馬斯科 (MAS) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Masco Corporation 2004 third quarter conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received a 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.

The financial and statistical data referred to on this call is included in the investor packet distributed prior to the conference call and posted on the company's website at www.masco.com under the Investor Relations section. In addition we may refer in this call to non-GAAP financial measures as defined by the SEC's regulation G.

Accordingly, a reconciliation of the differences between such measures and the most directly comparable measures calculated in accordance with GAAP, is included in the investor package.

After a brief discussion by management, the call will be opened for analyst questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at (313) 792-6646.

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

Thank you.

And I'm joined again today by Alan Barry, our President, and Tim Wadhams, our Chief Financial Officer, who'll be happy to answer any questions you might have later in our presentation.

We are pleased to report that net sales from continuing operations for the 2004 third quarter increased 12 percent to a quarterly record of $3.2 billion. This 12 percent increase in sales growth was achieved primarily from organic growth driven by market share gains, new products, positive economic conditions, benefiting the home construction and home improvement markets.

Particularly strong were sales of assembled cabinets, installation services, windows and plumbing products. North American sales from continuing operations increased 11 percent. Since we have had no significant acquisitions during the past year, virtually all of that 11 percent is organic growth. International sales from continuing operations increased 20 percent. In local currencies, international sales increased 9 percent.

This is the third consecutive quarter that we have achieved significant organic growth in Europe, and reflects the benefits of the recent reorganization of our European operations into platforms. And our greater strategic focus on expanding sales to more rapidly growing retail customers. We are particularly gratified with our growth in Europe since many of those economies continue to grow at a relatively slow rate.

Excluding the impact of acquisitions and foreign currencies, organic sales growth for the entire company were up over 10 percent in the third quarter including approximately 1 to 2 percent of price increases. Income from continuing operations for the quarter increased 12 percent to $289 million.

Earnings from continuing operations increased 21 percent, to a third quarter record of 64 cents per common share, compared with 53 cents per common share last year and exceeded the company's recently increased third quarter guidance of 60 to 63 cents provided in September and our guidance of 57 to 60 cents provided in early August. Results for the third quarter of 2004 include income from the sale of financial investments of 1 cent per common share, comparable with the third quarter of last year and lower than the first and second quarters of 2004.

In the third quarter this year, the company liquidated approximately $127 million of financial investments. As we have previously stated, our goal is to dramatically reduce our financial investments over the next few years. And we expect further significant reductions in the fourth quarter. We are especially satisfied with our third quarter earnings given some headwinds that we experienced. Compliance with Sarbanes-Oxley legislation cost us approximately 2 cents a share in the quarter. Higher incremental costs than we had expected at beginning of the year.

Some -- sales that were delayed due to adverse weather in the southeastern part of the country, reduced earnings slightly and higher than anticipated energy costs, as well as other material cost increases not totally offset by price increases, were also negative factors. We previously announced in the first quarter of this year, the planned disposition of several European businesses that are not core to our long-term growth strategy.

During the third quarter we completed the sale of 2 of these businesses -- Jung Pumpen in Germany and The Alvic Group in Spain. Total proceeds from the sale of these businesses were $191 million. The company recognized a third quarter pretax net gain on the disposition of these businesses of $108 million or 21 cents per common share.

In addition, the company recognized an additional third quarter pretax charge of $31 million, relating to the remaining businesses held for sale due to the lower than expected operating results, as well as weaker than expected demand for the companies -- the businesses that the company is divesting. These items are included in discontinued operations.

During the third quarter of 2003, the company recognized a gain from the sale of businesses aggregating 11 cents per common share after tax. Including discontinued operations, net income for the 2004 third quarter increased to 359 million, compared with 319 million last year and earnings increased to 80 cents per common share compared with 65 cents per common share in 2003.

As many of you know, Masco has invested over $10 billion during recent years in acquisitions, capital expenditure and new product development, to create the critical mass that we believe has made us arguably, the strongest company in the home improvement products industry.

These investments have give 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 9 months 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 share gains, to increase synergies among our operations and to achieve cost reductions.

Gross margins were 31.2 percent in the third quarter compared with 31 percent last year. Operating profit of 491 million in the third quarter of 2004 was a record for any quarter. Operating profit margins, as reported, were 15.5 percent for the quarter, compared with 16.8 percent last year. Excluding income related to the Behr litigation and the European charges in 2003, operating profit margins were 15.4 percent in the third quarter this year, compared with 16.2 percent last year.

Incremental profits from the strong sales growth that we achieved in the third quarter, offset much of the negative margin effect of substantial increases in a number of operate expenses. As we stated earlier this year, like most companies in our industry, we have experienced substantial cost increases in a number of operating expenses, including such items as material, freight, energy and insurance costs, as well as costs and expenses associated with the Sarbanes-Oxley legislation.

The company achieved improved operating margins in 3 of its 5 segments. The lower margins in the installation and other services segment, resulted primarily from increased material costs and an increase in installed sales of generally lower margin noninsulation products.

