馬斯科 (MAS) 2003 Q4 法說會逐字稿

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

Financial and statistical data referred on this call is included a in the investor packet distributed priority the call and is posted on the website under the investor relations section. In addition, we may refer in this call to non-GAAP financial measures as defined by the SEC's regulation G. Accordingly, a reconciliation of 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 analysts questions. If we're unable to get to your question during this call, please call the Masco Corporation investor relations office at (313)792-6646. Again, that number (313)792-6646.

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

Thank you, operator. We are pleased to report that net sales from continuing operations for the year 2003 aided by acquisitions primarily in 2002, increased 20% to a record $10.9 billion compared with $9.1 billion for 2002. North American sales increased 14% and international sales increased 49%. Excluding acquisitions and divestitures, 2003 consolidated net sales were up 9% compared with 2002. North American sales increased 8% and international sales increased 17%. In local currencies, international sales were flat compared with 2002.

For the full year 2003, income from continuing operations was $740 million, or $1.51 per common share, and included the recognition of goodwill impairment charges of 24 cents per common share, the majority of which relates to European businesses that the company plans to divest. Excluding the impact of the goodwill impairment charge, income from continuing operations was $1.75 per common share. This result is above the company's previous guidance that earnings excluding any fourth quarter unusual items would be in a range of $1.68 to $1.70 per common share.

Our fourth quarter 2003 net sales from continuing operations were $2.9 billion, an 18% increase over last year. Masco's North American sales for the fourth quarter were up 13%. North American sales from internal growth were up 12%. International sales were up 44% in the fourth quarter. Excluding acquisitions, international sales were up 18% and in local currencies, international sales were up 2% compared with last year. The increase in net sales was primarily due to stronger sales of assembled cabinets, paints and stains, insulation services, windows and faucets. Excluding acquisitions, consolidated net sales from internal growth increased a strong 13% in the fourth quarter.

Industry growth, customer expansion, new products and market share gains continue to be the major drivers of our internal sales growth. Income from continuing operations in the 2003 fourth quarter was $93 million or 19 cents per common share. Excluding the goodwill impairment charge, income was 43 cents per common share in the quarter, well above the company's previous guidance of 38 to 40 cents per common share.

For the full year 2003, operating profit margins as reported were 13% compared with 14.2% in 2002. Operating profit margins as reconciled were 14.3% in 2003, compared with 15.7% in 2002. While our total profits grew nicely, margins were adversely affected by increased energy, insurance and pension costs, higher promotion and display costs, stronger foreign currencies resulting in increased international sales which had lower margins, product mix and relatively higher sales in product segments with somewhat lower margins and companies acquired in 2002 with lower operating margins.

Total SG&A expenses in the quarter as a percent of sales including general corporate expense were 17.1% in 2003, compared with 16.1% in last year's fourth quarter. This increase was principally the result of increased advertising and display promotion costs. Our general corporate expense was 0.9% of sales in the fourth quarter, compared with 1% in the prior year. Our segment sales for the quarter were cabinets and related product sales increased 13%, plumbing product sales increased 31%, installation and other services sales increased 13%, decorative architectural product sales increased 22% and other specialty productivity sales increased 16%.

Combined sales to Home Depot, Lowe's and Wal-Mart, our three largest retail customers, increased approximately 10% for the full year. Total key retailer sales also increased 10% to approximately $3.4 billion, compared with $3.1 billion for 2002. Our fourth quarter key retailer sales, excluding discontinued operations, increased 22% compared with an increase of 8% in the third quarter of 2003, a 7% increase in the second quarter and a 5% increase in 2003's first quarter. Combined sales to Home Depot, Lowe's and Wal-Mart, also increased by 22% in the quarter, compared with an 8% increase in the third quarter.

Our very strong retail sales in the quarter were a result of new products, merchandising programs, such as our new paint color display centers, market share gains in most of our products and to a certain extent, the result of some customers having had a comparatively weaker comp store sales in the fourth quarter of 2002. For the year 2003, we repurchased approximately 37 million shares of which 9 million shares were repurchased in the fourth quarter. Approximately 2 million of these shares were used for our employee long-term incentive programs. We have continued our active share repurchase program into 2004 and have repurchased an additional 5 million shares of our common stock in January.

In December, 2003, the company's board of directors authorized the purchase of an additional 50 million shares of common stock. At the end of January, 2004, approximately 43 million shares remain under this authorization. Accounts receivable at year-end were 54 days, which was comparable with the prior year. Year-end inventory improved to 47 days for 2003, compared with 56 days for 2002. Accounts payable at year-end improved to 36 days from 33 days a year ago, as we continue to negotiate more favorable supplier terms. Working capital defined as accounts receivable and inventories, less accounts payable, improved to 18.1% of sales at the 2003 year-end from 22.5% of sales a year earlier.

