馬斯科 (MAS) 2004 Q4 法說會逐字稿

Good day, everyone. Welcome to this Masco Corporation 2004 fourth quarter earnings conference call. As a reminder, today's call is being recorded and simultaneously webcast. If you have not received the press release or supplemental information -- I'm sorry, if you have not received the press release and supplemental information, they are available on Masco's website at www.masco.com.

Statements in the following discussion may include certain forward-looking statements regarding Masco's future sales, earnings growth potential, and other developments. Actual results may vary materially because of external factors, such as interest rate fluctuation, and changes in consumer spending, and other factors over which management has no control. Additional information about Masco's product, market 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 to this call to non-GAAP financial measures as defined by the SEC's Regulation G. Accordingly, a reconciliation of the differences between such measures and the most directly comparable financial measures calculated in accordance with GAAP is included in the investor relations packet.

After a brief discussion by management, the call will be open 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 the conference over to Mr. Richard Manoogian, Chairman and Chief Executive Officer of Masco. Please go ahead, sir.

Thank you, operator. And joining me today are Alan Barry, our President and Chief Operating Officer, and Tim Wadhams, our Senior Vice President and Chief Financial Officer.

As you might be able to tell from my voice, I am fighting a bad cold. So I'm going to ask Alan Barry to conduct the first part of the meeting and then join you back again when we get to the questions and answers. Alan.

Thanks, Richard, and good afternoon, everyone. We are pleased to report that net sales from continuing operations for the year 2004 increased 14 percent, primarily from organic growth, to a record $12.1 billion, compared with 10.6 billion for 2003. North American sales increased 13 percent, and international sales increased 21 percent. In local currencies, international sales increased 10 percent.

Strong home improvement and new housing markets, customer expansion, new products, modest selling price increases, and market share gains continue to be the major drivers of our organic sales growth. For the full-year 2004, net income from continuing operations was almost $1.1 billion or $2.35 per common share excluding the impact of a fourth quarter goodwill impairment charge, well within the Company's most recent guidance of $2.31 to $2.35 per common share and compares with the $1.70 per common share for 2003, also excluding charges for goodwill impairment.

Including the impact of the 2004 non-cash after-tax goodwill impairment charge of 141 million related to our European operations, earnings from continuing operations were 930 million or $2.04 per common share. Benefiting from strong organic sales growth, record results were achieved for the year, even though we experienced increases in commodity costs which were not totally recovered due to the delay in implementing selling price increases to customers, costs associated with the Sarbanes-Oxley legislation, and increased energy and freight costs. In addition, 2004 benefited from net gains related to the liquidation of a portion of the Company's financial investments and from income related to the Behr litigation.

Our fourth quarter 2004 net sales from continuing operations increased 10 percent to over $3 billion, primarily from organic growth. Masco's North American sales for the fourth quarter were up 8 percent. International sales were up 17 percent. In local currencies, international sales were up 7 percent, compared with 2003.

The increases in net sales were primarily due to stronger sales of assembled cabinets, installation services, windows and plumbing products. Excluding non-cash European goodwill impairment charges, income from continuing operations for the 2004 fourth quarter was 247 million or $0.55 per common share, a 34 percent increase from $0.41 per common share for the 2003 fourth quarter.

Results for the fourth quarter of 2004 include the effect of lower-than-anticipated margins in our installation and other services segment, as well as at certain other businesses, principally resulting from the time lag in implementing selling price increases related to higher material costs. Historically we have been able to increase our selling prices to reflect material cost increases; however, the significant increases received from the Company's suppliers throughout 2004 have not yet been fully passed on to our customers, resulting in a decline in operating profit margin.

As previously communicated, we have experienced recent significant cost increases for insulation, as well as for non-insulation products that we install. In developing our previous fourth quarter guidance, we anticipated margins for our installation segment of 14 percent versus the 12 percent actually achieved. Reducing earnings in the fourth quarter by approximately $0.02 per common share.

Sales and earnings of the Company's installation business have also been constrained by the lack of adequate availability of fiberglass insulation which is on allocation from suppliers. The high level of demand for insulation, as a result of the strength of the new residential construction market has outpaced the industry's capacity to produce additional product. With additional insulation production facilities coming on stream and with an anticipated modest drop in housing starts, insulation should be more readily available later in 2005.

Results for the fourth quarter benefited from pretax gains from the sale of financial investments of $40 million, or $0.06 per common share after tax, partially offset by a pretax impairment charge of $21 million or $0.03 per common share after tax related to the Company's investment in Furniture Brands International common stock. Results also benefited from a reduction in the Company's tax rate, related to foreign tax credits generated in the fourth quarter, on distributions of foreign accumulated earnings, which benefited earnings by $0.02 per common share.

In the year 2004, operating profit margins, as reported were 13 percent, compared with 14 percent in 2003. Operating profit margins, as reconciled were 14.1 percent in 2004 compared with 14.5 percent in 2003. While our total operating profits increased significantly, modestly lower margins were the result of increased commodity costs, increased energy and freight costs, stronger foreign currencies resulting in increased international sales, which have lower margins, product mix and relatively higher sales in segments with somewhat lower margins, costs associated with complying with the new requirements of the Sarbanes-Oxley legislation, and increased expense associated with stock options.

