馬斯科 (MAS) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2005 second quarter conference call. As a reminder, today's conference is being recorded and simultaneously Webcast. If you have not received the press release and supplemental information, they are available on Masco's website at www.masco.com.

Statements in the following discussion may include certain forward-looking statements regarding Masco's future sales, earnings growth potential, and other developments. Actual results may vary materially because of external factors, such as interest rate fluctuation and changes in consumer spending, and other factors over which management has no control. Additional information about Masco's products, markets, and conditions which could affect future performance, is contained in the Company's filings with the Securities and Exchange Commission, and is available on Masco's website at www.masco.com. Masco undertakes no 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 financial measures calculated in accordance with GAAP is included in the investor package. After a brief discussion by management, the call will be open for analyst questions. If we are unable to get 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.

Thank you, Kelly. We reported our second quarter results this morning. Net sales from continuing operations for the second quarter of 2005 increased 9%, to a record 3.3 billion, compared with 3.1 billion for the second quarter of 2004. Sales of assembled cabinets, installation services, paints and stains, and windows were particularly strong in the quarter. North American sales increased 10%. Since we have had no significant acquisitions during the past year, virtually all of that 10% was organic growth. International sales increased 6%. In local currencies, international sales increased 2%. Income from continuing operations for the quarter was $274 million, and earnings were $0.64 per common share, above the Company's guidance of $0.58 to $0.62 per common share, and compared with $0.65 per common share for last year's second quarter.

Results for the second quarter of 2005 benefited from other income, principally net gains from financial investments of $0.04 per share, partially offset by realized currency transaction losses of $0.02 per share. The second quarter last year benefited by $0.05 per common share of non-operating items, principally net gains from financial investments and other non-operating assets. While second quarter results exceeded recent guidance, the Company's 2005 first half results were adversely affected by increases in commodity, energy, and freight costs, which have not been totally recovered, due, in part, to the lag in implementing selling price increases to customers, as well as product mix. Second quarter 2005 sales and earnings, however, were better than expected, due to the strong new construction market, as well as an improvement in our key retailer sales.

Gross margins were 29.4% in the 2005 second quarter, compared with 31.8% last year. Operating profit margins, as reported, were 14.1% for the quarter, compared with 15.6% last year. Operating profit margins in the second quarter, while up from the first quarter, were adversely affected by increased costs, as well as product mix, as I mentioned earlier. Total SG&A expenses for the quarter, as a percent of sales, including general corporate expense, were 15.4%, compared with 16.5% a year ago. Our general corporate expense was 1.4% of sales in the second quarter, compared with 1.5% a year ago.

Segment sales increases for the quarter, which were virtually all organic, included -- cabinets and related product sales increased 13%, plumbing product sales increased 5%, installation and other services sales increased 11%, decorative architectural product sales increased 12%, and other specialty product sales increased 4%. Total key retailer sales from continuing operations improved significantly from recent quarters, to an increase of 10% in the second quarter, compared with a 2% decrease in the first quarter and a 14% increase in the second quarter last year. Second quarter key retailer sales were aided by additional shipments to one customer in June in anticipation of a July promotion. Excluding these additional shipments, we believe that key retailer sales would still have been up approximately 7 to 8% in the quarter.

The Company's tax rate was 35.4% for the second quarter, compared with 35.8% for the comparable period last year. The Company estimates that its effective tax rate for the full year of 2005 should approximate 35%. We continue to make improvements in working capital management. Accounts receivable days at the end of the second quarter improved to 50 days, compared with 54 days a year ago. Inventory days were 50 days, compared with 52 days a year ago. And account payable days were 38 days at both June 30, 2005, and 2004. Working capital -- defined as accounts receivable and inventories, less accounts payable -- improved to 17.8% of the last 12 month sales, from 19.2% a year earlier.

For the 12 months ended June 30, 2005, return on invested capital, as reconciled, improved to 12.9%, compared with 12.1% a year ago. The Company continues to believe that we will achieve our 15% return on invested capital goal by the end of 2006, and 18% goal by 2010. Our liquidity and balance sheet were strong at the end of the second quarter, with cash and marketable securities in excess of $1.6 billion, and $2 billion in unused bank lines. In June, to take advantage of low interest rates, the Company issued $500 million of 10 year 4.8% fixed-rate notes, which added to our cash position. The Company intends to use a portion of its cash to retire $800 million of 6.75% notes, due in March of 2006.

In the second quarter of 2005 the Company also generated an additional $48 million of cash from the net sale of financial investments. Debt, as a percent of total capital, at the end of the second quarter was 49%, compared to 47% a year ago. The Company has continued its active share repurchase program and repurchased approximately 5 million common shares during the second quarter, bringing our first half total to 18 million common shares. At the end of June we had approximately 42 million shares remaining under our share repurchase authorization. In July the Company repurchased approximately 1 million additional common shares.