Historically, this group has generally been able to increase 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 with customers. The lower margins in the plumbing products segment are primarily due to increased material costs and an increase in the sales of lower margin products offset in part by higher sales volume of certain other products.

As we stated in our second quarter conference call, we continue to expect that the high point in the differential between cost and selling price was in the third quarter, and that differential should improve in the fourth quarter.

Total SG&A expenses, as a percent of sales, including general corporate expense were 15.8 percent in the third quarter, compared with 16.3 percent last year. The improvement was principally the result of lower promotion and advertising costs as a percent of sales, as last year we had significant costs related to our new Behr color paint centers. Our general corporate expense was 1.7 percent of sales for the third quarter compared with 1.1 percent last year.

The increase is primarily attributable to incremental external costs and expenses, principally professional fees associated with Sarbanes-Oxley, which incrementally cost us $11 million or approximately 2 cents per common share in the third quarter. With increases aggregating approximately $26 million for the 9 months ended September. Our costs related to Sarbanes-Oxley are above that of most companies, due to the large number of worldwide operations and locations at Masco.

Our segment sales were strong in most categories. Since we had no significant acquisitions in the last 12 months, our sales increases are primarily organic, and the result of market share gains, positive economic conditions, and the benefits from the large investments that we have made in recent years to strengthen 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 12 percent; plumbing product sales also increased 12 percent.; insulation and other service sales increased 15 percent; decorative architectural product sales increased 4 percent, and other specialty product sales increased 20 percent.

Sales to key retail customers in the quarter, which were adversely affected by weather in certain parts of the country, particularly sales of architectural coatings, increased 6 percent compared with an 8 percent increase last year. The company's tax rate was 36.3 percent for the third quarter, compared with 37 percent last year and we anticipate that our tax rate for all of 2004 will approximate 36 percent.

Accounts receivable days at the end of the third quarter were 51 days compared, with 53 days a year ago. Inventory days were 49 days, compared with 50 a year ago, and accounts payable days at the end of the third quarter were 38 days for both this year and last year.

Working capital, defined as accounts receivable and inventories less accounts payable, improved to 18.5 percent of the last 12 months of sales, from 20.5 percent a year earlier. For the 12 months ended September 30, 2004, return on invested capital was 12.9 percent compared with 11.3 percent for the 12 months ended September of last year.

We continue to believe that the company will achieve our goal of 15 percent return on invested capital by 2008 or sooner. Our liquidity and balance sheet at the end of the third quarter continue to be strong with cash and marketable securities of $1.3 billion and $2 billion in unused bank lines. Debt, as a percent of total capital at the end of the third quarter, was 45 percent, the same as a year ago.

The company has continued our active share repurchase program and repurchased 3 million common shares during the third quarter. In addition, in October we repurchased over 1 million additional 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 October, we had approximately 20 million common shares remaining under our original 50 million share repurchase authorization.

During the 2004 third quarter, we also increased our quarterly dividend by 12.5 percent from 16 cents to 18 cents per common share. The company has now increased dividends for 46 consecutive years. Last year, the company returned in excess of $1 billion to shareholders through share repurchases -- 35 million shares, and dividends. In the first 9 months of 2004 the company has already returned an additional approximate $1 billion to shareholders through share repurchases -- 27 million shares, and dividends.

We continue to experience better than expected sales performance thus far in 2004. And based on current business trends we believe that we will achieve record sales and earnings for 2004 with full-year earnings from continuing operations in a range of $2.31 to $2.35 per common share. This new guidance represents an increase from the previous guidance of $2.25 to $2.30 per common share.

As previously mentioned, the 2004 guidance includes a reduction of approximately 5 cents per common share on a full-year basis, resulting from the absence of earnings relate to the European businesses to be divested. This new guidance also includes the benefit of common share repurchases through September 30, 2004 and reflects a number of external cost increases.

The year's guidance includes income related to Behr litigation of 4 cents per common share in the first 9 months of 2004, principally in the first half, but the guidance excludes any fourth quarter Behr litigation income since we cannot predict such amounts, any gains or charges for businesses to be divested and other possible unusual items. The guidance also excludes any benefit from share repurchases after September 30th.

Based on current business trends, the company anticipates that fourth quarter 2004 earnings from continuing operations will be in a range of 50 cents to 54 cents per common share, compared with fourth quarter 2003 earnings of 32 cents per common share, which included a noncash charge for goodwill impairment of 9 cents per common share. While our 50 to 54 cents guidance is modestly below street consensus of 55 cents, it reflects our caution that higher energy prices may impact consumer spending, and hurricane-related damage may delay some construction activity into 2005.

Now, I'd be happy to open the meeting up for any questions that you might have.

(OPERATOR INSTRUCTIONS)

Margaret Whelen, UBS.

Well done. nice quarter again.

Thank you.

In terms of the guidance, a lot of people are confused about the fourth quarter. This is definitely better than your original estimation, right?