Return on invested capital was 10.6% on an as reported basis for both 2003 and 2002, and 11.5% on an as reconciled basis for both years. We continue to believe that we will achieve our goal of 15% return on invested capital by the year 2008. Our cash from operations for the year exceeded our expectations and after $270 million of capital expenditures, was in excess of $1.1 billion compared with approximately $900 million in 2002. Even though the company repurchased 37 million of its shares in 2003, and retired $430 million of debt, our liquidity at year-end was very strong with over $1.3 billion in cash and marketable securities. The company also continues to have unused bank lines of $2 billion. Debt, as a percent of total capital at year-end, was 43% compared with 47% at the end of 2002.

The company reviews its business portfolio on an ongoing basis, as part of our strategic planning. We have determined that a number of our European businesses are not core to our long-term growth strategy, and we have embarked on a plan of disposition. These businesses had combined 2003 net sales in excess of $350 million, and we expect net proceeds from the dispositions to exceed $300 million. These dispositions are expected to be completed within the next 12 months, and we expect to recognize a modest aggregate net loss in 2004 upon the disposition of these businesses.

First quarter 2004 results will include a charge to reflect those businesses that are expected to be divested at a loss. Any gains resulting from the disposition of individual businesses will be recognized as such transactions are completed.

Our favorable sales performance has continued in early 2004, and based on current business trends, the company believes that it will achieve record sales and earnings for 2004, with full-year earnings from continuing operations expected to be in a range of $1.80 to $1.90 per common share. This earnings guidance includes a reduction of approximately 5 cents per common share, resulting from the absence of earnings related to the European businesses to be divested. And excludes any loss from the disposition of these businesses. These businesses will be treated as discontinued operations effective in the first quarter, which will include the reclassification of their prior period results to discontinued operations.

The 2004 guidance of $1.80 to $1.90 assumes what may be a relatively conservative forecast of a decline in housing starts in 2004 of between five and 10%. Every 1% change in housing starts affects our earnings by approximately 2 cents per common share. If your forecast for housing starts differs from our forecast of a decline of 5 to 10%, you can make an appropriate adjustment to our earnings guidance. Our guidance also does not include any additional share buybacks, but, as I indicated earlier, we continue to be active in this area. The 2004 guidance reflects the company's expectation that certain operating expenses will continue to increase this year.

In recent weeks, we have experienced a significant number of cost increases, including wood, particle board, insulation, copper and brass, freight costs, and other operating expenses. The guidance we have given includes the effect of these increases, as well as other increase costs that we have previously mentioned, such as healthcare and energy. Even with all of these cost increases, we currently expect that profit margins in 2004 will approximate those of 2003.

Sales in January, in spite of difficult weather conditions in certain parts of the country, have continued the favorable trend of recent months. Internal sales were up high single digits with continued strength in the sales of assembled cabinets, paints and stains, insulation services, windows, and faucets. Our current projection for the entire first quarter includes internal high-single or low double-digit internal sales growth. Based on current business trends, the company anticipates that earnings from continuing operations for the first quarter of 2004, seasonally the lowest quarter of the year, may be in a range of 36 to 38 cents per common share, compared with 32 cents per common share reported in the first quarter of last year.

During the past six years, Masco has invested over $10 billion in acquisitions, capital expenditures and new product developments 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 we believe is unmatched by any other company in our industry. Our focus on leadership companies has resulted in nearly 90% of our sales being represented by products and services that we believe are number 1 in their respective market niches.

We are now emphasizing leveraging this critical mass 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. Our entire management team is committed to this strategy, and I believe the actions we will take in 2004 and future years will demonstrate this commitment.

Now, I'll be happy to open the meeting up for questions and I'd like to mention that Alan Berry, our President and Chief Operating Officer and Tim Wadhams, our Chief Financial Officer, are both with me here to answer any questions that you might have.

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to signal to ask a question, please do so by pressing star 1 on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, star 1 for a question. We'll take our first question from Budd Bugatch from Raymond James.

Good morning, Richard, congratulations on a very good quarter. My question, my first question goes to just plumbing margins, kind of the only issue that I have in the report. As we calculate them, there were 11.9%, I think that's the way you calculated them, without the impact of the goodwill impairment, and that was down somewhat from last year. Can you kind of go over that and what you think the prospects for plumbing margins are for 2004?

