seeing some pickup in acceleration of housing completion. But I think we're seeing it across the board in all of our operations. So I think we are getting some benefit of a general modest some benefit of a general modest economic pickup as well in our growth rate.

One of the things we've always have said is we think consumer confidence, consumer income and spending plans has a greater impact on our net results than individual housing starts per se do. I would hope that's going to see a pickup as we go forward.

OK.

I just want to thank everybody for taking the time to be with us on the call look forward to talking with all of to all of you again. If any of you have any specific questions that we did not address, certainly feel free to call and we'd be happy to address them. certainly feel free to give us a Thank you very much.

That concludes today's Masco Corporation third quarter earnings conference call. We thank you for your participation and have a great day.