That's correct, because we've basically moved up our guidance for the year. And I should mention,too, that the the 55 cents consensus I mentioned does include 2 or 3 estimates that were as high as 58 cents or higher.

If you take the median of analyst consensus, I think it averaged more to 53 to 54 cents. But, on the other hand, we are concerned that there is a possibility of additional impact of high energy prices on consumer spending, and the possibility that some of our business might be delayed into '05 particularly in Florida related to new construction. So, we thought it was appropriate to be cautious in our guidance.

Do you have a sense for what the delays may have been already because of the hurricane in the October quarter?

It is hard for us to quantify that. The home builders are working very hard to have their closings completed, but we have seen some delays in digging of holes or doing other work because of repair damage that is being done, particularly in some of the smaller builders in Florida. So, our feeling is that the net impact of the hurricane in aggregate to us might be a slight increase in total sales, but that some of those sales may be delayed from late third quarter, fourth quarter into 2005.

When are you going give us '05 guidance?

We would normally give '05 guidance when we report '04 earnings in February.

Just then, a last question. Kind of bigger picture question. I guess about 2 years ago now since that stock bottomed, and you came down and said that you were going to slow down the M&A, and now that the stock is up 100 percent, it's a much stronger currency for you. Are you going to change at all your track there in terms of looking at acquisitions going forward or buying in less stock? And any change really on the use of capital that we should expect in '05?

No, our strategy has not changed. As we've said in the past we do expect keep doing acquisitions, but they're more apt to be synergistic, bolt-on acquisitions, tying into to existing businesses, where either we bring significant value to that business or they bring significant value to us where the immediate return is much higher than we've historically achieved in free-standing acquisitions.

We have no significant acquisitions in the pipeline and I don't expect any. But, I can't tell you that there may not be something in the future. But again, it would be in keeping with our new strategy. And we see our high priority being on using our resources to create more shareholder value through higher dividends and through share buyback. And I might mention that our cash flow continues to be very strong. And we expect cash flow this year should be in the range of about $1 billion before dividends. So, we are throwing off a lot of cash flow from our businesses and we expect to return a major part of that to our shareholders.

Okay. Thanks, good job.

Budd Bugatch, Raymond James.

Congratulations on a good job. Can you talk maybe -- in past calls you have kind of given us where you are in sales growth in the first month of the new period. Can you kind of quantify maybe where you were in October for internal growth?

Yes. I would say that we don't have final figures for October, but adjusting for the number of shipping days, there are 2 less shipping days in October than a year ago, adjusting for that factor I would say that we expect our sales to come in somewhere in the mid- to high single digits and frankly that probably would be our forecast and guidance for the year as a whole.

And I would just point out that we are comparing against a very strong fourth quarter we had a year ago. So that rate of internal growth would still be maintaining pretty much the growth that we've had earlier in the year. It is just the comparisons that make the numbers a little lower.

So, you are saying mid- to high single digit internal growth for the year?

No, for the fourth quarter only. When you add that to the first 3 quarters, you will probably still end up in the low double digits, or close to, it for internal growth for the year.

That's certainly very helpful.

And, remember that our long-term goal which we've stated in the past, is to average 6 to 8 percent internal growth. So we think we are certainly on track for that and obviously in the strong years like this year we expect to exceed it.

I certainly do remember that.

Can you also quantify for us, I think you said that you had 1 to 2 percent pricing in the quarter. Is there any way to quantify what you think the raw material impact was in the quarter? And how that might change in Q4.

Well, we expect that -- we believe that our cost increases in the quarter were greater than that 1 to 2 percent and the guidance we have given in the past, is that for the year as a whole, we think that our cost increases are going to be in the range of low single digits.

And we believe that by the fourth quarter, or certainly by early next year, we will have price increases in place to offset most of that cost increase. So, we would expect the gap between margins and selling prices and costs to narrow going forward.

I'll qualify that with one comment. Remember, that we have said repeatedly, that our focus now is on generating incremental sales and in some cases we are going after lower margin work that has a very high return on invested capital. So, all things being equal , we might occasionally see our margins drift down a little bit, not because of cost in pricing but just because of strategy in terms of products that we are selling.

I understand that. Is there any way in installation services to parse out how much of the margin differential might have been due to the new work being done and the lower margin businesses, and some of the -- some of the impact of other factors of the cost increases?

I would say that most of the margin differential was related to cost increases rather than lower margin products which are increasing at a more rapid rate. I would just point out that even though our margins and installation was down in the third quarter from a year ago, it was up from the first 2 quarters of this year. So, we have been improving margins there.

We did have a phenomenal quarter a year ago, and we do expect the comparisons to improve as the year progresses. And we are implementing and getting some significant price increases in the fourth quarter going forward.

And in Q3 what was the noninsulation? I think the insulation part last quarter was like 68 percent?

Right, we said that I think last year we were running around low 30 percent and I would say our current run rate probably is in the mid-30 percent in terms of noninsulation products.

Thank you very much. I'll let others ask questions. Thanks. Congratulations.

