馬斯科 (MAS) 2004 Q2 法說會逐字稿

Thank you for standing by, and welcome to Masco Corporation's 2004 second-quarter earnings conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received the press release for this conference call and supplemental information, they are available on Masco's website at www.masco.com. Statements in the following discussion may include certain forward-looking statements regarding Masco's future sales, earnings, growth potential and other developments. Actual results may vary materially because of external factors, such as interest rate fluctuations and changes in consumer spending and other factors over which management has no control. Additional information about Masco's products, markets and conditions which could affect future performance is contained in the Company's filings with the Securities and Exchange Commission, and is available on Masco's website at www.masco.com.

Masco undertakes no obligations to update any forward-looking statements, whether as results of new information, future events, or otherwise. The financial and statistical data referred to in this call is included in the investor packet distributed prior to the conference call and posted on the company's website at www.masco.com, under the investor relations section. In addition, we may refer to, in this call, to non-GAAP financial measures as defined by the SEC, Regulation G. Accordingly, a reconciliation of the differences between such measures and the most direct comparable financial measures calculated in accordance with the GAAP is included in the investor package. After a brief discussion by management, the call will be open for analysts' questions. If you are unable to get your question during this call, please call the Masco Corporation's investor relations office at 313-792-6646.

Now, at this time I'd like to turn the conference over to Richard Manoogian, the chairman and chief executive officer of Masco. Mr. Manoogian, please go ahead.

Thank you, Duane, and joining me today are Alan Barry, our president and chief operating officer, and Tim Wadhams, our senior vice president and chief financial officer, who will be available during the question-and-answer period at the conclusion of my remarks. We are pleased to report that net sales from continuing operations for the 2004 second quarter increased 16%, to a quarterly record of $3.1 billion. We are particularly pleased that our 16% sales growth increase resulted primarily from organic growth, driven by market share gains, new products and positive economic conditions benefiting the new home construction and home improvement markets. All of the company's business segments, including our European operations, experienced significant organic sales growth. Particularly strong were sales of assembled cabinets, paints and stains, installation services, vinyl windows and plumbing products.

North American sales from continuing operations increased 15%. Since we have had no significant acquisitions during the past year, virtually all of that 15% growth is organic. I should point out, however, that the second quarter of last year was adversely affected by bad weather conditions, impacting both new home construction and retail sales in certain parts of the country, which reduced demand for certain of our products. International sales from continuing operations increased 23%. In local currencies, international sales increased 14%, compared with the second quarter of last year. This is the second consecutive quarter that we have achieved significant organic growth in Europe, and reflects the recent reorganization of our European operations into 3 platforms, with greater emphasis on expanding our sales to retail customers. We are particularly pleased with our growth in Europe, since many of these economies continue to be growing at a slow rate.

Excluding the impact of acquisitions and foreign currencies, organic sales for the entire company were up 15% in the second quarter. Income from continuing operations for the quarter increased 34%, to $294 million. Earnings from continuing operations increased 48%, to a quarterly record of 65 cents per common share, compared with 44 cents per common share last year, and exceeded the Company's recently increased guidance of 58 to 60 cents per common share provided in June. Results for the second quarter of 2004 include income related to insurance proceeds from the Behr litigation of 1 cent per common share, and incremental income from the sale of marketable securities and none other -- nonoperating -- other nonoperating assets of 1 cent per common share, compared with the second quarter of last year. Income from the sale of marketable securities and other nonoperating assets in the second quarter aggregated 3 cents per common share, compared with 2 cents per common share last year. In the second quarter of this year, the Company generated approximately $120 million cash from the debt disposition of marketable securities. We previously announced in the first quarter of 2004 the planned disposition of several European businesses that are not core to our long-term growth strategy.

The second quarter of 2004 results include after-tax income from their operations of $11 million, and an additional after-tax charge aggregating $44 million, 10 cents per common share, for those businesses that are expected to be divested at a loss, both of which are included in discontinued operations. The additional charge principally relates to operations located in Spain, and is primarily the result of lower-than-expected operating results of those businesses. Recent terrorist attacks in Spain certainly have not helped the situation. Any gains from the disposition of other individual businesses, which we expect later this year, will be recognized in discontinued operations as such transactions are completed. We continue to believe that these gains will substantially offset all of the 2004 charges, and that we will realize aggregate proceeds of approximately $300 million when the disposition process is complete. Including the operating results of these discontinued operations and the second-quarter charge I just mentioned, net income for the quarter increased to 261 million, and earnings increased to 58 cents per common share, compared with 46 cents per common share last year.

As many of you know, Masco has invested, during the last 6 to 7 years, over $10 billion in acquisitions, capital expenditures, and new product development to create the critical mass that we made -- that we believe has made us arguably the strongest company in the home improvement products industry. These investments have given us a major position in the marketplace, and increased Masco's importance to our customers. We believe that our favorable performance in both sales and earnings in the first half of 2004 is partially the result of these investments paying off for us, as well as a number of actions that we have taken internally to achieve market gains, to increase synergies among our operations and to achieve cost reductions. Gross margins were 31.8% in the second quarter, compared with 30.7% last year. Operating profit margins, as reported, were 15.6% for the quarter, compared with 14.2% last year. Excluding unusual items, operating profit margins were 15.4% for the second quarter, compared with 14.9% last year.