Total SG&A expenses in the quarter, as a percent of sales, including general corporate expense, were 17.1 percent in 2004, compared with 16.9 percent in the 2003 fourth quarter. Our general corporate expense was 2 percent of sales in the fourth quarter of 2004, compared with 1 percent in the prior year. The increase in general corporate expense in the quarter included higher cost and expenses associated with complying with the new requirements of the Sarbanes-Oxley legislation, which increased $8 million, as well as $5 million of increased expense associated with stock options.

Looking at our segment sales for the quarter, cabinets and related product sales increased by 12 percent. Plumbing product sales increased 9 percent. Installation and other services sales increased 12 percent. Decorative architectural product sales increased 2 percent and other specialty product sales increased 9 percent.

For the full-year 2004, key retailer sales were $3.7 billion, an increase of approximately 10 percent over the $3.4 billion for 2003. Sales to key retail customers in the fourth quarter of 2004 were comparable to the fourth quarter of 2003, partially reflecting the impact of adverse weather in certain parts of the country, which contributed to relatively slower sales of architectural coatings. Our other distribution channels experienced strong growth in the fourth quarter of 2004.

Accounts receivable at year end were 49 days, compared with 53 days a year ago. Year-end inventory days were 49 at the end of 2004, compared with 48 days at the end of 2003. Accounts payable at year end improved to 36 days, from 35 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 16.8 percent of sales at the 2004 year end, from 18.1 percent of sales a year earlier. Return on invested capital, as reconciled was 12.9 percent in 2004, and 11.3 percent in 2003. We continue to believe that we will achieve or exceed our goal of 15 percent return on invested capital by 2008.

The Company's free cash flow before dividends exceeded $1.1 billion in 2004. The Company had a strong balance sheet with $1.5 billion of cash and marketable securities at year end, and continues to have unused bank lines of $2 billion. In the fourth quarter of 2004, the Company repatriated cash related to accumulated earnings from certain of its foreign subsidiaries to the United States of approximately $500 million.

In 2004, the Company also generated approximately 330 million of cash from the net disposition of financial investments and 172 million net from the distribution of certain European businesses. Debt as a percent of total capitalization at the end of 2004 was 44 percent.

For the year 2004, we repurchased 31 million common shares, of which 4 million shares were repurchased in the fourth quarter. We have continued our active share repurchase program into 2005, and repurchased an additional 2 million shares of our common stock in January, and expect to repurchase at least another 2 million shares in February. In 2004, the Company returned $1.2 billion to shareholders, through share repurchases and dividends, compared with 1.1 billion returned to shareholders in 2003.

The Company has been reviewing its business portfolio on an ongoing basis as part of its strategic planning. We previously announced in the first quarter of 2004, the planned disposition of several European businesses that are not core to the Company's long-term growth strategy. During the fourth quarter, the Company completed the additional sale of 3 of these businesses.

The Company experienced greater than expected commodity cost increases in late 2004, which reduced expected gross margins in the fourth quarter. These higher costs are continuing in 2005, and should have an adverse impact on first-half results. The Company is implementing additional selling price increases on a number of its products, and believes that by the end of the second quarter, many of these commodity cost increases will be largely offset.

We believe that the impact of the delay of these recent cost increases, being offset by increased selling prices in shortages of certain materials will reduce earnings by approximately $0.05 to $0.10 per common share in the first half of 2005, largely in the first quarter. We have experienced further cost increases in recent weeks for insulation and petrochemical-based ingredients for architectural coatings, which combined, involve 10s of millions of dollars of added costs on an annual basis.

This should reduce first quarter earnings from continuing operations, seasonally the lowest quarter of the year, to a range of $0.44 to $0.47 per common share. This compares with $0.42 per common share reported in the first quarter of 2004, after excluding $0.03 per common share of income related to the Behr litigation and $0.07 per common share of previously disclosed other income. Principally, net gains on the sale of financial investments.

The Company believes that it will achieve further organic sales growth in 2005, and based on current business trends and our sales in January, we believe that we will achieve mid to high single-digit organic growth in the first quarter, and for the year as a whole, resulting in record sales and earnings for 2005 with full-year earnings from continuing operations expected to be in a range of $2.40 to $2.50 per common share.

The Company's guidance is based on housing starts declining 5 percent from 2004 levels, share repurchases of a minimum 12 million common shares, modest margin improvement reflecting selling price increases, and anticipated income from the sale of financial investments. This guidance also assumes no further significant commodity cost increases.

2004 was an exceptional year for Masco and we are extremely pleased with the progress that we made on a variety of fronts. While significant commodity and other cost increases were certainly challenging to manage, we were able, for the most part, to offset those items with stronger than expected sales growth, Benefiting from positive conditions in the markets that we serve, market share gains and price increases.

We are pleased with our 2004 accomplishments, as we continue to develop and execute our strategic plan. And we appreciate the efforts and dedication of our 60,000 worldwide employees.

In 2004, sales increased 14 percent to $12 billion plus, growth that was essentially all organic. Earnings per share, excluding goodwill impairment, increased 38 percent to $2.35 per share. We generated over $1.1 billion of free cash flow, and returned over $1.2 billion of cash to shareholders, through the repurchase of 31 million shares, and dividends which were increased for the 46th consecutive year.

