馬斯科 (MAS) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Masco Corporation 2005 fourth quarter conference call. As a reminder, today's conference is being recorded and simultaneously Webcast. If you have not received the press release and supplemental information, they are available on Masco's Website at www.masco.com. Statements in the following discussion may include certain forward-looking statements regarding Masco's future sales, earnings growth potential, and other developments.

Actual results may vary materially because of external factors such as interest rate 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 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 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 opened for analysts' questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations Office at 313-792-5500. I would now like to turn the call over to Mr. Richard Manoogian, Chairman and Chief Executive Officer of Masco. Mr. Manoogian please go ahead.

Thank you and happy Valentine's Day to everyone. Joining me today are Alan Barry, our President and Chief Operating Officer, and Tim Wadhams, our Chief Financial Officer. We reported this morning net sales from continuing operations for the year 2005 increased 7%, primarily from organic growth to a record 12.6 billion, compared with 11.9 billion from 2004. North American sales increased 8%. And international sales increased 1%. In local currencies, international sales also increased 1%. Sales of assembled cabinets, installation services, and windows in North America were particularly strong in 2005.

Income from continuing operations was $941 million or $2.19 per common share, excluding the impact of the noncash after-tax goodwill impairment charge of $69 million in the fourth quarter pertaining to certain European operations. During the fourth quarter of 2005, as part of the Company's strategy of reviewing its business portfolio for potential consolidations and divestitures, the Company complete the sale of two additional businesses with combined annual sales of approximately $200 million, for aggregate proceeds of approximately $200 million. Under generally accepted accounting principles, the net gain on these transactions along with 2005 full year and prior period operating results of these companies is reflected in discontinued operations.

The impact of including these businesses in discontinued operations was to reduce income from continuing operations in 2005 by $0.05 per common share. The Company recognized a pretax net gain on the disposition of these businesses of $50 million, which is also included in income from discontinued operations. Results for the year benefited from the strong new construction market, our cost reduction initiatives, and certain selling price increases. All of which were more than offset by increases in commodity, energy, and freight costs.

Results for 2005 also benefited from net gains to the -- in the Company's financial investments. Our fourth quarter 2005 net sales for continuing operations increased 6% from last year to over 3.1 billion, primarily from organic growth. Masco's North American sales for the fourth quarter were up 9%. International sales decreased 8%. In local currencies, international sales were flat compared with 2004. Sales of assembled cabinets, plumbing products and windows in North America, were particularly strong in the quarter. Increasing in the aggregate over 13% compared with a year ago.

Installation and other services was also strong with sales increasing 11% compared with the 2004 fourth quarter. Excluding the charges for goodwill impairment related to certain European businesses in both 2005 and 2004, income from continuing operations for the 2005 fourth quarter was $211 million or $0.50 per common share, compared with the Company's most recent guidance of $0.48 to $0.52 per common share, and compared with $0.54 per common share last year.

For the year 2005, operating profit margins as reported were 12.5%, compared with 13.4% in 2004. Operating profit margins as reconciled were 13% in 2005, compared with 14.1% last year. Full year 2005 operating margins were adversely impacted by increased commodity, freight, and energy and other petroleum-based product costs, as well as greater sales in lower margin products and services. Total SG&A expenses in the quarter as a percent of sales, including general corporate expense, were 15.2% in 2005, compared with 17.3% last year. Our general corporate expense was 1.5% of sales in the fourth quarter, compared with 2% last year.

Looking at our segment sales for the fourth quarter, cabinet and related product sales increased 6%. Plumbing product sales increased 4%. Installation and other services sales increased 11%. Decorative architectural product sales decreased 1%. And other specialty product sales increased 7%. Sales in our plumbing and other specialty products groups in the fourth quarter were negatively affected by weaker foreign currencies.