Incremental profits from the strong sales growth that we achieved in the second quarter more than offset the negative effect of substantial cost increases in a number of operating expenses. As we stated earlier in 2004, we have experienced substantial cost increases in copper, brass, particle board, lumber, insulation material, freight, energy and healthcare costs, as well as costs and expenses associated with complying with the new requirements of the Sarbanes-Oxley legislation. These items partially offset the incremental profits from higher sales volume. As we previously indicated, the company continues to expect that operating profit margins in 2004 will approximate those of 2003, as higher margins from increased sales are largely being offset by these cost increases, particularly in our installation service businesses, as well as the lag effect of implementing price increases with major customers. Historically, the Company has generally been able to increase its selling prices to reflect certain material cost increases. Typically, the benefits of such selling price increases are reflected in subsequent periods, as there is a time lag as a result of existing commitments, particularly in our service businesses.

Total SG&A expenses as a percent of sales, including general corporate expense, were 16.5% for the second quarters of both 2004 and 2003. Our general corporate expense was 1.5% of sales for the second quarter, compared with 1.1% last year. The increase is primarily attributable to costs and expenses associated with complying with the new requirements of the Sarbanes-Oxley legislation, which incrementally cost us over $10 million, or nearly 2 cents per common share, in the second quarter. Our costs related to the Sarbanes-Oxley legislation is above that of most companies of our size, due to the large number of worldwide operations we have, and the large number of locations that we have at Masco.

Our segment sales were strong in all categories. Since we have had no significant acquisitions in the last 12 months, our sales increases are primarily organic and a result of market share gains and benefits from the large investments that we have made in recent years to strengthen our public -- our product offerings and market positions. We believe that our organic growth continues to be stronger than industry growth and most of our peer group. Our segment sales for the quarter were: cabinets and related product sales increased 15%; plumbing product sales increased 16%; installation and other services sales increased 17%; decorative architectural product sales increased 15%; and other specialty product sales increased 22%. Sales to key retail customers in the quarter from continuing operations increased 14%, compared with a 7% increase last year.

The Company's tax rate was 35.8% for the second quarter, compared with 34.9% last year. The increase in tax rate was due principally to a change in the mix of foreign earnings in countries with higher tax rates. The Company anticipates that our tax rate for 2004 will approximate 36%.

Accounts receivable at the the end of the second quarter were 54 days, compared with 53 days a year ago. Inventory days improved to 52 days, compared with 57 days a year ago, and accounts payable days improved to 38 days, from 32 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 19.2% of the last 12 months of sales, from 22% a year earlier. For the 12 months ended June 30, 2004, return on invested capital, as reconciled, was 12%, compared with 10.8% for the 12 months ended June 30, 2003. We continue to believe that the Company will achieve our 15% return on invested capital goal by 2008, or sooner. Our liquidity and balance sheet at the end of the second quarter continued to be strong, with cash and marketable securities of $1 billion, and $1.9 billion in unused bank lines. Debt as a percent of total capital at the end of the second quarter was 47%, the same as a year ago.

The Company has continued our active share repurchase program, and repurchased 9 million common shares during the second quarter. In addition, in July we repurchased over 1 million common shares. We believe that our shares are attractively valued from a repurchase standpoint, and depending on market conditions and other factors, we expect to continue to be relatively aggressive in our share repurchase program. At the end of July, we had approximately 23 million common shares remaining under our 50 million share repurchase authorization. In the first 6 months of 2004, the Company has returned over $800 million to shareholders through share repurchases, 24 million shares, and dividends. In 2003, the company returned in excess of $1 billion to shareholders through share repurchases, 35 million shares, and dividends, and we expect to exceed that $1 billion in 2004.

In terms of current outlook, the strong sales trends of the second quarter have continued thus far in the third quarter. While we do not have final July results, July organic sales growth should be in the high single digits, and based on present trends, we expect at least high single-digit internal growth for the entire third quarter. While we expect these favorable trends to continue for the remainder of the year, even though there has been some modest slowing in consumer spending generally since the beginning of the second quarter, on a comparative basis our rate of organic growth should be somewhat lower in the second half than what we achieved in the first half, since our growth in the second half of 2003 was considerably stronger than last year's first half.