Yes, I think that we were down about 200 basis points in margins in the fourth quarter in plumbing, virtually all of that decline was caused by European operations in our plumbing group. Some of which are among the to be divested companies. So we did not experience any decline in faucet margins in this country or North American margins. So I think it was a one-time event and you will see that improve as we go forward.

As we look at that $350 million to be divested, I notice that's Europe, can you kind of give us maybe the segment breakdown of those revenues?

I don't have that in front of me, but I think the divestitures include a number of companies in almost all of the different segments. I mention that we're going to be divesting several companies, it's actually in excess of a handful so we have a number of a different businesses, and they are spread among the different segments. As soon as we have more data we can share with you, we'll provide that for you.

Understood. And I'll -- my last question relates to cap ex for this year. What is your expectation?

We expect to be about at $350 million.

Okay. Thanks, Tim. I'll let others ask questions. Thank you, Richard, congratulations.

David McGregor from Longbow Research.

Yes, good morning. You talked about raw materials, how you factored that into guidance, are you factoring in current raw material prices or have you projecting those similar to how you projected housing starts?

No, frankly, we have both ways. We have in our budget anticipated a number of cost increases during the year. And what we've done is taken into account any changes that have happened. So the guidance we're giving now is our best judgment of what our costs will be this year, both including anticipated costs, as well as the costs we've already seen. So based on our best judgment, we've covered all of our costs but those circumstances can change.

Is there any way you can give us any sort of matrix the way you have with the housing starts to help us think about the change in raw material prices going forward?

I guess I could give it to you in somewhat general terms. If you look at some of our major cost areas, we literally spend something like four to 4 to $500 million on freight costs per year. Currently, I believe diesel costs are running around $1.70 a gallon compared to an average of $1.50 something last year. On top of that, we have seen recent government changes in trucking regulations which are probably also going to also add to trucking costs. So, there's a fairly significant item alone that's going to be higher this year than last year. Copper and brass prices have gone up from 80 cents a pound to $1.20-plus a pound. We use probably 4 or $500 million worth of brass and copper materials a year. Again, that's reflected in our costs but it gives you some magnitude of these are fairly large groupings of cost areas and when we start getting 5, 10, 20% increases, it's fairly significant.

We've also seen recent increases in particle board of about 9 to 10%. I believe there have been two increases of insulation costs, aggregating in excess of 10%. So we're seeing fairly significant cost increases. And I just am going to be curious as to whether they show up in some of the government statistics.

The other side of that equation, I should mention, that we are very active on reducing costs throughout the company and we are making a significant progress in that regard. We also have a very active China program, Asia program, in terms of outsourcing components and products that's very substantial and increasing and we will be getting some cost savings from that area.

So when you put all of this together, our expectation, best judgment currently, is that we can still maintain last year's margins in this year from the cost increases that we've seen and can anticipate.

Great. That's really helpful, thank you. The last question, European divestitures. What were the criteria you used in determining the divested European businesses that were no longer a strategic fit, was it poor return on invested capital?

It really came down to several things. First of all, we reorganized our European operations into platforms of windows, cabinets, and plumbing. So we had a number of companies that didn't fit into that platform strategy. We had several companies that were basically just relatively small companies that were not part of our core strategy and then we also have some under performing companies where our feeling is that the prospect for returns on invested capital were not that high and those resources redeployed to other businesses or share buyback with give shareholders a better return in the long run.

Great, thanks very much. Nice quarter.

Our next question is Stephen Kim from Smith Barney. Please go ahead.

Thanks. Congratulations on a strong quarter.

Thank you, Stephen.

A couple of questions, first let's take the new starts one, as it pertains to your guidance. I understand you said negative five, negative 10. I guess my question is: You didn't really mention existing home sales, and you know, certainly I think our thesis is that new housing starts have been somewhat constrained and supply of new construction has been strained, but that doesn't necessarily keep people from turning over houses. Existing home sales are strong. I generally would have thought that would have been more important to you than starts. Can you tell us what your expectations are on existing home sales?

Yes, they're an important part, if anything, even more important part of or business. On the other hand, there's a lag factor in existing home sales. So whatever existing home sales are, typically result in repair, remodel, renovation, 12 to 18 months later. So, our sales in '04 should be good because existing housing turnover was good in '03. I would expect that housing turnover in '04 should continue strong.

I think the general consensus is maybe it will be off about 5%, but I think that won't have a significant affect on our business this year or even next year. So it's really more a question of what you think new housing starts will do.