We simplified our organization structure, through divestiture and consolidation of a number of businesses, and we are developing platform strategies to drive synergy and leverage opportunities. Return on invested capital as reconciled improved to 12.9 percent and we are well on our way to achieving our goal of 15 percent. And importantly, we achieved a record share price.

While our team is proud of these accomplishments, we are just getting started. We are focused and committed to continue to execute our strategy of further simplifying the Company, investing to grow our businesses organically, aggressively managing our business unit portfolio, improving our balance sheet, generating superior cash flow, and returning cash to shareholders through share repurchases and dividends. We firmly believe that our strategy, together with our leadership products and brands, multiple distribution channels and price points, position Masco to deliver long-term value for our shareholders.

Now, Richard, Tim, and I will open up the discussion for questions and comments.

Thank you. (Operator Instructions). We'll first hear from Margaret Whelan from UBS.

Hi, guys.

Good morning, Margaret. Or good afternoon.

Good afternoon. And I have some questions for you about your guidance, which seems conservative relative to the improvement that you have made in your margins and the kind of sales growth you are seeing. I wanted to start off and get a sense for January and February to date?

As far as the sales or earnings?

Well, sales definitely and then a sense for how your price increases are being realized versus costs rising?

I think, as Alan mentioned, we expect the first quarter to be up at least mid to high single digits, and January was in keeping with that trend, even though weather was not the best in a lot of the parts of the country. So we are encouraged that we are on track to achieve significant organic growth both in the first quarter and for the year as a whole.

And then in terms of the timing of price increases relative to the cost right now?

We expect that most of new cost increases we've incurred will be offset by price increases sometime during the first half of the year. So we expect by the end of the second quarter, most of those will be -- will be replaced with price increases, and we should get back to our better margins in the second half of the year.

Okay. And then in terms of the home center sales they were flat. Were there certain products that were stronger than others?

We were flat in sales for the home centers in the fourth quarter; although we did achieve significant strength in other channels of distribution, non-new housing related. So the slowdown in the home centers we more than offset with significant growth in other channels of distribution. I would say the biggest slowdown was in our architectural coatings, and I think that was due to 2 things, one, we did have some significant adverse weather in the fourth quarter of last year, remembering the hurricanes and all the rain in the southeast part of Michigan, as well as California.

And secondly, I do think that there has been some slowdown in consumer spending, particularly at lower income consumers, who I think are being negatively impacted by higher energy, gas and heating costs, which is impacting our sales of architectural coatings or paint. We are very comfortable that we have not lost any market share or any SKUs, so that any slowdown is market driven not competitively driven.

You are comfortable with that?

Yes, we are. And we've got good data on that. If anything, I would expect we are gaining market share.

Okay. Just the last question for me, in terms of your guidance for '05, how are you thinking about the sale of the financial instruments. How should we forecast that in our models on a quarterly basis?

Historically we have averaged about $0.01 to $0.02 a share gain from the sale of marketable securities, and I would think that that would be the kind of number you can put into your model. That's $0.01 to $0.02 per quarter.

Per quarter, yes, exactly. Okay. Thanks very much.

(Operator Instructions). We'll now hear from Budd Bugatch of Raymond James.

Good morning, Richard.

Good morning, Budd. Or afternoon actually. A couple of things -- I should mention just in case anybody is wondering, the only reason the call is at 1:00, whereas we usually have it at 11:00, was that we could not get any openings in the -- in the service that provides the conference calls. So there shouldn't be any message read into that delay.

Okay. Let's talk a little bit about margins and where they will go, and when they will get there. Normative margins for, as you said for installation services were the 14 to 14.5 percent. They have been coming down as your mix of business has changed. Where do they go? Do they get back to that 14 to 14.5 percent or does the mix of business also drive that down closer to 12, 13?

Well, you may remember that at the beginning of last year, we predicted that '04 would be relatively flat in operating margins for the year. And as it turned out, we were off about 40 basis points. Giving the strong increase we saw in costs across the board in Sarbanes-Oxley, commodities and all the other things that we mentioned, I think that loss of 40 basis points was not too bad, everything considered.

A lot of that cost we have been offsetting and are offsetting in the next few months with price increases. So we will recover a fair amount of that cost, and when you take incremental volume, we are projecting that for the year as a whole, in 2005, we will have a modest improvement in operating margins.

Okay. But what about -- what about installation services? That -- is that what you are talking about on that?

No, I'm talking about the entire Company. The installation margins, we think will improve from current levels, but probably in the second half of the year. Our experience has been that there is additional capacity coming on stream in insulation, and if there is a modest slowing of housing starts, that should dramatically change the dynamics of pricing in the insulation and raw materials side of the business and we have seen this happen in previous cycles. So I will be very surprised if in the second half of this year, we don't see a significant decline in the cost of insulation, rather than the increases that we're currently experiencing. And if that happens then we should see a nice pickup in margins later in the year.

Okay. A couple of other quick questions. Last year, if I remember right or if my day is right, you had 36 million in first quarter, general corporate expenses, and 60 million at the end of the fourth quarter, what do you think the general corporate expense rate will be in Q1? Is it going to be closer to that 60 million? Is that the Sarbanes-Oxley effect or partly that?