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 in a range of $2.25 to $2.30 per common share. This new guidance represents an increase from the previous guidance we've given of $2.00 to $2.10 per common share. This new guidance includes the benefit of common share repurchases through June 30, 2004, and reflects increases in a number of operating expenses, including such items as material, freight, energy and insurance costs, as well as the costs and expenses I've mentioned associated with complying with the new requirements of Sarbanes-Oxley. This new guidance includes 4 cents per common share of realized income related to the Behr litigation, since most analysts have included this item in their forecasts, but the buy -- but the guidance excludes any future Behr litigation income, since such amounts can't be predicted, and also excludes any gain or charges for businesses to be divested and any other possible unusual items. The guidance also excludes any benefit from share repurchases after June 30, and any additional gains from marketable securities. The guidance assumes that housing starts will approximate 2003 levels this year. We estimate that a 1% change in housing starts equates to approximately 2 cents earnings per common share effect.

Earnings guidance for continuing operations in 2004 includes a reduction of approximately 5 cents per common share, resulting from the absence of earnings related to the European businesses to be divested. These businesses have been treated as discontinued operations effective in the first quarter of the 2004, which includes the reclassification of their prior -- prior-period results to discontinued operations. Based on current business trends, the Company anticipates that third quarter 2004 earnings from continuing operations will be in a range of 57 to 60 cents per common share, excluding any possible unusual items, compared with a relative strong third quarter of 2003, of 53 cents per common share.

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

Very good. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit 1. Once again, star, 1 for a question. And we'll pause just a moment to assemble the question roster. And our first question will come from Stephen Kim with Smith Barney.

Thanks very much. Congratulations on a good, strong quarter, Richard.

Thank you, Stephen.

A couple of questions I had for you. I guess, first off, on the installation services division, you clearly indicated in your comments why we didn't see, you know, margins improving there this quarter, and I think you indicated that you expected it to improve by the time you got -- maybe by the end of this year, heading into next year. What kind of a -- of a margin ramp do you think you might expect to get back to normalized by the fourth quarter of this year?

You're right in that our margins in our services business did decline. Last year we were at approximately 15% margins. This year we were down to around 2 -- 12% margins. A small portion of that decline is accounted for by the fact that we are increasing our sales of noninsulation products, which we've informed the financial community have lower margins on average, low double-digit margins, and as those sales increase, that will bring our margins down a little bit. The primary reason for the decline in margins is due to the lag effect of implementing price increases, particularly with homebuilders. And we have seen very large increases in the price of insulation material. We've seen increases now 3 times in the past -- 4 times, I believe, in the past 6 months or 9 months, of insulation material, and when we try to pass that on to our customers, the homebuilders, they typically ask us to not implement those cost increases in homes that they've already sold at a fixed price and to talk to them about price increases when they begin building a new home. And that accounts for the major part of the margin decline. We expect to recover most of those cost increases, and I would expect we will recover a good portion of them by sometime in the fourth quarter, and certainly, assuming no additional cost increases, by the first quarter of next year. So I would expect that we'll be back up 200 basis points or more in margins by sometime in the fourth quarter, or certainly in the first quarter of next year.

Great. Thanks. And with respect to M&A activity in the insulation services business, did you make any small acquisitions that weren't large enough to discuss, or -- or were you completely organic in that business this quarter?

We did make some very small acquisitions, and I believe our aggregate sales from acquisitions was about $12 million in the quarter, compared to the year before. So a relatively small amount.

What kind of businesses were those that you bought?

Those would primarily be small branches in some market that we weren't represented in, and wouldn't represent anything major departure from what we're presently doing.

Okay. Great. You talked about Europe, I believe. Europe apparently went well this quarter. Can you talk about sort of anything in particular that -- that you saw in Europe? Was it across the -- the board in Europe, or was it particular categories?

We've been working on 2 major changes in Europe in the last 18 months. One is converting to a platform structure of 3 platforms over there so we could get more synergies and cross-benefits from our operations. And, secondly, we've been implementing a number of programs similar to what we've done in this country, where we go to major retail customers and offer them a package program to buy a variety of Masco products. And the main reason for the large organic growth that we achieved in the first and second quarters of this year is that we have received some substantial orders from retail customers taking on a greater number and a greater volume of Masco products as they expand their business. So we're encouraged with the project -- process -- progress that we're making in Europe, and I might also mention that we did achieve some nice margin improvement in our European operations in the second quarter, compared to last year, as well.

Were there any specific cost-cutting efforts or initiatives that you did that helped drive that?

I might ask Alan Barry to answer that.

We've -- we've done some consolidations of some similar companies. We've really been focused over there on the synergies that -- that we have in within the -- those platforms that we created. So, couple that with the -- the platforms that we've established worldwide, and some of the cost-cutting measures that we've put in, and that really helped to drive those margins.

Okay. Great. And last question, can you give us any updated guidance for your plans for financial asset sales and gains from those sales for the year?

Yes, we - wee mentioned that marketable securities were brought down by over $100 million in the second quarter, and we expect to have a -- another significant decline in marketable securities in the third and fourth quarter of this year. At the end of the second quarter, we had about $460 million of marketable securities, and another $440 million, approximately, of other financial assets that are longer-term financial assets which we've indicated we intend to run down, but those, because of their nature, will take several years to -- to reduce. So we're continuing to actively implement our program of reducing our financial assets and redeploying those resources in share buyback and operations.