The Company expects to return a minimum of $1 billion annually to shareholders, on average, over the next several years through share repurchases and dividends as part of our ongoing commitment to value creation. In 2004 and 2003 the Company returned 2.3 billion, in aggregate, to shareholders. In the first half of 2005 the Company has already returned an additional $774 million to shareholders through share repurchases and dividends. The Company remains committed to its strategy of value creation, and is focused on the simplification of its business model, cash flow generation, improvement in return on invested capital, and the return of cash to shareholders through share repurchases and dividends.

Consistent with this strategy, the Company is pursuing a variety of initiatives to offset cost increases and increase operating income including sourcing programs; the restructuring of certain of its businesses, including consolidations; manufacturing rationalization; headcount reductions; and other profit improvement programs. We described a number of these initiatives in detail at our investor conference earlier this year, and indicated that the Company believes that these initiatives will reduce annual costs by $200 million by the end of 2007. We are also continuing our program of balance sheet simplification. We generated cash of 117 million from the liquidation of financial investments during the first half of the year. In addition, all of our former acquisition share price guarantees have expired. Also, our contingent liability related to our five-year-old executive stock purchase program expired last month, with no payments or obligations incurred by the Company.

We are continuing to reduce the number of our operating units through consolidations and divestitures. Two years ago we had 67 operating units. And by the end of this year, we expect that number to be reduced significantly, to 37 operating units through consolidations and divestitures. Accelerating the implementation of the profit improvement programs that I have discussed, will result in additional costs and charges in the second half of 2005. Some of these costs and charges have yet to be determined. But these initiatives should improve the Company's earnings outlook for 2006 and beyond.

Since our last earnings guidance in May, we have also experienced additional cost increases, which will impact our second half results. Since May, copper has increased from less than $1.50 per pound to $1.65 per pound, negatively impacting our plumbing products businesses. And the cost of oil has increased by over $10 a barrel, negatively impacting our cost of freight and petrol chemical related commodities. Costs and charges related to the acceleration of profit improvement programs, when combined with recent additional energy related and commodity cost increases, and the adverse effect of changes in currency values are expected to result in the Company's full year 2005 earnings from continuing operations being closer to $2.30 per common share than the previous guidance of approximately $2.40 per common share.

Included in our approximately $0.10 per common share reduction in guidance for the second half of the year are estimated commodity cost increases of approximately $0.05 per common share; currency valuation changes, including a declining euro dollar, and an increase in the Chinese currency of $0.02 per common share; $0.02 per common share of cost related to headcount reductions, largely in the third quarter; and $0.01 per common share for carry costs of the recent $500 million debt issuance, versus what we will earn on the cash proceeds. Based on all of the factors that I discussed previously, the Company anticipates that third quarter 2005 earnings from continuing operations will be in a range of $0.60 to $0.64 per common share, compared with third quarter 2004 earnings from continuing operations of $0.64 per common share.

Our current guidance is based on no additional share repurchases beyond the 18 million common shares purchased in the first half of 2005; modest margin improvement in the second half of 2005, compared with the first half, reflecting further selling price increases, offsetting a portion of recent ;higher commodity costs; no further cost increases related to commodities; and anticipated income from financial investments; and excludes any other items. As far as current business trends, adjusting for the additional shipment of promotion-related products in June that I mentioned earlier, and one less shipping day, we believe that organic sales in July, and for the entire third quarter, will grow in the mid- to high-single-digits, and we continue to expect the same rate of organic growth for the year as a whole.

While we are disappointed with our earnings in 2005, we remain committed to our long-term value creation program, returning to shareholders annually $1 billion, on average, through a combination of share repurchases and dividends, and growing sales organically, on average, 6 to 8% annually. This six to percent -- 6 to 8% growth, when combined with a 4 to 5% average annual reduction in share count, and a 2% dividend yield, we believe will result in achieving our goal of double-digit average annual returns for shareholders.

Now, I'll be happy to open the question -- the call up for questions and comments. And I'd like to mention that joining me are Alan Barry, our Chief Operating Officer; and Tim Wadhams, our Chief Financial Officer. Operator, we'll be happy to take questions.

Thank you. [OPERATOR INSTRUCTIONS.] We'll take our first question from Margaret Whelan with UBS.

Hi, good morning, guys.

Good morning, Margaret.

Would you give us, first of all, I guess, some indication of the sales pace during the quarter and into July?

Yes. My recollection is that the sales were fairly strong in the quarter, but particularly, in May and June, so that we saw the quarter, if anything, pick up volume, and, clearly, the quarter came in a little better than we expected when we gave the May guidance. And I would say that most of that we saw on the retail side, as well as continued strong housing starts.

And into July?