I should qualify our internal forecasting, we're using the down five to 10% to be conservative in our budget and business planning. We projected 5% decline last year and we were wrong, we projected a 5% decline the previous year and we were wrong. So you can use your own judgment in what I said in my discussion was that every penny, every percent change in housing is the equivalent of 2 cents. So our $1.90 guidance would assume a 5% decline in housing if housing goes down 10%, then we're giving the $1.80 guidance. If you're assuming housing is flat, your guidance would even be higher.

Got it. And.

And I have to say that all our discussions with home builders is very optimistic and strong. So what we're doing is just saying, is there a possibility that the second half of the year could see a run-up in interest rates, and housing decline. We're not forecasting that will happen, we're just planning on it in our business planning.

Right. So I mean I guess what I was thinking is that your first quarter guidance here, obviously is not really going to reflect much of this down 5, down 10, because, you know, pretty much it's already been said, demand's still very good, starts if anything are are running up. So I guess really what you're saying is if, in fact, your conservative outlook is correct, we should see a pretty noticeable drop-off in the back half, that having been said, I was a little surprised the first quarter guidance wasn't a little higher because that would be seeming to reflect a relatively robust level of starts.

The only reason for that is really seasonal factors, some of the product lines we have growing the fastest, such as our paints and stains, first quarter is seasonally, their lowest business. So the first quarter is not really a good barometer of our year as a whole and then I'll just mention one other little thing, the divestiture of the European operations reduces our first quarter by a penny.

Okay.

So you need to add that back in if you're going to compare apples to apples.

Okay, no, I hadn't thought of that. Great. The last question relates to acquisition activity. In particular I was curious as to whether or not you've made any acquisitions in installation services that may have not been substantial enough to make mention of, but are you making small acquisitions there or should we take silence in that regard to basically mean that you're not growing through acquisition in that business?

We continue to make relatively small acquisitions in our service businesses, they would represent more of a branch or region acquisition, relatively small in terms of a few million dollar, and that level we tend not to announce them. If we did anything significant we would announce it but we continue to expect to acquire relatively smaller companies.

I think the big difference in our acquisition strategy is that we feel we've built the critical mass of product lines that we need, and additional acquisitions, we're focusing on real value-added acquisitions. Companies that either immediately do something for our existing businesses or we do something for them, so that the value of the acquisition and the immediate earnings impact of the acquisition will be higher than what we've historically done. And I don't want to mislead people that we won't do future acquisitions, we're just saying they'll be more value-added if we do do them and relatively less of them than we've done historically.

Great. Thanks very much.

Next to Keith Hughes from Robinson Humphrey. Please go ahead.

I want to focus in on you were talking about raw materials, particularly insulation prices going up. Are you going to be able to pass those on during the year to offset some of this pressure?

Our experience on the insulation side, generally, is that we are able to pass those cost increases on. It becomes more difficult with some of our other product lines where we have large retail customers or large home builder customers and historically, that is more difficult. So, in some of our other product areas, we're not assuming a price increase. So it's a mixed answer to your question.

So, but you'll have most success in insulation, most likely?

I think on the services side we should be able to pass on most of the cost increases.

Okay. Thank you.

Next we'll go --

I should also mention that we've seen in past years a number of insulation price increases that have not held up for the entire year. So it does not necessarily mean those increases will be year long.

Next we will go to Frank Danhow from Adage Capital. Please go ahead. Mr. Danhow, your line is open. Sir, if you can pick up your hand set. Hearing no response, we'll take our next question from Steve Faulkins from Lehman Brothers.

Good morning, one quick question: What's a fair estimate of the total assets that are going to be divested with the European businesses that are going, or how much above the goodwill is going to be gone?

One thing I'd like to explain a little bit in the charges that we have taken, because it is a little confusing, under accounting rules, once a year in the fourth quarter we have to look at all of our businesses and make a judgment if there's been impairment of the goodwill on our books for those businesses. We did that in the fourth quarter of last year, we looked at all of our businesses, and did take the goodwill impairment charges that I mentioned.

Coincidently, most of that goodwill impairment charge related to the businesses we're going to divest, that's a separate decision then, a decision to divest the companies, in which case we then have to write down those businesses to the value we think we can receive for those businesses. And the value we expect to receive is actually less than the carrying amount we had on our books at year-end, even after the goodwill impairment and that's the charge that we say we will also have to take in the first quarter of this year. Under accounting rules we were not allowed to take that until formal action was taken on the divestiture plan which has been in recent days.

On the other hand, we do believe that some of those divestitures we will make at a profit to our cost basis, and what we're saying is that we will a a charge to reflect the losses in the first quarter and we expect to make gains on some of the dispositions later in the year and the two would largely offset each other. In terms of goodwill remaining on our books to those businesses, I would expect that most of that goodwill was written off at the end of the fourth quarter.