Is it the -- the kind of pace we saw in 2Q, the kind of pace we could expect to see, you know, in 3Q and 4Q?

Well, I -- I would say that we would expect to see the second half of the year decline by more than $100 million in marketable securities.

Okay. Great. Congratulations on a strong quarter. Thanks very much.

Thank you.

And we'll next go to Budd Bugatch with Raymond James.

Let me also add my congratulations on a very, very strong quarter, Richard.

Thank you, Budd.

Could you kind of give us, maybe quantify for us, some of the cost impacts, and maybe if you could maybe even take it down to the segment levels, so what you think the cost of some of the raw materials were on the quarter, and drags in those margins?

We've seen double-digit increases in a number of the major product categories that we purchase, in terms of raw materials. Rather than get into segments and operations specifically, for competitive and customer and other reasons, I would just say that in aggregate, we feel that this year, by the second half of this year our -- our combined cost increases will probably represent low single digits in terms of sales, in total cost increases. And I do believe that by the end of this year, or going into next year, based on discussions we've already had, price increases we've already implemented, that we will have cost -- price increases in the low single digits by early next year that will offset a major portion of those cost increases. So they're very significant, but we do think that we'll recover a fair share of them from price -- price increases that we're implementing.

So, so far this year, you think you have not recovered, you know, half of that, or a -- a third of that?

Well, the -- each -- each item varies, depending on when the cost increase was implemented, what the inventory levels were that we had. In some areas where inventories are relatively low, like in our services businesses, you feel the impact of cost increases much more rapidly, but I would say that, up to this point, we've recovered perhaps a -- a half or two-thirds of our cost increases in price increases, and a major portion we haven't recovered yet.

Okay. When you look at decorative -- decorative and architectural services, the margins were very, very impressive this quarter. How sustainable do you think that is, and what caused the differential between the 14% last year and the 22% this year?

One of the major reasons for that improvement was that a year ago, we had the problems in our European operation, due to a systems failure that cost us $23 million in charges, so you really have to add back $23 million to the year-ago number. I believe, even putting that in, we had a nice comparison -- about 18% -- that would give us 18%, compared to about 22%. So we still would have had an improvement in -- in margins, and I think that margin increase was largely driven by incremental volume.

Okay. So you think that's sustainable going forward?

Well, I -- I would just point out that included in that sector are some categories, such as paints and stains, which are seasonal, and typically they have a stronger second and third quarter than a first and fourth quarter. So excluding the impact of seasonality, I don't think if you take any of our operations, any of the margins that we showed in any of our segments should not be sustainable throughout the year.

Okay.

[Inaudible] for additional price increases.

I understand. Sarbanes-Oxley 404 cost you 10 million incremental in the quarter. What is that -- what's the outlook for that?

Sarbanes-Oxley cost us in excess of $10 million in the second quarter alone. That's 1-1/2 cents a share in earnings. We expect that high cost to continue in the third quarter and hopefully taper off a little bit in the fourth quarter, but still continue at a relatively high level and then drop off significantly in 2005. And the reason for that high cost is because we do have a lot of locations. We currently have over 200 people, inside and outside of Masco, working full time implementing just Rule 404 of Sarbanes-Oxley. And the reason is because we have a lot of locations, we have a number of relatively decentralized operations with different information systems, and a lot of locations. As an example, in our service businesses alone, we have 400 locations of branches and distribution centers, and we have to implement Sarbanes controls in every one of those locations. So the complexity and amount of work involved for Masco is much higher and more costly than -- than most companies of our size.

Okay. And just for my purpose, the last -- the last issue that I've got is a potential new accounting rule I understand is out there, that might have some impact on diluted shares?

Yeah. I'll ask Tim to answer that.

Yeah, Budd. That would relate to the zero-coupon convertible senior notes that we have outstanding, and just to remind everybody, we issued those back in July of '01. The accreted value at this point in time is about $800 million. As Budd indicated, there's a couple of accounting issues that affect the inclusion, or potentially will affect the inclusion of those, in our diluted earnings per share. The instrument includes a put option that the holders have on specific dates going forward, and we have -- the Company has the ability to satisfy that put in either stock or cash. And because we rep to our auditors that we will satisfy it only in cash, we're able to avoid any dilutive impact. One of the amendments to FASB 128 would eliminate our ability to make that rep, and therefore require us to include those on a diluted basis. Now, we think we can remedy that unilaterally by basically giving up the right to use shares, and -- and simply resulting in the fact that we'd only be able to issue cash. And that doesn't do anything to holders of those, it just basically eliminates a right that we would have. So, that's one issue we might able to cure, obviously, by taking that action. The second issue that relates to these securities is still under discussion, and it relates to the fact that there is a contingent aspect relative to convertibility that essentially relates to our share price, and really requires our share price to be at a relatively high level, currently in excess of $41, before the contingency is removed. There's new accounting regulations that would basically eliminate any aspects of contingent consideration in the convertibility, and if that is to pass, if you will, in terms of the accounting regulate -- regulatory folks, we would be faced with a dilutive impact. We think we can minimize that dilution to 24 million shares. There may be some other actions we could take to -- to deal with that. The 24 million shares, Budd, if they were included in our full-year EPS calculation, would be about 8 cents a share, at 225, and would -- and this is also retroactive, I -- I would point out. It would affect 2003's EPS by about 4 cents, and 2002 by about 3 cents. So there is still a lot that is in the works here relative to the issuance of any of this new guidance and interpretation, if you will, and -- and we'll be watching that and -- and taking a look at what we might be able to do to minimize that. But I think on a worst-case case basis, we're probably looking at 24 million shares potentially included in our calculation. On the other hand, this is a very attractive instrument, with, I think, 3-1/8% interest that is non-cash paid.