And into July. The one thing I would point out, though, is that we did ship some -- approximately, we estimate, 20 to $30 million in June for a promotion that one of our customers undertook in July. And had we shipped those in July, it would have been a different number. So we're estimating that when you adjust for that differential, we would have resulted in the same mid-single to high-single-digit growth in July. I would say that, also, that those shipments probably moved, maybe, $0.01, possibly as much as $0.02 a share in earnings from the third quarter to the second quarter.

Okay.

In other words, if we had shipped those sales in early July instead of late June, it would have been distorted the earnings by $0.01 to $0.02 in both quarters.

Which category?

That was in our Behr Paint business.

Okay. The second question I have is just this $40 million hit that you're going to take in the back half, can you give us a sense or breakout for what percent of that would be because -- directly because of the higher commodity costs versus the deliberate cost cutting that you're doing?

Right. The $0.10 of guidance reduction that we gave, we're estimating about $0.05 of that is related to commodity cost increases. And the major portion of that are energy-related cost increases, both in a combination of freight, as well as petrol chemical commodities that we purchase. As an example, if you take just our cabinet businesses alone, we're currently paying $2 million a month of higher freight costs than we did a year ago. If you take our paint businesses alone, we estimate that our annual cost, just since the May guidance that we gave out a few months ago, have increased by an annual rate of about $30 million related to components, materials, and commodities that go into the production of paint. So, we have seen some further significant cost increases. When we had that call back in May, our feeling was it looked like commodity costs were topping out, if not even turning down a little bit. So the fact that we've seen an escalation in the last 30, 60 days has come as bit of a surprise to us. But, understandable, given what's happening to basic commodity costs.

At what point did you decide to accelerate the permanent cost cutting?

That's something that we've been thinking about for some months. And I would just say that as we've seen our results this year, be disappointing and less than we expected, we decided it was appropriate to start taking a hard look at whether we shouldn't accelerate some of the programs that we had planned to phase in over a two-year period.

And are they going to be -- of the 40 million, what percent did you say is going to be directly attributed to that?

Well, I mentioned that the $0.10 guidance had $0.02 in it of headcount reductions that we already know will take place in the third quarter. But I should point out that we're looking at a number of other programs that we haven't made decisions on yet that may result in additional headcount reductions, plant closures, and other changes. So it's possible there may be additional charges during the second half related to those changes.

On top of the $0.10?

That would be on top of the $0.02 that's in the $0.10.

Okay. So, you would run those for the P&Ls relative -- there's still risk to the 230 number?

They would run through the P&L statement. That's right.

So there is risk to the 230 number, or not?

There is in terms of one-time related costs and charges.

Okay. And you've been nibbling away at your share count over the last couple years. Given the strength of your balance sheet, have you considered really aggressively trying to reduce the share count, maybe, this year?

Well, we think we've been relatively aggressive. And if you take our current cash position and deduct the $800 million that we need to pay off debt that comes due in the spring of next year, then our current cash is actually a little under $1 billion. Now that will normally increase as the year progresses, due to seasonal cash flow. But we think it's prudent to keep a fairly liquid balance sheet, just to be ready for any contingencies or opportunities that may come up in the future.

And the last question I have is just on the pipeline for M&A. Is there any opportunity you're looking at?

As we've said in previous calls, our M&A activity is really focused on relatively small bolt-on acquisitions to existing platforms. We've said that we think there's some opportunities for us in the service businesses on some bolt-on acquisitions. But I would expect that they won't be very large acquisitions. And on the other hand, we continue to look at our portfolio of businesses, as to whether there might be some additional divestitures. And over time, I would expect that divestitures may approximate the cost of our acquisition. So it may not result in any negative cash flow. But that's just an estimate.

Okay. What percent of your sales will be in Europe once you get to 37 operating units?

Should be about the same.

I think --

About the same.

I think it would -- what we're doing is consolidating a lot of businesses, combining management teams, but it wouldn't necessarily result in lower sales, other than the business we've already divested. So I would expect that we'll continue to have somewhere in the high teens, as a percentage of our sales, being in Europe.

Okay. Thank you, guys.

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

Good morning, Dick. Good morning, Tim.

Good morning, Budd.

You --your gross margin improved 110 basis points sequentially quarter 2 over quarter 1, and improved last year 150 basis points sequentially quarter 2 over quarter 1. But last year's internal growth was significantly higher than this year, so it doesn't surprise me. What I'm trying to get at is -- Where do you think gross margins go from here, and what's the impact in this quarter you just reported? Maybe if you could parse that improvement between pricing and volume gains or absorption, and how you've analyzed it? And, then, what does that imply going forward for the second half, as more of the pricing takes hold?

Budd, your numbers are comparing gross margin for what periods again?

For the second quarter of this year versus the first quarter of this year.

Oh, okay.

And the second quarter of last year versus the first quarter of last year.