Stephen Kim, Smith Barney.

Good quarter. My first question, sort of follows on Budd's, regarding the installation services margin. Last quarter, I had in my notes that you expected to rebound from the -- the lag effect of the costs. That the rebound, when you sort of work through all that , might be as much as 200 basis points.

Is that a number that we could sort of look for, maybe coming forward in the fourth or first quarter? Or are seasonal factors, which naturally push up a third quarter, going to make it that you are not going to have that kind of an increase from the level you reported this past quarter?

Steven, this Al Barry. We did see about a 200 basis point improvement margin in the third quarter versus the second quarter. And going forward, the largest cost increase that we had came about in mid-June, so that really impacted our third quarter as well and we are still kind of recovering from getting the price increases on that one. But, those all should be in place by the end of the fourth quarter.

So, I guess when I look at the overall rate of the operating margin for installation services, would you feel comfortable that that is a level that would sort of be sustained in the mid-14 percent range or do you think we can get back up to the 15 and change range that we got in 2003?

I think we've said historically that we are looking to be in the low to mid- teens consistently in our services group and I feel pretty comfortable that that is where we will be.

Okay.

And, I think we've amplified that by saying that insulation tends to run in the mid-teens and the other products tend to run into the low teens, and it's the average of those 2 that gets you into the low- to mid-teens. But on the other hand, the new products that have lower margins, we have a very high return on invested capital. And therefore incrementally, they contribute a lot of profit to the bottom line, even though they bring margins down.

Got it. If I could switch gears to the investments portfolio.

Would you feel comfortable giving us a sense for what is the dollar value of the private equity fund investment is? The long-term investments?

I believe -- I believe at the end of the third quarter, our private equity funds were down to about 320 million from 340 or 350 million earlier in the year.

Could we expect that kind of a selldown -- that rate of selldown for the next couple of quarters, or do you think it might increase?

That one is a little bit more erratic, because we don't control that. That has to do with when our partners that run those funds divest of investments. But, I would say I don't think that is an unusual run rate because a number of those funds now are 3 to 5 years old and more of the investments are maturing. So, I think if you take the next 1 to 2 years, you would expect, if anything, a higher run rate of cashing out. And obviously we are putting far less money into those funds going forward. So, I would expect that number to come down significantly in the next 2 to 3 years.

Okay. Your corporate expense, excluding the Sarbanes-Oxley adjustments, seems rather high. Basically if we sort of look at what Sarbanes was in the first, second and third quarter I think you said 5 million, 10 million and then now 11 million. But you are still -- the increase that you have seen year-over-year in that corporate figure is much more than can be explained by what you have given us for Sarbanes. So I was -- 2 questions, I guess. One is, what is that -- what is the other -- it looks to me almost 11 or $12 million of extra cost outside of Sarbanes that hit you in this quarter. And what do you think about the Sarbanes costs and these other costs in corporate? What do you think they're likely to do as we head into next year?

I'll ask Tim Wadhams to answer the question. Before he does, I want to make a general comment on Sarbanes-Oxley. We have found that the cost of implementing the regulations related to that are running significantly higher than we originally expected. And we now expect about $35 million for 2004 of incremental external expense to implement the requirements of that legislation. I think we have something like 150 to 200 people outside -- inside and outside the company doing nothing but implementing Sarbanes-Oxley.

And the reason why our costs are probably significantly higher than most companies you hear about, is because of the fact that we've grown rapidly in recent years through acquisitions. We have a lot of different free-standing units relatively decentralized, that we are in the process of consolidating, but still relatively decentralized historically with different information technology systems and a lot of locations -- 400 plus in our services businesses alone.

And, therefore under Sarbanes-Oxley, we have to implement, where the average company is probably implementing controls of several thousand controls, at Masco we literally, under the rules, have to implement tens of thousands of controls. And our auditors tell us that we would be among the very highest in the country of any of their clients in terms of the amount of work it takes to implement those rules, and that is why our costs are running much higher than most other companies.

We expect those costs to largely continue into 2005 and then later in 2005 and particularly going into 2006 then fall off significantly. And I'll ask Tim to address the corporate expense increase besides Sarbanes.

Steve, if you take Sarbanes out of -- the incremental Sarbanes of 26 million out of our general corporate for the year, we are really about 1.2 percent of sales versus 1.1 percent last year.

As you pointed out, in the quarter, if you make that same sort of analysis and take the 11 million out, we are really comparing 1.4 to 1.0 last year. And we did have in the quarter, some additional outside fees that impacted that particular expense category, for some tax planning, some consulting and some other related fees, if that are really a little bit more unique just in terms of timing that hit the quarter. But ,I think the year-to-date comparison of 1.2 to 1.1 ex-the Sarbanes is probably, again when you take timing into account, the more appropriate comparison.

I might also add to that, with the stock price moving up , we had more option exercises and we have a provision our stock option plans, that allow reload stock options and therefore in the third quarter alone we incurred between 0.5 cent and 1 cent a share of increased cost just in expensing stock options compared to previous quarters. So, that was another factor that ran through that item.