A substantial portion of that, Steve, was written off in the fourth quarter. I think you can assume, as we indicated in the press release, that any assets related to those businesses we mention that proceeds are expected to exceed 300 million and we did indicate that we expected to have a modest loss. So I think if you, you know, if you think about that in the context of the assets, they would exceed 300 million as well.

Okay. So let me ask this a different way. Is it fair to say that the current return on capital on the businesses that you're divesting are probably below the corporate average and certainly not in the range that you want to get to over the next three to five years?

Absolutely.

Yeah. And I think you could assume the operating margins and the return on invested capital are both below the corporate average.

Okay. And then secondly, and I apologize I may have asked you this last quarter, if your goal is to get to a 15% return on capital by the end of '08, what does that assume in terms of a growth in the operating or after-tax operating profits versus growth in capital, i.e., you know, if you're going to from 10 to 15%, you can either get there by growing -- keeping the capital base flat and, you know having a decent growth in earnings, or you'd have a, you know, a very big growth in earnings, off, you know, more than offsetting some growth in the capital base. How should we think about that?

Well, Steve, I think you got to look at it in two pieces, as you've indicated. This year, we were able to keep our capital base, in fact, we were able to reduce our capital base at year-end 2003 versus year-end 2002 very modestly. We did not show any improvement in ROIC because when you look at average capital employed, which we do for our calculation, we had an increase. That primarily, yeah, over the last year, primarily reflected the fact that we had some investments in acquisitions in 2002. So I think we can continue to manage our capital base, I don't know that I can tell you or that we can tell you that we can keep it flat going forward.

There will be some incremental growth obviously, but given that we're focussed on slowing down the acquisition program as we've indicated, managing our portfolio and looking at other businesses that might potential;y be divestitures where we can redeploy that capital, continuing to allocate excess cash to repurchase stock, pay down debt and with the kind of growth we've been able to achieve, I think the growth in earnings will outpace the growth in the capital.

The other thing that I think we want to remind people of, is we do have financial assets on our books that aggregate a little bit in excess of $900 million. And we've -- excluding cash. And we've indicated that over the next three, four years, we plan to monetize those assets. That alone will add close to 100 basis points once we finish that program in the return. So that's another aspect that I think we've mentioned before.

And I think you will begin seeing significant improvement in our return on invested capital beginning in 2004.

Okay. Great. Thanks very much.

We'll take our next question from Michael Regan from JP Morgan. Please go ahead.

Hi good morning. Just a couple of questions. First on the internal sales growth, I was wondering if you can give us more visibility in terms of which segments led that, I guess North America grew 12% internally, which were the leaders there?

The leader, I think would be the ones that I indicated. We had very strong sales of paints and stains, a portion of which was because of the merchandising, the new color centers we put into place, gain of market share within the department. We had very strong sales of cabinets, assembled cabinets all year long, particularly in the second half of the year. We had strong sales of installation during the year, our window sales were strong, faucet sales were strong, so, they were you will up. In aggregate, they would have been up double digits.

Right, I mean, you just walked through almost all of your segments there. I was just hoping to get you know maybe the top two or three that really were above the 12% average?

Well, I think for competitive and customer reasons, I'd rather not get more specific than that.

Okay. Just looking at Europe a little bit more in terms of, you know, the goodwill write-down and the businesses that you've identified as noncore, you know, where do you see, I mean, do you see the review process in terms of what you're looking to keep on over the next couple of years, do you see that review process continuing, there being additional businesses that you identify that just don't make the cut on return of capital, and I could extend that question also to North America as well?

Yes, I would say that we have had a very intensive strategic planning process now for over a year and it is continuing very actively. And we are looking at all of our businesses, all of our portfolio businesses, all of our assets to determine which ones will give us the best returns, which ones are core to our key growth strategy, which ones tie into the platform building that we're doing and I think clearly, you will see more actions during 2004.

Okay. And likewise, on the acquisition side, been relatively quiet, do you guys see any pickup in activity there and you've commented before that, you know, acquisition multiples have, you know, increased in the M&A market, I was wondering if you could comment if there's any change there?

We have seen an uptick in valuations of companies, there's a lot of private equity capital available. The good news of that is that if we're going to divest anything, they may have more value than they would have had a year or two ago. By the same token, I should mention with the strengthening of the foreign currencies, the euro, selling of European businesses will bring more value today than they would have a year or two ago as well.