Yes, Budd, this is Tim. In terms of general corporate for the full year, we were up 1.1 to 1.6 percent, and in that is Sarbanes-Oxley at 34 million, as well as stock option-related expense at 18, in terms of incremental versus the prior year. So that's 52 million. That represents about 40 basis points of the increase from 1.1 in '03 to 1.6 in '04. As we have indicated previously, we would expect Sarbanes to be pretty much flat in '05, versus '04. We may see a little bit of a tail-off late in the year, but at this point, our best guess is to going to be generally flat. So having said that, I would guess that our general corporate will run around 1.5, 1.6 percent next year, in terms of -- with a little bit of reduction given sales increase, if you will. So we'll probably be 1.4, 1.5 would be my guess.

And quarterly, Tim, is it changed much now?

I think the 60 that you saw, Budd, in the fourth quarter, again, I think we were maybe around 53 in the third quarter as I'm remembering. We kind of ticked up a little bit in the second half and some of that has to do with timing, as I mentioned on the last call for the third quarter in terms of a variety of different things in terms of professional fees and some other stuff. So I think that 60 ought to go down a little bit in the first quarter.

And my last question, Dick, you said on the balance sheet you got 1.5 million -- 1.5 billion of cash and marketable securities. The cash account shows $1.256 billion the balance of them, is that the marketable securities that are left to sell -- to sell or liquefy, is that showing up in other assets?

Yes, we have 2 categories of marketable securities. We still have 4 million shares of furniture brands, which is valued at about $100 million and we had at year end about $150 million of market value of diversified portfolio of marketable securities. So that's roughly the 250 million. And at year end we had something like 30 million of unrealized gains and so we are comfortable as we liquidate that. If anything, we should be able to translate that into some gains.

Okay. And that's in the other asset classification, and you didn't --

That's in the long-term assets, under other assets, that's right.

And you didn't add to that at all this year?

We reduced that significantly. I think it was by --

Yes, it came down --

$200, $300 million.

Well, yes, about 330 million of cash generated, Budd, which includes gains.

Right.

And I think if you look at just the carrying value, it's down about 270 year-over-year.

And our goal is to dramatically reduce that total of marketable securities and we think it will be significantly lower by year end.

And the other assets held for sale that will be realized by when? When do you think that will be --

That has to do primarily with the remaining European businesses and we have already concluded one of the larger ones in terms of those sales in January or February, and I think we're down now to maybe 1 other company of modest size. So by then of the first quarter most of those items should be completed.

Yes, we should have that done in the first quarter, Budd, and we generated I think net about 170 million in '04 in terms of proceeds and the expectation is that we would on a net basis generate about 80 million again before the end of the first quarter.

And when we talk about 1.1 billion in cash flow last year, we did not include in that total the cash flow generated from divestitures or the liquidation of marketable securities. So when we're projecting another year of 1.1 billion in cash flow we think we'll also have additional divestitures and liquidation of marketable securities. So we are throwing off a lot of positive cash.

Thank you.

(Operator Instructions). We'll now hear from Carl Reichardt of Wachovia Securities.

Good morning, guys.

Good morning, Carl.

I had a question, Richard, if you could tie some numbers to 2 efforts that you've been making over the last couple of years. One is the attempt to get your capacity utilization up to move to doing lower margin products in addition to higher margin products. And the second is if you could just update us on your outsourcing to China efforts and where you think that can go numerically over '05?

Yes, and I should mention while everybody is on the phone too, we do have an investor meeting that we're going to hold an all-day investor meeting on March 22nd of this year. Everyone is welcome to attend that meeting here in Taylor, Michigan. And we will get into a lot of these types of topics at much greater length.

You may remember in 2003, we outsourced approximately $200 million of product to China. And we had said that at the beginning of 2004, our goal was to be between 350 and 400 million. I can tell you, if anything, we are running ahead of expectations and we should be well over 400 million for 2004 and we would expect to set a new goal for 2005, well above 500 million. And we estimate that we save about 25 to 30 percent on whatever we can outsource to China, which helps us partly offset the cost increases that we incur in this country.

In addition, I think one of the interesting things is it does free capacity up for us, and effectively gives us a better return on our assets because since we're outsourcing a number of our components, as well as finished products, that frees up or doesn't require capital expenditures that we would otherwise have had to have made to keep that capacity high in this country. So I think that also translates into a higher return on assets over time.

Okay. And then just a follow-up, Richard, I'm thinking about moving to -- do you have a capacity utilization figure you can give us and how that might compare with last year? The U.S. --

The only place I think we're really tight on capacity is in our cabinet business. And I think we may have talked about this on previous calls. Our cabinet business exceeded our expectations in 2004, and whereas we would normally have something like a 4-week delivery time in retail, we got up to 8 or 9 weeks delivery time, which I'm sure cost us some business. Normally we would -- I'm sorry, we normally try to aim at about a 2-week delivery.

We have brought some additional capacity through efficiency technology and capital expenditure in 2004 and that 8-week delivery now has come down. We are undertaking, however, a major expansion program in 2005 and 2006 in excess of $100 million to put in major capacity additions on the West Coast of the United States to expand our cabinet business because we're comfortable that the demand is there for our products. And we think we'll get a good return on that investment. So that's about the only area where we're really capacity constrained and in other areas with overtime and additional efficiencies, we are relatively in good shape.