Originally , Steve, we thought we would have about 2 cents this year of incremental expense related to stock options and it's probably going to be more like 3 for the full year.

No, when you said 35 million incremental, or extra in '05, I just want to make sure we understand exactly what that means. Does that mean that you are going to have an extra 35 million in '05 , over what you will do for the entire '04?

No, what is means, Steve, is that in '04 versus '03 we will be incremental 35 million. And, again, I should point out that that is just external professional fees, that does not include any quantification of any cost we've incurred inside for infrastructure systems and other things, which is pretty tough to quantify.

What Richard meant, was that we will continue to be at about that same level for next year , with maybe a little bit of improvement in the latter half of the year and then more improvement, if you will, in '06 relative to that incremental $35 million coming down somewhat.

Got it. That helps greatly, thanks very much.

Michael Rehaut, J. P. Morgan.

First on the -- you referred to the timing of sale with other European businesses. You announced the sale of a couple. Do you have an idea if those remaining businesses may get sold over the next quarter or so?

And also in that same regard, it also referred to the sale of financial investments, with more to come. Can you give us an idea, type of size or timing over the next quarter or 2 in that area as well?

In terms of the businesses, Mike, we would expect to have those divestitures complete by sometime in the first quarter of '05. And again, I -- there would be some activity in the fourth quarter, but generally speaking we will get that done over the course of the next 3 or 4 months.

I should mention, by the way, that when we first announced the divestiture program at the beginning of this year, we said that we expected proceeds of 300 million or more and we continue to expect to get proceeds of $300 million.

That should be posted at 250, Richard.

250 in proceeds?

Yes, at this point in time.

But we also said that we expected to have either break-even or a modest lost in the divestiture. And we are now expecting, and we have taken charges for that in the third quarter and second quarter, of losses of 30 million to $40 million pretax. And the primary reason for that shortfall, was that we had a number of operations in Spain that we are divesting. And since we announced the divestiture program, we has the terrorist activity in Spain, a shortfall in performance in some of those companies.

So, those are the businesses that we're largely getting less than we anticipated when we announced the program. But we think virtually all of those charges, as best we can determine, are now reflected in our financial statements. In terms of financial investments -- we did reduce our marketable securities portfolio by over $100 million in the third quarter.

In the last conference call we said our goal was to increase -- reduce them by at least 100 million in the last 2 quarters so we are ahead of that target. And I would expect that we will reduce marketable securities in excess of $50 million at least in the fourth quarter.

And in terms of the European sale, just to get an idea of the magnitude here, you'd said that those businesses represented about 350 million in sales. Roughly, what percentage has been sold with these 2 businesses that you completed this quarter?

That would be probably in the 125 range in terms of sales.

Okay.

And probably a little higher proportion in terms of profitability.

Yes.

Which would reduce the remaining earnings to be earned on the discontinued operations line.

Okay. And just last question here.

You talked about pricing and the lag in terms of getting the full offset to the higher cost. Where have you been -- has that been mostly in plumbing products? Or could you highlight which segments you are getting the most price in and if it is mostly in plumbing then I would assume -- perhaps are you expecting margins to be at least flat year-over-year once those pricing goes through.

The largest increases in absolute terms we've probably experienced in our service businesses where we have seen 30 percent plus increases insulation material, which is a large percentage of our cost of sales.

Second category probably would be in plumbing, where we have seen very high increases in copper and brass as you have read about. And we do expect that most of those cost increases will be offset by price increases by late this year, early next year. What was your other question?

No, that -- that covers it. Thanks a lot.

Ivy Zelman

Hi, gentlemen, Dennis McGill on for Ivy. Just wanted to touch on the margins in the decorative product segment.

We would have thought with the topline obviously coming in lower than you had probably previously expected with the weather and raw material costs going against you, that those margins would have been under a little bit more pressure , but you were still able to increase them pretty sizably from last year. Can you give us an idea of the dynamics of that? Kind of, what is behind that improvement?

One thing, Dennis that we should point out, is that if you are comparing it to last year, we reported in that segment last year, 13.6 in terms of margin. That was impacted by about 35 million of charges related to the European operation. So, when you add that back that is about 20.8 percent in terms of segment margin for the quarter which we are comparing to 23.6.

We are still looking at it versus that higher 20 percent that you are looking at. But still, a pretty significant improvement. And, like I said, you would have thought it would have been a little bit under more pressure. Are you on LIFO or FIFO accounting for material costs in that segment?

We're on FIFO.

Can you explain what maybe, is driving that? Give us a little color?

Well, I think last year we had some promotional expenses in that category that were a higher percent of sales, relative to this year. The color centers -- I mentioned that last year we had a lot of costs related to rolling out the color centers and a lot of promotional and other material, one-time costs that we incurred last year in relation to that, that affected margins last year.