In terms of current acquisition activity, we always have a very active program of looking at companies, looking at others in our industry. We have nothing in advanced negotiation stage other than small fill in acquisitions in our services businesses. So, there's nothing in the immediate horizon and the comments I make about future acquisitions are just prospective, right now we're focusing on building value and creating value with what we have and organic growth. It doesn't mean we won't make them, but there's nothing currently in the horizon.

Lastly, I apologize, depreciation and amortization and cap ex for the fourth quarter?

For the quarter alone?

Or for the full year.

Full-year capex was 271, depreciation and amortization was 245.

Great. Thank you so much.

Next to Michael Morserow from Bear Stearns.

Thank you very much. If we could go back to Europe, quickly, maybe I could get further color on what exactly is behind why you have not been as successful over there and why you are not able to transfer really, what has been successful in North America. Going forward, you know, how you plan on changing that?

I would say two things have been a factor in the European businesses. One, as you probably know, the economic growth in Europe the last few years has been sub par and particularly in some of the countries where we have strong representation. If you take Germany as an example, I believe housing starts in Germany have now declined for six consecutive years.

So the environment that we're working in is not the best and our strategy going forward is more to replicate what we have done in this country in terms of building platforms and putting greater emphasis on some of the retail opportunities that we have in Europe. We are experiencing some very significant growth with retail customers in Europe, who are rapidly expanding throughout Europe and eastern Europe, and some of the companies that we are divesting just do not fit into that strategy or do not have product lines that are meaningful on the retail side of the business, or are relatively small or are regional.

We have a number of companies that are relatively regional, and in a particular country, and if it doesn't fit into a broad European strategy, and platform, then our feeling is we'd rather put that time, effort and capital into businesses that do. So we have other businesses that are expanding in Europe but we have a number of that, as I say, are not part of the strategy, and those are the one we're primarily divesting along with the limited growth opportunity or return on capital opportunity we see in those businesses.

Okay. Can you, regarding pension expense, should we expect that to be better, year-over-year?

Our pension portfolio like a lot of other companies has done very well in the past year and I would say our pension costs this year should be up a little bit from last year, but I did mention that as a significant incremental cost in '04 versus '03.

Thank you.

Next we'll go to Ivy Zelman from Credit Suisse First Boston. Please go ahead.

I thought you guys were excluding me or something. Anyway, congratulations on the quarter.

Ivy, you're usually the first one.

I tried, I pushed the button. A lot of the questions I had were asked already. But with respect to your specifics in terms of guidance for SG&A, you obviously had a lot of promotional activity, and increased costs related to increased displays, et cetera. And can you give us a sense, if you can expect to see an improvement on that line item, especially as, Richard, you've talked about looking into more synergies with respect to sales and other pieces of similar businesses?

I think, Ivy, based on the fact a lot of the cost increases we had in SG&A took place last year, as an example we literally spent 10s of millions of dollars on additional displays in '03. We amortized that over a three-year period but if our sales go up, then the percentage of that cost on sales decline. So I haven't specifically looked at that number but I would be surprised if SG&A as a percent of sales does not go down in '04 versus '03.

We did also, Ivy, in that in SG&A, did have acceleration of benefit-related expense. You might remember Ray's passing, we I think net about 15, $16 million, ended up in that category or about 15 basis points. That won't be recurring.

Can you tell us a little bit about what maybe is on the plate with respect to the synergies in some of the businesses that are similar? Whether it's cost savings through consolidating sales efforts, I know there's been some discussion there?

I think, I'm going to turn this over to Alan Berry our President, but I might add that we would expect to share with the investment community a number of additional data at our investor meeting coming up in June where we can give you more factual information in terms of some of these questions that you're asking, in the meantime, there's a lot going on, including consolidation of businesses, I'll turn that over to Alan.

Internally we've basically going through the consolidation of at least five companies right now. And we're also working on substantial number of synergy opportunities that we have. A few months ago, we realigned responsibilities under our group presidents so that our group president has an entire category of product. And we're already seeing some of the benefits that have that we're getting by the control features that we've got within the particular platforms. Mill's Pride, as an example, we've set up a group Vice President over the retail cabinet group which includes KraftMade and the Mill's Pride organizations and we've started seeing some substantial benefits of just doing some of those type of things. And going forward, we have plans to do more that as well. So we are seeing the benefits of what we've been working on for the past six months to a year.

Alan, would that include therefore if you're not willing to give specifics, I understand, but if you could, in terms of the retail VP, in terms of Mill's Pride, KraftMade would that mean that junior consolidating sales forces in that effort?

We've done some small part of that. But certainly, we're looking at manufacturing opportunities, where we can use the expertise of one plant versus another organization. And just looking to put in the best practices that we have around the company, not just in the retail cabinet side.