Thank you very much, Richard.

Next we'll hear from Armando Lopez of Morgan Stanley.

Hi, good morning, guys.

Good morning.

Or good afternoon. A quick question on inventories. Could you just comment on what you are seeing on the inventory situation and the channel? It looks like Lowe's inventories were up quite a bit year-over-year and Home Depot also grew inventory faster than square footage.

Are you talking about at year end?

Yes.

I would just say that we have pretty good information, and if anything, I would say our -- our inventories with major retail customers -- and I can't give you, obviously, for confidentiality and competitive reasons, too much detail, but our feeling is that inventories were certainly not excessive. Have been anything in the past month or so might have even been a little on the tight side in the field. So there's clearly not excess inventory in the retail channels of our products.

Okay. Great. And then on -- with respect to the installation services business, you had mentioned insulation being on allocation. Are you -- are you guys on allocation as well and, I mean, are you having to walk away from business because of a shortage of product?

Yes, we are on allocation and we've had to walk away from significant amounts of business. As an example, you may remember that we previously announced that we signed up 5 of the top 10 home builders to national contracts to provide installation services and other products to them. Frankly, we could have signed up several additional home builders in the top 10 and we've not been able to do that because we are unable to deliver the product to them, if we entered into those agreements.

The other thing that comes into play is when there's that kind of capacity constraint, you lose a fair amount of your negotiating capability in terms of pricing, and so it hurts you in terms of your ability to get more attractive costs from your suppliers. So we have lost out both in lost volume, as well as lost margins because of that tight capacity, but we think that will alleviate later this year.

Okay. Great. And then one last one. Was there an FX impact on the profits in the quarter?

I believe --

Foreign currency?

I believe foreign currency was only up modestly in the quarter.

Yes, we have a reconciliation of that, Armando, in the package we gave you, I think on page 13. And in the quarter, currency generated about 50 million of sales, and that would have had about an 8, 9 percent margin with it.

Okay. Great. Thanks.

That margin is for the quarter.

Thanks, guys.

And we'll take a follow-up question from Margaret Whalen.

Thanks. And I didn't expect that to come up so quickly. I just wanted to ask really about the guidance, going back to it again in terms of the insulation. Can you give us a sense for the capacity that's coming on in the industry and when that's coming on, the timing? And whether or not that's reflected in the guidance you provided?

Capacity, there will be some capacity brought on in the second half of 2005, additional capacity beyond that brought on in 2006.

Plus, if housing is down the 5 percent we indicated, that frees up significant capacity.

Sure, but Alan, do you have a sense for exactly how much is coming on and the timing of that? In speaking with your big suppliers.

Well, I -- in terms of the timing, the third quarter of 2005 should see some minimal amount of capacity coming on stream. The major capacity is scheduled for second quarter 2006, and that may drag into third quarter of 2006, but that's what we would be looking at.

So that's why you are saying that you're going to see a much bigger pickup in your margins in the back half of the year, you're not expecting anything in the first half?

Well, that's partially it and the other partial is that the new cost increases we've experienced recently, we would expect to get some price relief from that in the second half as well.

Yes, so the 2 will come together.

Right.

In terms of the price increases, are they surcharges or are they price increases that you've put through that will actually stick in the event that the commodities do break.

They have been price increases that we have accepted from our suppliers and price increases that we have passed on to our customers.

Our experience, a lot of these are energy related particularly in the architectural coating side, petrochemical type products, resins and other products, and our experience has been that there's a lag factor in the price of energy, filtering through the system, and coming out the other end in commodities. And so I think some of the price increases we're experiencing now are the result of energy prices having run up in the second half of '04.

So we think that the current price increase should offset a good portion of those increases unless we have additional energy price increases from this point forward and your guess is as good as ours on that one.

Sure. But in terms of the guidance that you provided, what exactly are you assuming on the insulation pricing.

We're saying that the cost increases are going to cost us between $0.05 and $0.10 a share.

Yes.

I would say that the $0.05 reflects the cost increases that we have already seen and some of the second $0.05 is increases that we're anticipating. So we do have a little slack in that number.

In the event that they don't go up as much.

Right.

Okay. That's basically what I was looking for. And then the second thing is, in terms of $1 billion you're committing to returning to shareholders in '05, your dividend total was only around 300 million, and then you are saying 12 million shares how does the math work there?

Well, I'm not sure I committed that we're going to return $1 billion in '05. What we have said is that we've returned over $1 billion in '03 and '04 and our goal is certainly to average at least $1 billion return to shareholders over the next few years. Frankly, there may be years that we do more than that, if our cash flow is high and our liquidity is high.

Which it is right now.

Which it is right now. So I think 12 million shares that we have indicated in our guidance is probably on the conservative side and I would expect that there's a good chance we'll acquire more than 12 million shares this year.

That's good. Thank you.

We'll take a follow-up from Budd Bugatch.

Yes, I didn't think we'd get a chance for a follow-up. Alan, you have initiated a number of streamlining projects and I wondered if we could get an update on that or whether you going to defer us to the analyst meeting for that.

Yes, we plan on really getting into a lot of detail on that at our investor conference in March.