And I think it is just execution and some incremental margin on the sales growth even though it was little lower than what we've experienced year-to-date. Year-to-date we are up 14 percent in terms of sales in that segment and obviously the third quarter was a little slower, as Richard mentioned earlier.

Would you expect those margins to be under some pressure next year, as some of these higher costs roll through?

We try not to talk about specific product categories, because there is customer issues involved. But, I think they are doing an excellent job in most of the businesses in that sector.

Okay. I was looking purely from a cost standpoint just on the accounting of it.

I would just say that if you get into some of the product categories, I think there have been some significant cost increases, even recently in some of the product lines -- resins and other things that go into architectural coatings. So, we may have additional challenges in '05 based on those cost increases.

Just I'm not sure if I missed this earlier. As far as the date that you will have to start including some of those shares from the contingent or from the convertible, has that already been decided?

On that zero -- You're talking about the zero coupon?

Right.

And relative to that , we will if we don't have a change and we are looking at some alternatives, you are probably aware that some people have done an exchange that will mitigate some of the dilutive effect. We are in the process of looking at that alternative, quite frankly and if we get that implemented we can avoid a significant amount of that dilution.

The dilution as we indicated in our highlights, is capped at 24 million shares, that would be approximately 8 cents a share. Vis-a-vis 2004. We have got about a month and a half to mitigate that if we can get something done between now and then. So, that won't show up until our fourth quarter if in fact there is any dilution related to that.

There are about 300 companies that have similar instruments in the marketplace, and a number of them have come out with exchange offers exchanging a relatively similar issue but with enough changes in it to eliminate the dilution problem. And making that exchange offer for existing bond holders. That is one of the areas that we are taking a look at to see if that works for us.

But, Tim if there's no change and if it gets implemented, then it would be in the fourth quarter and you'd have to restate retroactively.

Yes, we have to restate retroactively, including '03 and '02. And we indicated earlier the impact there is 4 cents and 3 cents respectively.

Tarun Khanna, Wellington Management.

Great quarter. Richard, I was just wondering, with the stock up here at these levels, what are your priorities now as you go into '05? Share buyback versus acquisitions? I know you touched on this earlier, but clearly the stock is not at 17, $18 when you guys really got aggressive on the share buyback front and I'm just to understand, at $35 I think the story changes perhaps a little bit. So, just want to get your thoughts on that.

Well, I don't think it changes significantly on the acquisition side if that is the thrust of your question. And on the share buyback, side I think the fact that we repurchased over 1 million shares in October while the stock was pretty close to these levels, may answer the second part of that question.

Okay. And just, could you address the dividend issue, as to what you were thinking on that front?

We've increased the dividend last year and this year at a double digit rate which has been higher than we have done in recent years. And I would expect that, as long as our earnings continue strong and our cash flow continues strong and the tax benefit stays in place for shareholders in terms of a lower tax rate on dividends, that our Board of Directors, which ultimately has to make that decision, would continue to look favorably on further increases. And as you know, we have a 46 year record and I would hope that we don't lose that record. So, I would think the odds are in favor of future increases, rather than not.

And just one follow-on question. Richard as you look into '05, I realize you aren't giving any guidance at this point, but are there any unusual charges that you're thinking about for any of the business going into 2005 to kind of clean up?

I would think and obviously I can't say this categorically but I would think that most of the charges and items are largely behind us with -- and I should say that one of our goals is to simply the company from an operational and balance sheet standpoint because we think we have been too complex in the past and that has resulted in a number of unanticipated charges periodically, and our gel is to reduce or eliminate that as best as we can.

We are in the process of reducing the number of businesses we've had. We've shared with the financial community that we've reduced our operations from 67 operating units down to 50 through consolidations and divestitures. And frankly, we think we can go significantly lower than that in '05. But we think we can do virtually all of that without any charges other than absorbing them as we go along.

The one heads up I would give that we put into our highlights, we do own 4 million shares of Furniture Brands stock, which we obtained in return for some debt related to the spinoff of our furniture business years ago, and that stock is down significantly from our cost basis of 30.25 and we have said that we may take a look at that at the year end and if it is still down significantly may have to look at whether we take a charge against that investment.

On the other side, we have gains -- unrealized gains in excess of the losses we have in the Furniture Brands, so in aggregate our investment portfolio has a positive to it but that may not prevent us from taking a charge in the fourth quarter related to that investment.

Carl Reichardt, Wachovia Securities.

I wanted to ask again, to return to Dennis' question on paint. Did you shift any of your production to more efficient facilities during the quarter? Again, the paint margins, even relative to last year on the sales numbers, seem so high, at least relative to our expectations.

I would point out that you are talking about a segment margin and remember, that architectural coatings are only one product line, although obviously, a large product line in that segment.

Sure. And did inventories in that segment -- or paint inventories specifically, increase faster than overall inventories for the company during the quarter?

I'm not aware of that, Carl.

We pretty much have 100 percent delivery rates there so, we typically don't carry a lot of inventory.

All right. Fine. Then the last question just on plumbing.