And I'll just -- I'll just add that whether we have that dilution or not, depending on how we end up treating those debentures, the conversion price is substantially above the current market price.

Understood. Any idea, Tim, when that will be -- when -- when the FASB will go through its -- its conclusion on that process?

I would guess, Budd, that's probably going to be late this quarter or early fourth quarter, and these would be affected for 2004, as we understand it at this point in time.

Okay. Thank you very much.

Sure.

And we'll next go to Michael Rehaut with J.P. Morgan.

Hi. Good afternoon.

Hi, Michael.

Just a couple questions following up on -- on what was going up on the margins. First, just a point of clarification. The year-ago comp for decorative architectural I have is 19.8, not 18%, if you add back the 23 million. Is that -- is that what you guys have?

You're right, Mike. I think you're right on that.

Okay. Just wanted to make sure.

You -- you should do the call for us next year.

Let me double check that real quick, but I think -- yeah.

Okay.

19.8, and then foreign margins would have gone from 5.8 to 11.1 in international sales, as well.

Great. And if -- if you could just, I guess again, give a little bit more color in terms of the drivers of the -- if possible, the margin improvement on not only the decorative, you know -- is -- I'm -- I'm curious if one of the drivers is also that you've annualized now the higher -- the incremental amortization costs, if that's something that, now that you've worked through that for a full year, it would be in new product displays, if -- if -- if that's something that's allowed margin expansion to resume?

The -- the only thing that would change there is that that's a 3-year amortization, and the only thing that would change there is, as our volume goes up, it would represent a smaller percentage of sales due to volume.

Right, but if you -- if you've started like an incremental 5 or 10 million of amortization costs starting in 2Q '03, or 1Q '03, then you -- you wouldn't have had to have that tougher year-ago margin comp, correct?

Yeah, Mike. My recollection is we picked up the amortization in all 4 quarters of last year as well.

It would have been less in the first quarter, and I think a full second quarter, Mike.

Okay. And if you could also comment on, you know, the nice turnaround in -- in margins from the first -- in plumbing, where you had a contraction in the first quarter, to an expansion in the second quarter, and also a nice pick-up in expansion in other specialty. If you could address, given that you -- you have been talking about all the higher costs that have hurt you, in those 2 segments, what were the drivers in the expansion?

Yeah, a -- a couple things there. First of all, plumbing does have a higher proportions of European sales than most of our other segments, so the fact that we're improving our European results would be reflected in our total plumbing performance. And remember that we're also divesting a number of companies, although that's out over the year-ago numbers as well, and you can assume that some of the companies we're divesting were underperformers which, you know, will help our absolute margins. In term of some of the other comments you have, I would again point out the seasonality that -- some of our product categories have strong sales in the second quarter, and that incremental volume alone would drive margins higher in the second quarter than we normally have in the -- in the first quarter. But having said all of that, I think the key is that we do have, as -- as a company generally, relatively high incremental margins on increased volumes. So, frankly, if it weren't for substantial cost increases, you would have seen a significant improvement in our overall margins in the second quarter, driven by 15% organic growth, particularly in North America. So it gives you some idea of the impact of those cost increases that, even though margins were up about 50 basis points, that's still substantially less than they would have been, had we gotten the full impact of that sales increase.

Right.

And -- and Richard's comment applies to the other specialty segment as well. That -- that also has a disproportionate share of European-related businesses. And the other thing I would add, in both of those segments there has been some -- as we've formed the platforms, there's been some consolidation-related work going on, and we did have a little bit of cost in the first quarter that, you know, would have impacted those margins versus the second quarter.

Okay. So just to recap here and make sure I'm getting this right, the -- in -- in plumbing, some of the divestitures that you put the income in discontinued ops, so the exclusion of that on the regular operating line helped from a mixture?

It -- it -- yeah, it wouldn't have helped in the comparison, because those came out of the year-ago numbers as well.

Oh, okay. Right.

But the improved performance in Europe this year would have helped that -- that category.

Okay. And lastly, in terms of the share repurchase, you know, it's been pretty, you know, strong and also consistent throughout the first half of the year. Should we expect a similar type of pace and -- and trend line for the back half?