Okay. Yes, obviously we get a little bit of help in terms of leverage with the higher sales in the second quarter versus the first quarter. So that's one aspect. In terms of going forward, I think what we've said, that what Richard mentioned earlier, is we'd expect margins to improve in the second half of the year versus the first half. And that would certainly include some improvement in gross margin, relative to our ability to offset some of the cost increases that we've seen vis-a-vis selling prices, as well as some of the other initiatives that we've talked about.

I might just add, Budd, that, as you mentioned, our operating margins are down about 140, 150 basis points over a year ago. I would attribute a major portion of that, probably at least 100 basis points, to the lag in pricing over cost increases. So that gives you some idea of the shortfall we have yet that we hope to still recover at least major portion of from future price increases.

The second is that we have said a number of times that we are putting less emphasis on profit margins and greater emphasis on absolute profit improvement. And as a result, we are seeing some product mix that is resulting in a little bit of a margin decline. As an example, we are increasing our importation of faucets that we are making in China. And when we sell those products here, we may get additional sales. But on the other hand, they may be at lower margins than our historic margins. But the same token, as you know, we are increasing our sales of non-insulation products in our services businesses, and we've said those have lower margins than installation of insulation, and that brings their margins down lower than they would have been otherwise. So, some of those factors also drive the margin decline.

Yes, I understand -- I think I understand all of that. I was just trying to see if we could pinpoint in this quarter, if you have an impact of pricing. You've now told us you think you're going to gain 100 basis points, or you should have an opportunity to gain 100 basis points of pricing, for the balance of the year. And maybe you could give us a feel of where that comes in?

I'm not sure -- I'm not sure -- I'm not sure I said that. I think I said that we -- we're 100 basis points short of recovering our cost increases. We would hope to recover some of that during the course of this year. But, on the other hand, we've seen a wave of new increases. So as a result, I think our margins, although up in the second half, we won't recover, get back to the comparable margins of last year.

Care to put a number on what you think you can recover, Dick?

My track record hasn't been too good so far this year. So, I think it's just hard to say. My hope is that some of these commodity costs might still turn down later in the year. So, that could make a difference as well. But we'd just be guessing.

Okay. Two other quick questions. One, you're going to go to 37 operating units by the end of the year, I think. Where are you now on the number of operating units, Alan?

We're reasonably close to that at this point in time. I think we talked about it at the investor conference, that we were in the high-40s and on our way down. And since then, we have brought that number down. And feel very, very confident that we'll be at that 37 number by the end of the year or sooner.

Okay. And the last question I have, Tim, for you, is Sarbox spending. I think we've been running at about $36 million a year, or 9 million a quarter. Any update on that?

Yes. We were down a little bit this quarter, Budd. Actually, we were down about 6, 7 million versus last year. And I think, as we indicated at the beginning of the year, we thought that the incremental cost last year versus the prior year was 34 million. We said we expected to see a little bit of improvement in that. And I think the second half is probably going run at a level fairly comparable to last year.

So the net that we're down year-to-date is about 5 million versus last year, which, obviously, is a nice segue into the improvement in SG&A. That helped us with about 20 basis points. We're down about 110 basis points SG&A quarter-versus-quarter last year. And Sarbanes cost and contributed to that about 20 basis points. And, then, we've got a variety of other things, compensation, promotions, and variety of other items that are off just a little bit last versus year 10 or 20 basis points.

I think, really, a question of leverage giving us a little bit of help there, obviously. And, then, as we said last year, that category does fluctuate a little bit quarter-to-quarter based on outside services that we might acquire. So, I'd expect Sarbanes to be a little stronger in the second half, just based on the plan we have for the testing work and some of the other work that we need to do.

So when you look at the SG&A, the selling side of it is relatively comparable, and the G&A is where you've had the improvement?

Actually, both in selling and in the G&A side. And I was talking in a combination when I gave some of the data there a second ago.

I was trying to get you to parse that a little bit. Okay. Thank you, very much.

Thank you.

We'll take our next question from Carl Reichardt with Wachovia.

Actually, I'm sorry, guys, I tried to get out of the queue. My question was answered. But while I have you, the -- I'm curious about cabinet margins. And you mentioned freight, Richard. What about wood costs and what that's done since we've seen those moderate? I was surprised the margins weren't a little bit better than they came in.

Actually, there've been -- there've been some materials that have leveled off in some areas like particle board, maybe, even a modest decrease. But those have been more than offset by other factors, particularly freight. I think we're pleased with our margins in the cabinet business, although, they were down from the very strong numbers of a year ago. But we're not seeing net reductions, I think, of any consequence in terms of cost yet.

Okay. On the installation services side, are you guys still in allocation from an installation standpoint, and have you had much success in your ability to pass on increased cost in insulation to customers now?