I would just say in summary, we mentioned in Alan's presentation that we think we really accomplished a lot of things in '04. I would also say to you and we will cover a lot of this in detail at the investor meeting. I think we're going better than we expected in terms of the reduction in a number of operations, consolidations, the track we're on for improving return on invested capital. So I think hopefully you will be pleased by the update we give you at that meeting.

Okay. And today on the installation business, what percentage of that is insulation now? What is the current number?

I think it's down to the low 60s.

I think it's 65. 65 percent.

For the year, but I think -- yes, for the year I think it was 65 percent with insulation, and by year end I think the run rate was in the low 60s. So we continue to increase the installation of other products.

Okay. And can you give us an idea of how much freight costs went up or energy-related costs other than the material cost increases.

I think -- we don't -- we don't have an exact number on that, but I believe our -- our freight costs run somewhere in the $500 million range, and I think you can assume that that would have gone up at least 10 percent or more for the year.

For '04 or '05?

For '04.

And similarly again in '05 or --

I'm not sure it would go up that amount because a lot of the fuel cost surcharges were in '04 and I don't believe gasoline per se or diesel fuel per se has gone up as much as petroleum. So I would certainly hope the increase, if there is one in '05 would be less.

Thanks, Dick.

(Operator Instructions). We'll now hear from Stephen Kim of Smith Barney.

Thanks. The first question relates to the installation services business. In light of the fact that you are having to sort of take a step sideways here in terms the insulation, driving your business, how about the other products that you said are accounting for, like, the high 30 percent range on sales. Was there an opportunity for you to get more aggressive there this year to maybe fill in the gap in sales growth and installation services?

We grew that well into double digits in 2004, and we fully expect that we'll grow that well into double digits in 2005 as well. So it clearly remains a strong opportunity for us going forward.

What is your ability to accelerate?

By the way, I will just mention too that the insulation constraint preventing us from entering into additional contracts with large home builders also reduces the opportunity for us to include in those contracts other products. So it has a double-negative impact on us in that sense, and even with that we expect to be up double digits in other products.

Okay. Good. And then with respect to the paint business, you mentioned that weather impacts hurt your business with some certain key customers, but you said that other channels remain strong.

Not in paint. That was in overall.

Oh, that was overall. Okay.

Because paint we -- our largest by far percentage of paint sales goes only through the retail channel.

Right that was sort of the gist of my question. Okay. And would you say that the paint sales were hurt due to the weather, and if so, how much do you think the weather impacted you there?

Well, I think what hurt us was that a fair amount of paint sales at that time of the year include exterior paint and when the weather is bad, you are not accomplishing a lot of exterior painting. The other thing was that in the fourth quarter of 2003, we had very large comp sales of paint because I believe that we were still rolling out a lot of our color centers around the country and getting the benefit of the rollout that we have of color centers and I think we were up -- my recollection is double digits in the fourth quarter of 2003, so some of that small increase is partly a -- because of the comp comparisons.

Right. Thirdly, you talked about your marketable securities value, I think you said it was 250. How about your private equity, what would you say the market value of some of your private equity holdings are?

Well, we carry the private equity investments on our books at roughly between 300 and 350 million, and then we have, I believe, about another 100 million of other long-term investments that have to do with previous spin-offs of our automotive business and some other operations. We carry that at our -- our best judgment, we don't mark that to market, but if we think there's any impairment of value we write down the asset.

So our feeling is that in all likelihood, the value of those investments is certainly equal to what we have on the books and more probably worth a premium to that because a number of those are investments that the equity funds made several years ago and we're increasingly seeing them take those public or divesting them. So we would expect that amount to come down in 2005.

That didn't really come down materially though in the last 6 months, right?

I believe it came down about 30, 40 million in -- my recollection in '04. Tim?

It's about a push. Yes.

Okay. And then lastly, can you comment about the windows business? I understand you have some plans there to perhaps open some facilities. Can you give us a sense of timing, maybe talk a little bit about what your opportunity is, in that segment to gain share, and also if you could touch on the fiberglass component of the windows business?

The window business continues to go very strong for us. We are -- we have plans to open in 2005 1 or 2 additional facilities in the Western area of the country that pretty much regionally, logistically help us as we continue our expansion. We opened up 2 facilities in the Midwest, 1 in Virginia and 1 in Illinois, over the last couple of years. We don't plan in 2005 on moving any further expansion into the Midwest. We really have some opportunities we think to take advantage of the two facilities we already have. So our expansion plans for 2005 are really just to continue the regional expansion out west, where we enjoy pretty good market share to begin with.

Relative to the fiberglass, that program is doing extremely well. Very well received. Very good quality windows. Our customers’ acceptance of that has been very, very good. We have some other things in terms of research and development that we're working on. Additional products. We introduced the patio doors in 2004, and we have extended that line in 2005. That continues to go extremely well. So we're feeling pretty good about our challenges and opportunities that we have in the windows section.

Okay. Great. Thanks very much.

We'll hear next from Ivy Zelman of Credit Suisse First Boston.