Okay. If you guys maybe Alan also, while I have you, address the --

Ivy, we have had, already we've had head count reductions in, you know, in triple digits. So we are seeing -- at Mill's Pride alone. So we are seeing the benefits of some of those synergies that we're going after.

Great. I'm excited to hear more about that in June. Can you elaborate where you are in installation services? Richard, I think the last time you spoke at the end of the third quarter you said it was 65% installation of insulation and we know you're expanding your footprint in those services. Can you give us an update where you are, please?

Ivy, I think we ended up 2003 with insulation being just under 68%. That number continues to trend downward, thought because we're deemphasizing insulation but because our other products have been growing substantially in double digits and I think that trend is going to continue for the foreseeable future.

Do you have an expectation where it would be at the end of this year? Roughly?

Yeah, I think we'll be talking more about that in subsequent meetings.

Okay. And you know, Tim, you actually gave some specifics on keeping the capital base relatively flat and growing earnings. You know, you guys have a very distinct goal, though, to getting to a 15% return and the gentleman that asked the question earlier, it was really the question I wanted to focus in on, realizing you have a distinct goal of 15% by 2008, one of the questions I have is that with mix obviously affecting margins, and you might have clearly some deceleration just in the overall macro environment, can you give us sort of a framework of how you guys are so confident you can get there by 2008? I mean, what are some of the steps that you have to achieve to getting there, what are the red flags, or not red flags, you know, basically, targets you have to hit?

Well, I think some of the drivers, Ivy, are consistent with what I mentioned a second or two ago, you know, one of the big items in the monetizing of the financial assets. That's a significant issue for us. The other, Alan talked about some of the consolidation activity that's going on, and some of the potential cost savings and synergistic opportunities that we will be able to realize from those efforts. Obviously, we're going to talk more about that in June, as Richard mentioned. So, that would be another factor. The continued management of our portfolio, you know, we had divestitures earlier this year with Baldwin Weiser Marvell, we've announced the European businesses, redeploying those assets. We are continuing to buy back stack and repay debt, you know, I think I feel comfortable that we have a good chance to get there.

We did have growth in operating profit this year of 9% and as I mentioned, we kept our capital base relatively flat. We didn't see any improvement in the ratios, but I do believe to the extent that we can continue to manage our capital base, with, and it will, you know, grow to a certainly extent, if we can keep that below the operating profit growth, which I think we can, I think you'll see, you know, continued improvement over time.

We ought to be up, as Richard mentioned, this year we're not going to give a number yet but we would expect to see improvement at the end of this year.

I would just add to that, too, that remember we have very high relatively high return on assets on incremental business. We typically make 30, 40% return on assets incrementals businesses and some of our businesses like services, that number could be 80 or 100%. So as we generate internal growth, organic growth, if we meet our targets of at least six to 8% growth, then that by itself, return improves our overall returns because our capital base is not expanding anywhere near as the return we're getting on the additional investment.

That's helpful. I guess your monetizing the 900 million of cash, assuming obviously that's a pretty low return, given where rates are, that you must be earning.

It's not just that, but effectively it reduces your capital base. If you just take that money and pay down debt, you shrink your capital base which enhances your returns on investment.

Would we expect that 900 million would go to debt pay-down and share repurchases and not expect it to go to acquisitions as a ranking order?

That's going to be driven by what the opportunities are and where we can generate the highest rate of long-term return on invested capital. So I think it probably would be a combination of different things.

Okay. Great. Thanks a lot, guys.

We'll go next to Matt Vinyel from Moore Capital, please go ahead.

I wanted to ask where your inventory levels were at at the end of quarter?

47 days.

Which was a significant improvement over the year ago period.

Okay. And do you have the amount in dollars, too?

Yeah, we do. Just a second. A billion 019

Great, thank you.

Next to Michael Strong from Crane Communications, please go ahead.

I have two questions. First, can somebody explain to me why the total revenue figure that you all reported changed from 9.4 billion at the beginning of the year to 9.1 billion now? And the secondly, can you sort of provide more detail about why the sales key retailers really pushed up in the fourth quarter?

Yeah, the change in the prior year's sales number reflects the businesses that we sold during 2003, Baldwin Weiser and Marvell, we have to treat those as discontinued operations.

Retroactively, take it sales out for all periods.

So those have all been restated to reflect the sale.

That's what I thought. Then a little bit on the fourth quarter push in those -- with those--?