The formal allocation is still in place from our suppliers. But having said that, we have been getting enough allocated to us to take care of all our customers. Relative to the pricing, the last price increase on insulation was in January, and we said pretty much right along that it's been taking us up to six months to get those price increases through. We're pretty much there by the end of the second quarter. If you look at our margin improvement in the second quarter, that gets us pretty close to where we think we'll end up being, back into the 14, 15% range. We may have a little bit more to go. But unless there's additional increases from the suppliers, which could still happen, we think we're pretty much there now.

Okay. Terrific. Thanks a lot, guys.

We'll take our next question from Michael Rehaut with JPMorgan.

Hi, good morning.

Good morning.

Couple questions. First of all, just to clarify, Alan, did you just say that, given that you haven't seen any incremental insulation price increases that you're expecting to get back over a 14% margin for the second half?

Yes. I think we're pretty much there at the end of the second quarter. And I think that we'll probably stay in that range for the rest of the year. Again, assuming that there's no unusual cost changes from where we are right now.

Yes, I think what we saw, Mike, is some improvement late in the quarter. Obviously, it's taken some time to implement those price increases. We were up thirteen -- up to 13.4% in margin for the quarter, versus 12.8 last year. And -- and, again, coming on stronger late in the quarter, and should see some continued improvement, we think, in the second half.

Okay. And on the margins, with regards to decorative, that came in a little bit lower than we were looking for. And I guess, you guys are getting hit by the raw materials there. I was wondering if you could comment on your ability to pass through some of those higher raw materials in that segment? And where you stand with some of your larger customers?

Well, we -- as we've said in the past, we really can't talk about individual price increases with individual customers because they ask us not to. And, obviously, that has a competitive element to them. So, we -- we're still have increases that we want to pass on, but that's largely because we've had additional increases in costs beyond what we expected. And a lot of the price increases that have been implemented thus far in the year were put into place reflecting 2004 cost increases. So, the increases we've seen this year, again, we typically have anywhere from a three- to six-month lag, whether it's big boxes or home builders, large home builders, and in some cases, even longer to implement. So, there is a significant lag effect that comes into play.

Okay. Well, I mean --

There's also some cost increase in that segment related to the builder hardware group, in terms of zinc and brass and plastic and that type of thing as well.

Okay. But, just looking at the paint for a second, I mean, would you assume that over the next 6 to 12 months that, and in normal course of business, you would be able to gradually recoup some of those higher costs that you've seen, kind of, accelerate in the last six months?

Well, again, that relates to a specific customer, and I'd rather not make a forecast on that at this time.

Okay. Also, just heading back to cabinets for a second. We saw the 16% margin this quarter. And I guess you guys really pointed to freight as a major driver of that. Are you expecting a similar type of margin decline in the second half as you saw in the second quarter year-over-year, or kind of keeping it around a 16% margin? Or how should we think about that?

Well, I think -- I think you can certainly assume that the freight, distribution, logistics related costs will continue to be an issue in that segment at this point in time. You might remember that we do have two large capital expenditures, both for builder and retail cabinets, that are to be located on the West Coast. Obviously, those are not up and running yet, and probably won't be until the early part of '07. So we get a -- we do have a fair amount of expenditure there for freight relative to shipping to that part of the country. So at this point, given where we are with current costs relative to energy-related, I would expect that we're going to still have some impact for that for the second half.

Okay. And just last couple quick questions here. Cost savings from the headcount reduction. You'd mentioned that in the second half, you're going to see about $0.02 associated with the severance cost. Do you have any idea what that would save you in terms of a benefit?

Actually, the $0.02 is a net cost after offsetting the -- some of the total costs with the benefits that we would get back. Having said that, obviously, the net costs are the only ones that -- or the net savings are the only ones that go forward into 2006. And all the costs of that program would be in 2005.

Right. But any ability, just to give us an idea of what those savings might represent?

Well, I think I'd rather not get into that. We, as I say, are looking at a number of different programs. And I think when we have more decisions made on some of them, then I think we'd share more details.

Okay. And just lastly, in terms of the guidance, you said that you assume within that guidance you have an 18 million share repurchase. You are already up to 19. You have -- you're still about 350 million below the average of total dollars that you've spent in returning to shareholders over the last couple years, which could be another 10 million shares, or so, give or take. Any reason that you're not including that in guidance?

You also have to pick up the dividends that we would pay in the second half of the year to get to your $1 billion. But we've just done that historically to be conservative because we never know what might happen to stock markets and cash flow and other needs. But, basically, your math is correct. The only thing I would point out is that any additional shares we buy in the second half, you will only get a portion of the benefit of those in 2005, because we have to weight them by the date in which we repurchase them. So, as an example, if we repurchased them, on average, throughout the second half we only get the equivalent of one quarter benefit of the share repurchase of the additional shares. So, any shares we purchase in the second half, really, have more of an impact on 2006 than they do in 2005.