Sales at retail continued relatively slower growth exhibited in the third quarter. Which the Company believes were negatively impacted by higher energy costs, adversely affecting spending by lower income consumers, as well as inventory adjustments by certain retail customers. Sales to key retail customers in the fourth quarter of 2005 increased 5%, compared with the fourth quarter of 2004 and 2% increase in the third quarter of 2005. For the full year 2005, key retailer sales were 3.8 billion, an increase of approximately 4%.

Working capital, defined as accounts receivable and inventories less accounts payable, improved to 15.9% of sales at the 2005 year-end, from 16.8% of sales last year. Return on invested capital as reconciled was 13.4% in 2005, and 12.9% in 2004. The Company continues to believe that we will approximate our 15% return on invested capital goal by the end of this year, and our 18% goal by 2010. The Company's free cash flow before dividends exceeded $1 billion in 2005.

The Company had a strong balance sheet at year end, with over $2 billion of cash and marketable securities and continues to have unused bank lines of $2 billion. The Company will utilize 800 million of its cash to redeem debt coming due in March. In 2005, the Company generated 193 million of cash from the net disposition of financial investments and 278 million from the net disposition of certain businesses.

For the year 2005, we repurchased 31 million common shares, of which 8 million shares were repurchased in the fourth quarter. We have continued our active share repurchase program this year and have repurchased an additional 3 million shares of our common stock in January. In 2005, the Company returned 1.3 billion to shareholder through share repurchases and dividends.

As we have previously stated, the Company experienced greater than expected commodity cost increases in the fourth quarter of 2005, which reduced expected gross margins. These higher costs would likely continue to have an adverse impact on the first half 2006 results. The Company is implementing additional selling price increases for a number of its products. And believes that by the end of this year's second quarter, most of these commodity cost increases will largely be offset.

We also believe that we will achieve further organic sales growth in 2006. And based on current business trends, believe that we will achieve full year earning from continuing operations in a range of $2.35 to $2.45 per common share. Including approximately $60 million of increased benefits expect to be realized this year from profit improvement programs. Our full year guidance is based on housing starts declining 5% from last year's levels. Share repurchases of a minimum of 20 million common shares. Modest margin improvement in the second half of the year, reflecting selling price increases offsetting higher commodity costs. And anticipated income from financial investment. Our guidance also assumes no further commodity cost increases and excludes costs associated with our cost reduction programs and any other items.

Last month, we announced a plant closure in the plumbing products segment. A major faucet manufacturing facility in Chickasha, Oklahoma. The costs associated with this closure are expected to be incurred over the remainder of the year. These costs and other costs and charges related to the Company's profit improvement initiatives are anticipated to aggregate approximately $70 million this year. Including the $70 million of anticipated costs, which amounts to approximately $0.11 per common share, guidance for earnings from continuing operations in 2006 is expected to be in the range of $2.24 to $2.34 per common share.

Our relatively strong sales performance in the fourth quarter has continued into 2006. Our January sales were up more than 10%. Although they may have benefited from one additional shipping day in this year's January, and relatively warm weather in certain parts of the country. Based on these trends, we would expect our organic sales growth for the quarter to be up mid to high single digits. Assuming some moderation in housing activity in the second half of the year, we still expect full-year sales to achieve our average annual organic sales growth goal of 6% to 8%, though possibly at the lower end of that range.

The Company remains committed to its strategy of value creation and is focussed 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, we are pursuing a variety of initiatives to offset cost increases and increase operating profit. Including sourcing programs, the restructuring of certain of our businesses, including consolidations, manufacturing rationalization, headcount reductions, and other profit improvement programs. Our Asian sourcing has grown from $200 million in 2003 to $450 million in 2004. And in 2005, exceeded our goal of $550 million. We generally save 25% to 30% on products and components that we outsource to Asia.