At retail, since you had an increase in the sales on lower margin stuff in plumbing, are you noting that consumers have shifted to lower priced faucets? In other words, if Depot is selling a faucet at $30, they're selling a different faucet that is -- would be a -- similar to the carpet business, a lower margin product at 30 bucks?

No, we haven't seen that. As a matter of fact, if you take our products generally, if anything, we have seen strength in some of our higher price products not at the expense of lower priced products. My reference to that, was more that we have certain companies within our plumbing group that have lower margins, particularly in Europe, and the sales of those companies partly because of currency adjustment , were stronger in the third quarter. Therefore that brought our average down. It wasn't the question of consumers trading down. If anything, we have seen the opposite trend.

That's what I needed. Thanks a lot, Richard.

Keith Hughes, Robinson Humphrey.

I want to follow up on an earlier question in installation. You had said the margins on noninsulation business were lower than insulation. You said that before. What about those products makes them better in terms of return on assets or return on working capital?

The main reason that we get such a high return on them is, when we can generate incremental volume, a great deal of our cost structure is fixed, in the sense of we have all of our branches and all of our infrastructure, distribution capability, logistics capability in place. So when we are able to take an additional product and put it through our pipeline and install it, we make close to 100 percent margin on sales on that incremental return on asset because our only asset is working capital.

So as a result of that we have a very high return on the incremental working capital employed to generate that additional volume and that translates into a very high return on invested capital.

That return is going to be independent of the product, whether it's a fireplace or a cabinet or whatever?

That's correct.

David MacGregor, Longbow Research.

Going back to the pricing of up 1 to 2 percent in the third quarter. What pricing assumptions do you have in your fourth quarter guidance? And the second would have to do with the observation you made in your in prepared remarks that you'd achieved a lot in terms of market share gains this quarter and I was wondering if you could elaborate a little more there. Thanks.

I would say we would probably expect a slightly higher percentage contribution from price increases in the fourth quarter because we are continuing to implement price increases, and we implemented some in the third quarter that we didn't have a full year's impact on so -- somewhere in that 2 percent range might be a good number for the fourth quarter, maybe slightly higher.

So we are being -- trying to be conservative on our sales projection going forward, just because we think there are uncertainties not related to Masco but generally just related to weather and economic conditions and energy prices. And I have always been a believer that high energy prices sooner or later reduce consumer spending, particularly on lower ticket items such as paint. And if high energy prices stay there with gasoline prices and heating oil prices, I think sooner or later that has to result in a slowdown in consumer spending, and we factored that caution into our guidance.

And then, on the market share gain?

Market share gains, and again, I would ask Alan if he's got a comment on this, but I would say that we've probably gained market share in virtually all of our major product categories.

We just -- basically we continue to be aggressive in the marketplace.

I think one thing that is happening is that the leading companies in our industry, and not only Masco, but I could name 1 or 2 of our peer group as well, I think continue to gain share with our big customers at the expense of a lot of smaller other companies that you wouldn't be as familiar with, who are losing share. And the reason for that is, that whether it has to do with product development, cost structure, relationships with big customers, logistics, internet capability. We can do a lot of things that a lot of smaller independent companies cannot do and as a result I think that is resulting in gained market share.

On top of that, we are entering into increasingly, agreements with the big builders who are gaining share within their industry, for additional product line particularly in our installation side and that is resulting in significant market growth through market share gains.

I don't know if you look at it this way, but is it possible to say how much of the growth this quarter was from market share gains?

It is very hard for us to quantify that across all the channels that we have and all the different products that we have. But historically, I can tell you that we have tended to say that market share gains represent about a third of our internal growth rate and historically new products represent somewhere close to a third and price increase and other factors could represent the balance. So I would say 30 to 40 percent of our growth probably comes from market share gains but I have to tell you in all honesty that is more of a guess than a factual statement.

Jacob Grossman, Goldman Sachs.

A couple of quick questions. I was wondering if you first -- if you could speak to trends within the quarter? And secondly, just seeing sales at key retailers decelerated somewhat. Besides weather is there anything notable or worth discussing?

I would say, two things on that latter part, first. One thing that did affect our sales to retailers in the quarter was -- I mentioned earlier that we had weather impact that clearly impacted the September. We had a number of home centers that are located in the southeast , not only in Florida where the hurricanes were but in the other southeastern states where we had a lot of rain and flooding, that I think resulted in lower than expected sales of paint during September. I should also mention that we had a very successful paint promotion on July 4th weekend and much better than -- stronger than we had a year ago, and a lot of of the product that went to that promotion was shipped to the home centers in June.

So that some of our impact in July really came from shipments of products that were in June. And if you take the 9-month sales to home centers, it would be much higher than the quarter alone was. So, I would say it was a combination of the weather as well as the timing of that promotion in July 4th.

On top of that we are seeing nice growth in our sales at retail in Europe, but that is still a relatively small percentage of our total sales throughout the company.

Alex Mitchell, Scapuzzo (ph) Asset Management.