Well, we -- we don't forecast going-forward share repurchases, because it's subject to balance sheet, market conditions, other factors. The one thing we did say on the first quarter call was that we had an above-average rate of share repurchases in the first quarter because we were front-loading our share buyback in anticipation of the divestiture program, which was going to generate 300 million of proceeds later in the year. So the only thing that we've said is that we do expect to return over $1 billion to shareholders this year, as we did last year, and I would expect that, all things being equal, we'll continue a fairly active share buyback program for the balance of the year.

All right. But -- but -- okay. And certainly, though, if you're expecting to, you know, do about $1 billion in returned proceeds through dividends and share repurchase, being at 800 million -- you know, obviously you're -- you're most of the way there so, you know, it would be safe to assume to some extent that, you know, the -- the number of shares repurchased in the back half will be less than the first half?

Well, I -- I think because of that front loading, that would be the case anyway, but I guess you can assume that we'll be well over $1 billion in returns this year, compared to last year.

Okay. Fair enough. Thanks a lot.

And one thing I should also add, though, that as -- as the year progresses, additional share buybacks have less of an impact on this year's results, because we use an average time period for the buyback, so they would have more of an impact on 2005 results as the year progresses than -- than they would otherwise.

Thank you.

And we'll next go to Margaret Whalen with UBS Financial.

Good morning.

Good morning, Margaret.

Nice job on the quarter. And, a lot of the questions and the way you've answered them, when it comes together it seems that there might be a disconnect between your guidance for the back half of the year and for '04 in general, versus the results that you're putting up. And specifically the question I had is about your assumption for houses starts being flat, while they're up year-to-date 11%. Do you expect demand to slow meaningfully? Are you seeing that in the channel right now?

We're not -- we're not seeing any significant slowdown in houses starts, but you are correct. We're using a flat housing-start assumption for the year, and the first half of the year was up 10 to 11%, and we're assuming in our projection that the second half will be down 5 to 10% from the strong second half of last year. Now, as you know, we've been forecasting a housing-start decline now for 2-1/2 years, and we've been wrong every year, and I'm hoping we're wrong in the second half of this year.

Uh-huh.

But that's the assumption that we're using in the guidance and forecast, and I just also would add that, as you probably know, we've been pretty conservative in the guidance we've put out now for a number of quarters, and we're certainly hopeful that if business stays strong, that we might turn out be to conservative in the guidance that we've given.

Well, it -- it seems then -- I mean, I -- I guess what you're saying was we're in the first week in August, demand through July was around the same level, to kind of mid-teens organic growth. Would that be safe to say?

I -- I would say that the strong trends that we've had have continued, so the rate of sales and growth that we had late in the second quarter has continued into the third quarter, so we haven't seen any slowdown in that sense.

Okay. Good. And then --

And one -- one of the things that we do is that we give the guidance that every 1% swing in housing starts adds 2 cents a share to earnings. Yeah. So if you want to use a different housing forecast than we have, you can adjust our guidance accordingly.

Okay, 250.

[Inaudible -- laughter].

And -- and then, you know, the -- the raising your selling prices, hopefully more quickly than your costs, so the margin improvement should continue in the back half of the year, right?

What I'm -- what I'm saying is that for the year as a whole, we're looking for relatively flat margins, which is pretty close to what we had in the first half of this year, because we think that the lag effect will still impact our third quarter, and then taper off as we go into the fourth quarter.

Uh-huh. Okay. And in -- in terms of your working capital management, everything is improving. Should we expect this level to continue, now it's kind of inventory turns above 7 times, or is there more upside to that, in terms of the fundamental business as opposed to liquidating the financial assets?

Margaret, this is Tim. I -- I think what we said is that there still are a few areas in the Company where we think we can improve inventory management and, in fact, we're working very diligently to do that. I think relative to working capital, as we've communicated previously, the area that probably has the -- the most opportunity is in the payables area.

Uh-huh.

And we continue to chip away at that, and you know, when we look at ourselves versus peers, we're still probably 7, 8 days below peer comparison. So I think there's opportunity there. Otherwise, I think we're doing a good job, and I wouldn't expect anything dramatic in inventory, but I think we can stay pretty much where we are and maybe see a little bit of improvement, again, in certain areas.

Okay. And when you put that together, Tim, the -- the margins are improving sustainably, the inventory turns are improving a little bit. The return on capital is already, you know, close to 12%, and the target is, I think, 15% by '08?

Yes.

It seem like we might get there a little more quickly?

Well, I -- I think there's an opportunity for that to happen, Margaret, yes.

Okay. And then just finally, inventory in the channels right now, do you have any sense for that?

I think we feel that inventory in the channels are -- are normal. We don't see anything unusual out there.

Great. All righty. Thank you guys very much.

Our next question comes from Ivy Zelman with Credit Suisse First Boston.

Good morning, gentlemen. Actually, Dennis McGill on for Ivy today. Just to clarify, Richard, a couple of the comments you made earlier on the questions. You mentioned that you have -- have or have not seen any slowdown in sales from July into June, other than, you know, normal seasonality?