Business consolidations, together with divestitures, have reduced our business units from 67 in early 2003 to less than 40 at the year end 2005. We estimate that the direct costs associated with our cost reductions initiatives approximated $30 million in 2005. With anticipated direct costs in 2006 approximating $70 million, primarily related to manufacturing plant closures or the $0.11 per common share that I mentioned earlier. The quarterly timing of recording costs this year will be driven by events over the course of the year. We believe that we realized additional cost reduction benefits in 2005 of approximately $40 million.

Additional cost reduction benefits this year are expected to be $60 million. As previously disclosed, we have accelerated a number of our programs -- cost reduction programs, and we believe that we will reduce annual costs on initiatives we have undertaken since 2004 by $200 million by the end of 2007. Additional costs related to these programs are presently expected to be minimal for 2007. And thus, the earnings benefits from these programs should be more evident next year. We expect to provide further detail related to our profit improvement programs during our March 30, 2006, investor conference.

While we're pleased with the progress that we have made in a number of our profit improvement initiatives, we are very disappointed with the earnings performance that we achieved in 2005. Commodity and other cost increases were much greater than we expected at the beginning of the year. Aggravated even further by hurricane-related refinery closures in the Gulf region in the fall, which caused an additional spike in certain costs, especially petroleum-based products. While the lag in offsetting these cost increases with price increases penalized our 2005 results; we continue to believe that if costs remain relatively stable going forward, we will be able to largely recover the past, higher costs through pricing adjustments. We expect this to have a favorable impact on our margins in the second half of 2006.

To summarize, in 2005, sales increased 7% to 12.6 billion, growth that was essentially all organic. We generated over $1 billion of free cash flow before dividends. We returned 1.3 billion of cash to shareholder through the repurchase of 31 million shares and dividends and dividends which were increased for the 47th consecutive year. We simplified our organization structure. The platform strategies we developed are driving synergy and leveraging opportunities. And return on invested capital as reconciled improved to 13.4%, as we are well on our way to approximate our goal of 15% return on invested capital by the end of this year.

While our team is proud of recent accomplishments, we have more to do. 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 been sheet. Generating superior cash flow. And returning cash to shareholders through share repurchases and dividends. As we continue to develop and execute our strategic plan, we appreciate the efforts and dedication of our over 60,000 worldwide employees. We firmly believe that our strategy, together with our leadership products and brands and multiple distribution channels and price points, position Masco to deliver long term value for our shareholders. Now, Alan, Tim and I will be happy to answer any questions that you might have.

[OPERATOR INSTRUCTIONS] We go first to Budd Bugatch with Raymond James. Please go ahead.

Good morning, Dick. Good morning Alan and Tim. Richard, just if you would, on the guidance going forward help us. You did say, I think the 6% to 8%, even at the lower end of guidance --

For organic sales growth.

For your organic growth. Help me think through, then, you said a modest margin improvement. This year, your margin -- your gross margin was down on the restated numbers about 240 basis points at the gross margin line. You had an improvement of 120 basis points at the SG&A line. Help us think through what you -- how you would look at these two components for 2006 based upon your best look forward?

Right. You're right, Budd, in that we offset part of the margin decline in operating margins with continued improvement in our SG&A. A portion of which is the result of the consolidations that's we've been undertaking internally. The net effect of that was to reduce our margins by approximately 110 basis points in '05. We estimate that our cost increases greater than price increases were even greater than that number. Perhaps as high as 200 basis points.

So effectively, we were really set back by costs going up much faster than we implemented price increases. We expect over time, assuming costs level off, and I'll be very surprised if from these levels we continue to see any significant escalation in some of the commodity areas that have been impacted, particularly those impacted by the hurricane developments. So, that we think with leveling off of costs, we will begin catching up during the first and second quarter of this year by implementing price increases to offset those cost increases.

The net effect of that is that we think this year our margins will be up slightly for the year as a whole. And particularly as the year progresses, our margins will compare favorably with last year, particularly in the second half of the year.