Good afternoon, guys. You know we have talked a lot about installation services and what I would really like to focus in on if we could is talking a little bit about your margins and the decorative architectural product segment. Clearly, even with modest sales growth, you are still able to improve margins significantly and yet raw material prices you've indicated have been a headwind for you and that you expect to see price increases in the back half of the year possibly, which may help improve the overall, I guess, operating profit in the segment, although I guess I'm looking at it saying it's already pretty profitable despite the increases in energy costs. How are you doing that? And then secondly, what should be sort of a normalized margin for that segment because it's been somewhat volatile? That's my first question.

Ivy, this is Tim. You might remember last year when that margin, I think it was down around 13.5, 14 percent in the fourth quarter. We mentioned at that point in time that we had some under-performance by our hardware-related businesses, this year the improvement in margins that you see in that segment is almost all related to improvement in the builders hardware side. So we have had much better performance in the fourth quarter of '04, versus '03 in that particular category.

How big is the builder hardware business? Isn't the majority of that --

I know you would love to know, Ivy, but we don't break that down, because obviously that would indicate what our architectural coating sales were and since we have limited customers on that, I'm sure they would rather we not break that information out.

Okay. Well maybe then you can just elaborate on what we should expect that segment margins to be sort of on a normalized basis. Because we are looking at, again, raw material headwinds and excluding those headwinds are looking out into '05, what you think you can do on a normalized basis and assuming those costs won't be there or you will have gains through price realization.

I don't have that in front of me, Ivy, but I think we would be projecting relatively flat margins in architectural -- decorative architectural products for the year.

Relative to the full-year '04 of [inaudible]?

Full-year '05 to full-year '04.

And you mentioned, Richard, in your opening comments --

And again, I'd just remind you that we do have in a number of our product lines, price increases rolling out in the first quarter of '05 that relate to cost increases we experienced in '04.

That's what I was trying to understand, if anything, could margins go up in that segment if you are already raising --

Well, again, that partly depends on what happens to costs for the balance of the year and it's a little difficult to forecast that.

Well, you mentioned in aggregate, you expected margins company wide to increase modestly from the operating margin I guess for '04, if you look at full-year operating margins '04, versus '05. Can you kind of walk us through how you expect to do that with a little bit more detail?

Well, again, I think one of the biggest parts of that is that we did have significant cost increases in '04, and as we have been saying right along, we expected to offset most of that with price increases and those price increases are now rolling out, so that that in itself should improve our margins. I would just point out that if our margins went down 40 basis points last year, with the kind of organic growth that we achieved, in a normal year, we would have expected significant margin improvement from that incremental sales. So that the incremental margin was eaten up in effect by cost increases, and as you offset those cost increases with prices, then you should get some of that benefit on the higher volume.

And on your paint business, do you have contracts that are still locked in from old prices on raw materials or are they on a rolling basis? How are you locking up those costs, if any?

Well, I think -- I can't comment really on individual product lines, particularly where we have unlimited customers, but I think one of the things that we have said in the past is that the hesitancy some of our bigger customers have to give us price increases is they're concerned that the cost increases are temporary. And I think what's happened now, not only from Masco but for a number of other companies in our industry, is that the cost increases have been out there long enough that our customers are realizing that they are not temporary, and so we're getting a lot more receptivity to being able to offset some of those cost increases with price increases.

Okay. Lastly, just to get back to the margin for installation services, I think Budd asked this question, but I don't know if I got the answer I needed. With respect to mix, the installation of insulation has been the predominant product in that segment, yet you continue to add more services in different categories. The new services that you are adding into the mix, would they be dilutive to margins and may offset some of the benefits you pick up with volumes or capacity coming back on line and pricing relief there in terms of your raw material?

I think what we said in the past --

What do you think the overall margin should be?

I think what we said in the past is that our operating margins on insulation tend to run in the mid-teens and our operating margins on other products tend to run in the low teens. Well, if our group margins are down to the low teens then you are not getting the same dilution from the expansion of the sale of other products.

But, again, I would also point out that as a strategy throughout the Company, we're putting a lot more focus on return on assets than we are return on sales. And particularly, in our installation services businesses, where we have a large established infrastructure, and to sell additional products, basically our only cost is working capital. And so if we generate internal sales and we have margins of only 10, 12 percent, we're probably making 80, 90, 100 percent return on assets and that's the key driver that we look at in terms of returns.

And looking at that business right now, with assuming your employees are flexible, I think you have described in the past, if the market were to weaken, your cost basis there is flexible, variable.

That's right. Most of our work is done on a piece rate basis so it's a variable cost. The other thing I should also mention is that in terms of implementing Sarbanes-Oxley, probably the most disruption inside the Company has been implementing that in the services businesses, because of the fact we have so many locations that it has been a distraction for our operating people, and I'm sure that that's cost us some margins and some sales in '04. Hopefully that will be behind us sometime in '05.

Okay. And --

And I want to emphasize that we're still very excited about the opportunities that exist in that group. And as I mentioned earlier, we have additional major home builders that are anxious to enter into contracts with us. It's just a question of our ability to get the material.

One more question, Richard. With respect to your guidance, you said the 240 to 250, is it correct to assume that in that guidance, you are expecting another $0.04 to $0.08 is included in that guidance for asset sales.

That's right, we are assuming a $0.01 to $0.02 average, somewhere in that range each quarter.