No, we have not seen any slowdown in the -- our sales rate, compared to those months. Comparisons will get more difficult, because a year ago was stronger, but our business continues to be as strong as it was in May and June.

Okay. And getting to the installation services --

Now, my own -- I might just add, my own feeling is that the overall economy, I believe, has slowed 2 or 3%, in terms of retail sales going back to the first quarter, and I guess what that means is that our second quarter would be even stronger if that hadn't happened. But we haven't seen any slowdown in recent months.

Okay. On the installation services side, you mentioned the mix to noninsulation. I think that might have been around 35%. Has that changed much?

We're -- that's about right. But we're continuing to grow double digits, or even a faster rate in noninsulation products, although with the high cost increases of insulation, the sales of that will go up as we pass on those cost increases. But we continue to expect double-digit growth in noninsulation product sales for the next few years.

What would be the ideal mix for that for you?

I don't know if we have an ideal number. We -- we just want to grow both sectors as fast as we can, and -- and the one clearly is going to outgrow the other.

Okay. And -- and the margin improvement, you had talked about there, with the price increases rolling through, you had mentioned 200 basis points. Was that sequential from the second quarter here into the fourth? Or are you talking year-over-year?

No, we're -- we're -- we're talking about by year-end, we would expect to have margins back to the levels they were at last year, other than for that mix of products, which would represent about a 200 basis-point increase.

Okay. And then just 2 other quick ones. Do you have the average share price of what you repurchased in -- in the quarter?

In the quarter? Yeah, just a sec. I can grab that. I think it was right around -- let's see here. Actually, there's -- I think it was around 29. Share repurchase -- you got it -- 29.73.

Okay. And -- and how much gains from the financial services portion are you -- modeled into your 225 to 230?

The only thing we have in the -- the balance of the year, we have no gains from marketable securities. We do have in the projection approximately 1 cent a quarter from income from Masco Capital. Masco Capital is a more predictable activity. We've averaged historically, other than the 2, 3 bad market years of a few years ago, we average about $10 million a year of income from Masco Capital, and we projected about 1 cent a quarter in the last 2 quarters from that entity. But otherwise, no other marketable securities gains.

But there is approximately 8 cents in the first half of the year that relates to marketable securities and Masco Capital.

In aggregate?

Yeah, in aggregate.

And, Richard, you had mentioned that you thought roughly 100 million or so could occur in the second half. Is that what you're saying, is it's likely but not in the --

Well, the -- the -- the liquidation of marketable securities may or may not result in gains.

Okay.

It depends on whether there's a gain in the securities you liquidate.

Okay. Fair enough.

I -- I would be surprised if we don't have some other additional income from marketable securities but, as I say, we -- we can't predict that.

Fair enough. Thanks a lot, guys.

Your next question comes from Keith Hughes with Robinson Humphrey.

You talked a lot about some of the cost pressures you face in the first half of the year. Are you already starting to hear from of your suppliers on further increases, for example on steel, and I know energy costs have gone up in the back half of the year?f

No, I would say -- I would say the great majority of the cost increases that we've seen, we saw in the first quarter, or knew about in the first quarter, and therefore, I think that our costs in aggregate have -- have leveled off.

Okay. Thank you.

Our next question will come from Michael Morrisroe with Bear Stearns.

Thank you. Good afternoon. Just had a quick question, and I respect your conservatism on the guidance, but if I look at just lower interest and a lower share base from 3Q of last year, I get a little over a nickel additive, which would imply, you know, above even the low end of your guidance. Taking that with some of the comments on the sales front, can you just reconcile why you would even put out such a -- such a low number on the low end there?

Well, I -- I'm not sure how you've -- you've done your math, but the share guidance wouldn't change that much, because the large share purchases we had this year were in the first quarter. I believe if you take 9 million shares we repurchased in the second quarter, we only get a little over 6 months' benefit of those share repurchases, so that's not a big EPS number.

Okay. I -- I had you upwards of 480 million shares a year ago.

That's correct, but -- but a lot of those share counts came down in the first quarter and were reflected in the old guidance. Some of that was reflected in the old guidance.

Okay. I'll follow up with you there. I just had a bigger quick -- bigger question on, kind of, raw materials and -- and potential price increases. Is there a --- a point in time where you believe that the retail channel will be -- you'll have some pushback from them, potentially if -- if we see a slowing environment on the retail sales?

Well, we've -- I -- I don't want to talk about specific customer or -- or channels, because that can be awkward with the customers involved who would probably be following what we're saying, but I would just say that we've already had extensive discussions with a lot of our major customers, and therefore we're comfortable in what we've said, in that we expect some significant price increases later in the year which will offset a major portion of the cost increases.

Thank you.

The next question comes from Steve Fockens with Lehman Brothers.

Hey, good morning, guys. Just a follow-up on the -- on the question around housing starts and the impact to your earning. Richard, if you're assuming effectively a down second half of '04 in housing starts, but earnings up, is -- is that just -- being conservative, or is the -- the simple math of a 1% start either way changing earnings 2 cents, can that be offset in other areas?