Great. Thank you.

We'll take our next question from Stephen Kim with Smith Barney.

Thanks. I had a few questions. Following up on the previous questioner. Mike asked you about the impact, the positive benefit you might get from the severance. But, if we just sort of broaden that to the overall productivity initiative expenditures that you're looking to make here, have you incorporated any benefit accruing to you in the back half of this year in your guidance from those productivity -- those incremental expenditures?

Yes. I think -- I think our guidance includes any benefit of programs that we've already implemented. As an example, included in that $200 million of savings is our outsourcing. And as we've indicated earlier, we expect to increase outsourcing by $100 million this year, or more. And we would expect 25 to $30 million of savings. So that's always been in our guidance. So most of the benefits of what was already planned originally in 2005 is in our older or newer guidance. What we're looking at now are programs that we might not have implemented until 2006 and 2007 and pulling some of those forward. If we do that, then the cost of some of those programs will hit 2005. But on the other hand, the benefits will come sooner in 2006 and 2007 than they would have otherwise.

Right. And it's those incremental benefits that I'm asking you if you've incorporated in the back half of 2005 or is it -- we not going see them that quickly?

No, none of those are included in our '05 benefits. And real world, I would expect that virtually all the benefits would come in '06.

I see. Okay. Can you give us an idea of how much more '06 will benefit from those savings than they would have prior to you accelerating this program?

Well, again, you can look at the 200 million that we said was going to be spread over three years, and our goal would be to try to spread most of that over a shorter time frame. But beyond that, at this point, I'd rather not give more detail beyond what we already gave in the investor meeting. But we will try to get more information on that as the program develops.

Okay. Fine. Your commentary regarding how July sales have been going was interesting. You said that you thought that July -- I believe I heard you right -- was running at mid- to high-single-digits, adjusting for the Behr shipment of 20 to 30 million, right, in June?

And one less shipping day.

And one less shipping day. Okay. So I guess I just want to make sure I understand what that means. That assumes that the 20 to $30 million -- 20 to $30 million didn't happen in June, but actually happened in July?

That's right. What I'm saying is that what really happened was, because of the promotion that was coming in July, product that might normally have been shipped in July was shipped in June to stock the stores for the promotion. So the timing of the promotion moved the sales from what might have been in July into June. So we're trying to smooth it for you, just to give you the better picture of an ongoing business.

Okay. And, so, if I'm understanding this correctly, assuming you don't smooth it for us, it sounds like the lumpiness created by that shipment means that your July shipments were probably running something like 2 to 3%, that be -- ?

That would be right, again, excluding the benefit of the one day. But when you spread that over a quarter, then it becomes less than a 1 percentage point for the whole quarter.

Absolutely, sure. Okay. I understand that. Regarding this accelerated shipment of -- in Behr in June, was there a SG&A benefit or any other kind of margin benefit that you saw in 2Q that you might have to -- we might see go the other way in 3Q?

Well, effectively, what I mentioned in my comments was that there might have been $0.01 to $0.02 of earnings --

Earnings, okay.

-- that would have been in the third quarter that moved into the second quarter. And some of that would have been the leverage of that incremental volume helping the benefits of that segment in the second quarter. So, you'll give some of that back in the third quarter.

Got it. And you also made a comment in your guidance about continuing to pare down the investments portfolio. But you didn't -- you refrained from putting a range around that. But, obviously, you've assumed something in your guidance. Can you give us a sense for ball park, what we're talking about there?

Well, we have two major areas of additional financial assets. One is marketable securities. And we've reduced our normal marketable securities portfolio down to about 50, $60 million at the end of the second quarter. That was 200 million or more a year or two ago. The second portion of marketable securities is our 4 million share investment in furniture brands. And that, we've said a number of times, is really going to be opportunity-driven, depending on valuation and market conditions.

So, the marketable securities is the first piece we expect to continue to liquidate. The other will be liquidated, but we can't tell you what time frame that might come in. The other 400, $500 million of additional financial assets we have, are in investments where we may not control the liquidation of them. They're in various investment funds that we did for tax purposes. And those would get liquidated over a two to four-year time frame, with about a -- probably an average spread over that time period.

Okay. What did you assume? That the marketable security's 56 million would pretty much go down to 0 by the end of the year, or -- ?

Well, it would be reduced further.

Okay. And, I guess my last question related to your comment about the headcount -- basically the productivity initiatives. You've assumed $0.02 for the year, but there may be more. What kind of things will determine whether or not you decide to take more costs out? Or I should say, make those incremental expenditures?

Well, I think what we're talking about is timing. So it's just a question of when a final decision is made, as to what moves are going to be undertaken. And, then, the costs will come into the period as those decisions are made.

All right, okay. So you're going to make a business decision. You're just basically going to do it at the right time, whatever's the right time for your business.

Right. Right.