Hi, I just want to pick up on paint. Are you seeing any -- any trends so far into the fourth quarter? And can you also refresh -- I missed what you were saying on the raw side of paint and we are -- are margins going to -- did you think you're going to hold margins into the fourth quarter?

I would rather not make any comment on a specific product, because of again customer and competitor situations, but did I think I did say generally what our October results were running at and we would expect to continue that throughout the quarter. But, that does include some negative impact from the possible hurricane damage in the Florida area.

Having said that, I can tell you that I think we continue to gain share in paint as we do in most of our products. We certainly have no lost shelf space, so that any trends that are happening are really industry and consumer trends not any negatives related to Masco.

Operator, maybe we have time for one more question.

Steve Fockens, Lehman Brothers.

One quick question, on the installation business, what percentage of the cost structure would be labor, and do you guys consider that variable or fixed?

I will turn that over to Alan Barry , but one thing I will comment on before he does, is that most of our work in the installation business is on a piece rate, so because of that a lot of the labor becomes variable in terms of costs.

Alan.

We would consider the bulk of our labor costs to be variable.

And then as a percent of costs it is -- is that relatively low compared to the actual materials costs and the overhead with the -- well, not overhead , but the centers or the trucks and that sort of thing.

Clearly the material cost is the major cost consideration that we have and labor would be the second and there would be -- labor would be quite a bit less of a factor to us than the material costs would be.

Great. One quick follow-up then maybe looking a little longer term, in again in the same business, I think you're running now some where around 2.5 or 2.6 or 2.7 billion in sales and 14 to 15 percent operating margin. If over the next 2 to 3 years the macro housing market is flat or even down a little bit each year, what do you think this business segment can do in terms of sales and margins? And is that a function of continuing to shift the business over to the faster growth noninsulation items? Maybe, just provide a little thoughts on what that business might do longer term, assuming the housing market is a lot -- on a macro basis, is a lot less favorable than it is today?

I guess it would depend on what you mean by a lot less. But, given a market condition where housing would decline in the flat to down maybe 10 percent range, I would still expect that we would be able to grow our business in the services sector.

Margins, I think we addressed earlier. That we would still expect to be able to produce low-teen to mid-teen kind of margins. When you start getting down to a 10 percent drop, probably more on the lower end of that. But we continue to feel pretty good about our growth opportunities in that sector.

Number one, the customers that we are with, even in a down market we think major customers going to continue to grow. And we are looking at growing with them. And continuing to expand our product offerings by branch. Again, I think continues to offer us the opportunity to grow that business.

One of the things to put that in perspective, is as you know, we are trying to emphasize noninsulation products. We do do some cabinet installation at this point in time. And as we've indicated in some other presentations, if we can penetrate 25 percent of our existing customer base additional, in terms of cabinet installation, that is $1 billion sales opportunity for us.

In windows if we can penetrate 25 percent of our existing customer base and install windows that is about a $700 million opportunity in terms of top line. We make both cabinets and windows, and so as you know one of areas we are really trying to focus is on is how we can leverage that installation business with some of our own products, and the opportunities there are pretty exciting quite frankly.

In a market where housing is flat or down a bit you would expect maybe even a greater acceleration of the proportion of your sales coming from noninsulation areas?

I think to the extent that we can continue to penetrate in terms of cabinets and/or windows, yes, I think that would be true.

Okay.

I think we've said in previous calls that if housing sales were down 10 percent next year, we still expected our company wide aggregate sales to home owners to be up for the year due to new products, market share gains, and some of the major inroads, we are making in terms of contracts with the large home builders and other factors. So, clearly, more homes being built is a plus but we have a lot more going for us than just the number of housing starts.

I might just finish my call with a couple of comments.

I would like to mention as I did in the last 2 quarterly conference calls, that you might continue to see some insider executive selling, over the next year as you have in recent months. As many of you know, we had a major stock executive 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 they committed to personally.

These obligations come due in less than a year. So, there has been selling by executives as they retire those loans and obligations. I might also mention that we have seen a significant reduction in contingent liabilities in the company. Almost two-thirds of the loan obligations under that stock purchase program that I mentioned, have already been retired by the individuals involved. And our largest remaining share purchase price guarantee expired in June -- July of 2004, with minimal consideration paid to the shareholders involved.

As a closing comment, I would also like to add that we are pleased with our third quarter results and favorable outlook for the balance of the year and we believe that we are beginning to see significant returns from the $10 billion we have invested in recent years in our expansion programs as well as benefits in synergies from our internal focus on cost reductions and organic growth.

We are achieving synergies from our operation consolidations and as I mentioned on the call, we've reduced our operating units from 67 last year to less than 50, through divestitures and consolidations and we expect that number to go significantly lower next year.

So, we have a lot of momentum in the company currently and we do appreciate all the efforts of our over 60,000 people at Masco throughout the world who have contributed to our success.

So, we thank all of you for taking the time to be with us today and look forward to talking to you again on future call. Thank you.

That will conclude today's conference. Thank you all for your participation. Have a great day.