I'm not -- I'm not sure what you mean, but, you know, when we talk about housing starts being relatively flat for the year, that may sound overly conservative, and I'm sure many of you have your own forecasts. I would just mention that the Chicago Federal Reserve just recently came out with their forecast for housing starts for the year, and they're using a flat number for the year. So I wouldn't just assume that housing starts in aggregate are going to be up 10 or 11% for the year, as they were in the first, both because I think there will be some slowdown in housing and, secondly, the comparison gets much more difficult. So, you know, we may be conservative, but there are other knowledgeable people out there who are also forecasting a -- a flat housing start year.

Oh, no, no. Fair enough. I'm not -- I'm not questioning the forecast, but I'm more saying let's just assume that you're right and that housing starts are flat for the year, and since they've been up a lot in the first half, they've got to be down in the second half. So let's just assume for minute they are down in the second half, and yet you're still pointing to an earnings number up year-over-year. What -- I guess what I'm trying to get at is, how important is that housing start equating to 2 cents, of is that really more coincidental , as opposed to causational?

The -- the 2 cent impact from a 1% swing in housing starts is an extreme impact, and what we've said is that even if houses starts went down, we would expect to increase our sales to the new construction industry through through market share gains, through new products. And at the beginning of the year, when we forecast a 10% decline in housing starts for this year, we said that we expected our sales to actually go up to new construction, even in that environment. And that's really through the fact that we're increasing our installation services, we're -- we're getting a greater share of product with a -- a lot of the new housing market, we're increasingly doing more work with the large public homebuilders, increasing our share business with them. So we look for our sales to new construction this year and next year to be up, even if housing were to decline 5 or 10%.

And on that basis -- you still stick to, I think what you've said in the past about good variable contribution margins such that if you still get some level of positive sales growth, whatever the housing market looks like, that you're still generating, what was it, 4 cents a share or something like that, for every 1% increase in sales?

That's right.

Okay, so -- so --

On an annualized basis, every 1% swing in Masco sales is 4 cents a year in earnings.

Okay, so --

And another thing I'd just mentioned is besides housing, you know, we continue to have a strong position with retail customers are that are growing at a rapid rate. We expect that to continue for the next few year and, if anything, we're increasing our penetration with those customers, and our European operations, we expect to continue to grow and improve margins. So when you combine all that with share repurchases, you know, we're fairly -- we're fairly optimistic on what we can do in earnings, not only this year, but next year, even if housing were to taper off

Okay, so -- so -- following up on all this, most forecasts I've seen for next year, and granted we've all been wrong for a long time, but that housing starts are down 5%, it's not a simple, okay, housing starts are down, so let's knock off 10 cents of earnings?

No, that -- that's absolutely right, because that -- that's the mathematics of it, but we would expect to more than -- we would expect to offset part of that decline with other benefits.

Which -- not to -- to -- to harp on this too much, but doesn't it beg the question, why even bother bringing this statistic up?

Well, because -- because in any given month or quarter, if you have a swing of housing starts of 1%, that immediate impact is 2 cents a share in the short run. In the long run, you offset those -- those impact with other factors.

Okay. Fair enough. Thanks so much.

There are no further questions. At this time I'd like to turn the conference back to Richard Manoogian for additional or closing remark.

Yeah, thank you, Operator. I -- I would just like to also mention, as I did in the first-quarter conference call, that you might see some -- continue to see some insider executive selling over the next year, as you have seen in recent months. As many of you know, we had a major executive stock purchase program that we implemented some years ago, where 300 key people within the company purchased 8 million shares of Masco common stock, at their own risk and exposure, with borrowed money that they committed to personally repay. These obligations come due during the course of the next year, so you will see some selling by executives as they retire those loans and obligations. And I might mention that we continue to see a significant reduction in the contingent liabilities of the company. Over half of the loan obligations under the executive stock purchase plan that I just mentioned, have already been retired by the individuals involved, which reduces the corporate guarantee behind those loans, and our largest remaining share purchase guarantee expired on July 30,with minimal payments made to the shareholders involved. So we have very little share price guarantees remaining going forward. So, basically, we're -- we're pleased with our second-quarter results and the favorable outlook for the balance of the year, and we believe, as I mentioned earlier, that we are beginning to see significant returns from the $10 billion that we've invested in recent years in our expansion programs, as well as benefits and synergies from our internal focus on cost reductions and organic growth. We are achieving synergies from our operations consolidations. We are reducing our operating units from 67 last year to less than 50 by the end of this year, through divestitures and consolidations, and we expect the number to go even lower next year. So we have a lot of momentum in the company and -- currently, and we appreciate all the efforts of our over-60,000 people at Masco throughout the world. And we would hope, if business trends continue, that the guidance we have given may prove to be conservative, as it has been in recent quarters. And thank you for joining us today.

Again, this does conclude today's conference call, and I'd like to wish everyone a good day.