I would say really a combination of our penetration in markets, our market share gains, our - customers are doing better and obviously, the consumers are spending more money, at least in our products and markets. And the other thing I just mentioned in my earlier comments, if you take a look at the fourth quarter of last year, some of our customers were showing very large negative comp store sales, so the comparisons also get enhanced with that. But even if you take that out, it was a very strong sales force at retail and there was nothing unusual in it that shouldn't be a pattern of continuing going forward.

We will take our next question from Scott Stark from Citigroup. Please go ahead.

Thank you. On the debt reduction, you in past calls you mentioned you did have interest in getting up to the A level. Is that still the goal within the next year or so?

What we've said is one of our goals is to have a credit rating improvement, we're currently BBB-plus and that continues to be one of our goals and if we meet the targets that we think we can meet, we think that's a good likelihood. I should mention during 2003, we went to positive outlook with one of the rating agencies so, I think we are making progress in the right direction.

Still about 35% debt to cap, is that --

Our big issue not debt to cap because the agencies don't look at equity the way they used to because of all the goodwill charges and other things that happened in a lot of companies. It's really cash flow on total assets -- total debt, total capital, is it?

No, cash flow to total debt is a measure that they are putting a lot more focus on as opposed to debt equity ratios. Debt equity is still important but one of the major metrics now is cash flow to total debt.

As we retire debt, that automatically gets better along with the improving earnings.

Do they give you anything specific because it's tough for me to get it out of them.

They have guidelines, we know what those guidelines are, on the other hand, rating agencies tend to want to move a little slowly. So the fact you get to that number, doesn't mean you automatically get a rating improvement, they like to see you stay at that number for some period of time, too. So, we can't give you a timetable on that, but clearly it continues to be one of our goals.

All right. I mean, you're already trading like your almost at A level.

Basically, from everything we see and here, our bonds trade at spreads that are the equivalent of an A level. So the fact that we can get that rating enhancement, won't necessarily save us any money. I think we're getting the benefit of the higher rating.

I would argue that's correct. One more question. You know, given rates still are low, any need or desire to come back into the market, I know did you a lot prefunding over the last couple of years.

Well, you know, we always watch the markets. As you say, there are some awful attractive opportunities out there. We have 900 million of cash, four or 500 million of marketable securities, and we do have, I believe 2 to 300 million of debt coming due in May and we have I believe virtually no debt coming due in '05. We don't have a lot of need for additional debt at the present time.

Sounds good. Thank you very much.

And I did mention, by the way, that in addition to the cash we have, if we complete the European divestitures, that will be an additional 300 million of liquid resources that we'll get also.

I was going to ask that, what your main use of the proceeds was.

I would guess we would continue to use that cash flow to pay down debt, repurchase shares and invest in the business.

Thank you very much.

Our last question is a follow-up question from Budd Bugatch from Raymond James.

That was kind of where I was going, what debt can you pay down in 2004?

We have limited options. We do have some debt, as I mentioned, coming due.

Right. 334 million.

Most of the other debt we have is farther out, and what caused us a pretty big premium to retire. So you know, it is a challenge for us to pay more debt down. But on the other hand, if interest rates go up, the trade-off for that is that we're earning only 1% or whatever on our cash and if interest rates go up, even if we can't retire more debt, at least we ought to earn more on the liquidity that we have.

Understood. Two other quick questions. On the cumulative translation account, Tim, if you're divesting these businesses in Europe, is that an account where we're going to see some movement when you make the actual transaction, I don't think you can prebook, that right?

There should be some movement in there, Budd, yes, once the transactions are finalized.

Okay, you say you've written up the assets so you have to take the loss, that's where that will show up, part of that?

Part of it would potentially flow through that category, yes.

That would bet write-up that you have, because currency is appreciating.

That's correct, yes, I understand. And my last question is can you give us the purchase price of the 9 million shares or average purchase price? I know you may not answer this, but where your appetite is as the stock moves up?

Well, maybe the best answer to that is, I did mention in my call, we bought an additional 5 million shares in January, and you probably know that January probably averaged right around these current share levels.

Right. And for the fourth quarter, where was it?

I don't have that number and I'm not sure we put that out, but we typically buy on a regular basis. So you know, we're pretty steady buyers on both given days.

Okay, thanks, Dick.

I think for the year as a whole, we averaged about 22, and I believe we averaged about 27 or $28 a share in the -- oh, what was our average in the fourth quarter, does anybody know offhand?

We don't have that in front of us, but it would have been about the average price our shares traded at for the quarter.

Okay. All right, thanks.

Okay, operator, I think we're all set, and just want to take this opportunity to thank everybody for taking the time to be with us. Thank you very much.

And, ladies and gentlemen, this does conclude our conference today. We do thank you for your participating. You may now disconnect.