Okay. Great. Thanks, a lot.

Moving on to Armando Lopez with Morgan Stanley.

Thanks. Good morning, everyone.

Morning.

Just a -- most of my questions have been answered. Just a couple quick ones. Could you just comment on what you're seeing in the retail channel for inventories at this time?

I think that, excluding the product that we shipped for the promotion, which I mentioned was shipped in June and, obviously, that's either sold or the inventory's run down in July. I think, Alan, that our inventories in the field are pretty much as expected?

Yes, we're pretty comfortable. We aren't -- we don't see any inventories out of line anyplace. So, we're pretty comfortable there.

Okay. And, then, with the sales to key retailers, that showed a nice improvement over the last couple quarters. Could you maybe just give us a little color in terms of products which may have been better or worse than the average that you reported?

I think that, as I mentioned in our summary, that our strong sales were clearly in architectural coatings, paints and stains, and the cabinets. We had assembled cabinets. We had good sales at retail. Those are the two biggest product lines that we sell through retail.

Okay. And, then, I guess, just, lastly, as you think about the third quarter and the fourth quarter, how are you thinking about the growth rate in, like, sales to the retail channel? Are you expecting that to accelerate or decelerate or -- ?

Well, I've said in the past that my own feeling is that energy costs are sapping the consumer. And whether it's several hundred dollars for gasoline or $500 for heating costs, if you take $1,000 out of the average family, my old-fashion economics say that if people have $1,000 less money, they're going to spend less money sooner or later. Now, that, obviously, impacts people in lower income brackets. If you're making 40, $50,000, $1,000 is a lot of money, after tax. If you're making $200,000, maybe you don't change your patterns. So, I feel that there has been some impact on consumer spending. I'm amazed that we haven't seen more of it. And I continue to believe that it will show up, particularly, as energy prices keep rising, that sooner or later people can only spend what they have, and, therefore, we're being conservative on our outlook in terms of retail forecasting.

Having said that, I would just also emphasize that our sales to retail tend to fluctuate quarter-to-quarter, but that doesn't necessarily mean that our organic sales growth, in total, fluctuates as much because what that represents are channel changes. So, there are quarters when the key retailers will increase their sales at the expense of other distribution channels, like kitchen distributors or kitchen retailers. And conversely, when the retailers slow down, that often means others are taking the business from them. So the fact that business moves from one channel to the other does not necessarily mean that we don't get the business, because we're present in all those channels.

Okay, great. And, then, just one last one. As you think about the installation business, you had mentioned continuing to grow the non-insulation piece of that. What is the non-insulation as a percent of the total now?

Alan?

At the end of last year it was about 35% for the year. And this year it should be somewhere between 38 and 40% by the end of the year.

Run rate by the end of the year?

A run rate.

And we've also said in the past that, because we're on allocation, we have not entered into additional contracts with some of the large builders. And as that supply situation improves, and it's already improving, we think that if that continues, we may enter into additional contracts with some of the national builders that should accelerate our sales growth in 2006.

Okay, great. Thanks a lot, guys.

Thank you.

Next we'll hear from Ivy Zelman with Credit Suisse First Boston.

Good morning, guys.

Good morning, Ivy.

Most of my questions were answered, as well. But maybe you can focus on one of the positives in the quarter, which was your working capital as a percent of sales improvement. It looks like pretty much everything from inventory turns and accounts receivable days outstanding and accounts payables, everything improved. Can you give us a sense with respect to those measures being sustainable? And would you actually have further improvement? And, then, if you would, Richard, maybe just give us some idea of where the strength is really coming from within the business segments?

Yes, this is Tim, Ivy. We've said in the past that we feel like we still can do some more improvement in the payables area. You may have noticed I think the days quarter-to-quarter are flat 38 days. We all have some areas of inventory that we can continue to improve. And when you go back to the end of the year, I think we were down to 16.8, in terms of working capital as a percent of sales. And we mentioned at that time that that rate, we thought, was sustainable, maybe a few basis points up or down. So I think we're feeling pretty comfortable about the progress we've made there.

I wouldn't want to suggest that we'd see dramatic progress going forward, but we do have incentive programs in place at our business units and our, quite frankly, our operating guys have done just a fabulous job over the course of the last couple of years. So I think we can maintain, maybe improve a little bit. But I wouldn't want to suggest that it'll be as dramatic as what we've done over the course of the last three or four years.

One thing I'd like to add, too, Ivy, is I think the team has done a good job in bringing inventories down to 50 days. The negative side of that is, because our inventory days are lower than most companies and most of our peer group, when we have a period like this of increasing commodity costs, we have less inventory to absorb those cost increases. So, when costs go up, we feel it sooner because we only have so much inventory that is based on the old pricing. Conversely, if we ever reach the point where costs come down, we'll feel the benefits sooner, as well.