Okay, so if that's correct then if you walk through the model and you assumed mid to high singles top-line growth, margin expansion, slight margin expansion, it would actually be higher than the 250?

Well, the thing you have to remember is that your starting point of 235 included significant gains. So if you take the gains out of last year, and you drop that number to -- I don't remember what the number is, but 220, 225, the 240, 250, we had more gains last year than we are projecting this year so have you to make sure that you make that apples to apples.

Okay. Thank you.

Next we'll hear from Edward O'Kein of Basso Capital.

I'm sorry, I don't know if you did comment on that already, but I was just wondering if you would comment on what you think would be the outlook for energy pricing effect on your margins going forward. I mean, do you have -- do you hedge any of your commodity risk or do you just [inaudible]try to buy them?

In terms of energy, we -- we really don't do any hedging because we haven't found any -- any system that really is reliable and from an accounting standpoint, it wouldn't be of fewer heads so basically on energy, we don't do hedging.

Okay. Well, what about some of that inputs that you use for your production?

I'm sorry?

Other inputs that you do use. I mean, do you do any hedging at all or you have -- you are hedging all of your requirements?

Other hedging? We do try to -- we do try to hedge some of our copper and brass requirements. Sometimes we'll hedge some of our currency situations, but those are not major and my experience has been that it's not that easy to really effectively hedge your costs because the markets tend to be very smart and they price into your hedging contracts what they expect the market is going to be 6, 12 months. So the question is, are we smarter than professional traders who are making those judgments and my experience has been that most manufacturing companies aren't that smart.

Okay. And then -- would you consider a special dividend? You do have a lot of cash and -- a lot of cash has been repatriated back from the [inaudible] also, would you consider [inaudible] --

I don't think the Board has really discussed a special dividend, but having said that, I think as we said last year, the fact that we have high cash flow, and the fact that we have good liquidity, and the fact that the tax laws have changed. I would be surprised if the rate of dividend increases we have going forward last year and going forward wouldn't be at a higher rate of increase than it was in previous years. Now, obviously, that's subject to the Board of Directors and also subject to current conditions, but I think they would look favorably on continuing to increase the dividend at a fairly good rate. Operator, I think we have time for 1 more question.

Okay. Our final question will come from Steve Fockens of Lehman Brothers.

Hi, good afternoon, guys. Just a quick question, if you guys have had trouble getting insulation, but correct me if I'm wrong, you're the majority -- you install the majority of insulation in the country, then your being put on allocation is not -- I mean everybody is being put on allocation, correct?

That's fairly correct, but when commodity costs are -- or commodity products are tight, I think that works to the disadvantage of the large buyer because the large buyer normally can negotiate very favorable terms because we can offer a lot of volume to fill up their factories. If they don't need the volume we lose a significant amount of leverage and negotiating power. So in periods of constraint you are hit both by the shortage of material, as well as the fact you are probably not getting as good a price as you might have -- if there was excess capacity. So it hurts your margins in 2 ways.

But, I mean, I guess the other -- what I'm really asking is, did you lose share in installing insulation?

The other thing I just mentioned is that to my knowledge, the retail industry has not been on allocation, and as you can imagine the retail industry has been growing pretty rapidly so that effectively has drained off some supply as well.

Oh, okay. So it was a case of where just retailers were able to get it and the installers for the builders were not.

That's right.

Okay. And then secondly, I think you guys should really be commended for the fact that it looks to me that your capital base has basically been flat since '02. If you go forward over the next couple of years, is it fair to say that your planned increase and returns is going to continue to beat growth in the earnings, but still trying to keep growth in the capital base as limited as possible?

Yes, I think that's accurate, Steve, and we'll give you some updates on some objectives on ROIC when we meet in March.

And basically, what you've said, I had mentioned earlier that if anything were running ahead of schedule, and that has to do with both the time in which we can improve returns and maybe the magnitude of the improvement in returns.

Okay. Thanks very much.

Mr. Manoogian, that does conclude the question-and-answer session for today. I'll turn the call back over to you for any additional or closing comments.

Okay, operator. I might just make one more comment as I have done in the last 2, 3 calls because we have had a number of questions on insider selling of shares. And many of you may remember that about 5 years ago, Masco undertook an executive stock purchase program where some 300 executives throughout the world in the Company purchased 8.5 million shares of stock at their own risk. On their own borrowing, but Masco guaranteed the borrowing. That program runs out this year, and of the 8.5 million shares, 6.5 million shares have been paid for and the obligations have been retired, and if needed, the shares have been sold, so there's only 2 million shares left under that program. There's only about 30 people out of the 300 who have not eliminated that program.

I obviously happen to be -- maybe not obviously, I happen to be one of those people, and I still have 1 million shares in the program, and I have never sold a single share that I had in that program. So somewhere in the next 6 months, the remaining 30 of us will have to liquidate those obligations. So if you do see some insider selling, I can assure you it's not based on our opinion of share price or outlook, but just our need to fulfill those obligations.

Other than that I would just say that all of us continue to be very encouraged on our outlook, and I think we're as optimistic in what we can accomplish in the next few years as we have ever been, with the exception of the little bumps we might have in the next few months in terms of cost. So hopefully we can get back on track pretty rapidly and get the kinds of returns that our shareholders expect. Thank you very much for participating in the call.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.