No, that's a good point. And in looking at the inventories, what segment of the business have you seen the greatest improvement in the inventories?

I would say it's spread pretty much across the board. Our cabinet folks have done an excellent job, as you might remember from the investor conference. But, really, pretty much across the board, Ivy.

And, as you know, we've gone to a platform structure in the past year. And the fact that we're operating with platforms now, I think, is helping working capital and all of these issues in terms of finding additional areas of savings.

Okay. In terms of the breakout on cabinets, just a curiosity, with the business mix what it is today, roughly how much is new construction versus repair and remodel today?

We'd be estimating because it's hard to track the end product. But I would say that about two-thirds is repair, renovation, remodeling, and maybe one-third, maybe, 40% is new construction.

Okay.

Those would be pretty much industry comparable numbers.

Okay. Your comment -- I know Budd tried to get into margin and your comments on -- just related to expectations for margins. Your focus is more on returns. If we're looking at your historic margin range, call it, 15 to 17%, and your margin's now running more in the -- with the second half of the year, roughly, 12 to 13%, what do you think we should be modeling, Richard, on a long-term basis? And do you think you can get back to the old levels?

Well, I think -- I think a year ago one of the comments that I made was that the margins that we were running in 2004 were a good run rate for us in terms of a long-term goal, that because of high incremental margins on incremental sales, if we can grow organically 6 to 8%, normally you would expect, if anything, margins to improve. But we've said that that incremental improvement, we give back in the way of product development, customer promotions, price reductions, and other things, and, therefore, if we could maintain our margins, I think we'd be doing a good job, excluding product mix, which is really a different issue. So I think our goal is still to try to get back a good portion of the margins that we've come down in the past year from a long-term standpoint.

Great. Thank you.

Okay. Thank you.

We'll take our next question from Keith Hughes with Robinson Humphrey.

My question's been answered. Thank you.

Okay. Operator, maybe we have time for one more question.

And our final question will come from Steve Fockens with Lehman Brothers.

Hi, good morning, guys.

Good morning, Steve.

Just two quick questions. First, what have been the reactions so far from both the retail side and the builder side to the price increases you've tried to push through, especially the ones even more recently? And, maybe more importantly, is there any sign at the end consumer level that they are not willing to accept these kind of price increases?

Maybe answering the latter question first. When our customers have implemented price increases, everything we've seen and heard, there hasn't been any significant consumer impact. And, by and large, by the time it gets to the consumer, you're talking about 3, 4, 5, 6% price increase on many products. And that seems to have been relatively well accepted. In terms of the acceptance of the increases, you really have to break that into two categories. As we've said before, when it comes to home builders, the home builders typically respond to us by saying, they -- if there is a price increase, they'd like to have it on a home they haven't sold yet, so they can build it into their cost structure and selling price structure. And since their business has been so good, more often than not, they're actually selling homes they haven't even begun to build yet. So, whereas in the old days, the lag might have been three months, these days we see the lag running out to six or even eight or nine months in terms of time frame.

With the home centers, their biggest concern is not giving a price increase and building it into the system to reflect temporary costs. And so they typically want to know that the price increases and cost increases are permanent in the system, and so that takes some time for them to accept that those prices aren't going reverse, or costs aren't going reverse. And, secondly often there are questions of timing, in terms of catalogs, promotions, other commitments that they've made, printed material, that causes a lag in pricing. So, in both cases, over time we think the majority, if not the great majority of cost increases, we can recover in price increases. But it's the lag of three, six, even nine months that ends up costing margins in a rapidly escalating period.

So, assuming that they accept these, this still may run into early '06 at this point?

Oh, I think, in terms of the additional costs that we've seen in recent months, if they stay, I think some of those price increases will well run into '06 before we recover them.

Okay. Great. And one last final question.

And that's built into the guidance that we gave.

Okay. To the extent, Richard, that you talked about on focusing more on operating dollars, as opposed to operating margin, I assume this keeps in mind the relevant capital necessary to generate such dollars, i.e., if you're going to generate more operating dollars that could be lower operating margin, but use relatively less capital, that's the kind of equation you're keeping in mind?

Exactly. And maybe I should have -- didn't say that as well, because we're really focusing on return on assets and return on invested capital. And if we can do things that improve our returns in those areas, even at the expense of margins and increase absolute profits, then those are the things that we're putting the extra effort into.

Okay, great. Thanks, very much.

Okay. Thank you, Operator. And we appreciate all of you taking the time to be with us. And, as I say, I can only re-emphasize that the entire team here has continued to be committed to value creation. And from a long-term standpoint, I think we're still well on track to do that, even though in the short run we've experienced profits that we would certainly consider disappointing in 2005. And we certainly hope and believe that's going to be a temporary situation. So thank you for taking the time to be with us.

That does conclude today's teleconference. Thank you for your participation.