But my problem is when you do that and try to put those numbers through, you get some numbers that are significantly or -- are markedly higher than the guidance assumption. Should we then also assume that we have some increase in SG&A going forward? How do we think about that because to get to your guidance numbers doesn't require a lot of margin improvement?

Well, remember that we have a cost increases that we absorbed in the second half of '05, which we will have to absorb for the entire year of '06.

So overall, what do you think gross margins will compare year over year?

I don't have the gross margin. But I know the operating margin, we certainly don't expect a pick-up in SG&A expense. I believe that we're projecting an improvement in operating margins of somewhere between 10, 20, 30 basis points for the year as a whole. That's in the guidance number.

And most of that, Budd, would show up in the gross margin. We have additional commodity costs in the budget for this year -- in the guidance for this year, that are fairly significant, as Richard said, in the 100 to 200 basis-point area.

We should basically expect negative comparisons early in the year and more positive comparisons --?

I would say that may be true. But I don't see a significant decline in margins in the first and second quarter. But a good portion of the pickup will come in the second half.

Just lastly, the -- your guidance is based I think on 36% tax rate, is that correct Tim?

Yes, that's what we have in Budd. Which is slightly higher than the previous year's tax rate of 35 adjusted.

Thank you.

We go next to Margaret Whelan with UBS. Please go ahead.

Good morning, folks. Just to follow up on that, how is your interest expense going to change for the year?

Interest should be down to 220 million in '06, Margaret, from the 247 that we incurred in '05. We've got 800 million of debt due, as you know, in March. And we did have some negative carry in '05, roughly $12 million, $13 million related to that which was issued in June.

I should also mention that we tend to have a fairly large cash position. And the one offset to some of the negative costs is that as interest rates go up, we earn a little more on the cash we have in the Company than we did in the previous year, as well.

Well, that was a good lead into my next question, which is why don't due something with it?

Well, we ended the year with about $2 billion in cash and marketable securities. I mentioned that $800 million of that is earmarked for debt reduction, which is coming due in March. That would still leave us with nearly $1 billion of cash. And I think I also said that we continue to have a very active acquisition program -- share repurchase program, rather, so I guess --.

Was that a slip?

No, that wasn't a slip. What we've said in the past is that any future acquisitions we have, we see as primarily bolt-on acquisitions. Where we would get much higher returns in the near term than we get -- we've gotten historically. So, I don't anticipate any large, freestanding acquisitions. So that gives us a let of flexibility in terms of the cash going forward to take advantage of any opportunities that may come along, including possibly increasing our share repurchase program.

Beyond the $1 billion-plus that you did this year?

Well, what we've said is that our goal is to average the $1 billion a year for share repurchase and dividends. If anything, we've exceeded that average in the last three years. But I think we want to stay with the commitment to average it over the next few years.

Okay. The last question I had was just on the trend of your business into February. Have you seen a pick-up?

I would say that our business has been quite strong in January. And in some key areas like architectural coatings, we've had double-digit growth, not only in January but continuing into February. So, we feel comfortable that this quarter looks like it should be at least mid to high single digits based on the first six weeks of this year.

Okay. Thank you.

We go next to Ivy Zelman of Credit Suisse. Please go ahead.

Good morning, guys. Actually Dennis McGill in for Ivy. Just a couple of questions on the cost savings and the outsourcing initiatives. First, do you have a goal for '06 where that 550 million can go?

What we've said in the past is that we expected the outsourcing to get up to about 750 million in '07. So, I think you could sort of estimate that we're averaging about $100 million pick-up a year in outsourcing.

And related to that $100 million. How much of that do you share with your customers and how much are you able to actually drop to the bottom line?

Well, in a normal year we would expect that a fair amount of the savings that we generate we would be able to retain. Unfortunately, that's been more than offset the last year or two by cost increases. But I think the reducing of the costs, we don't want to assume in the long run we're going to have a dramatic pick-up in margins. We think the margins in the last year or two have been unduly depressed by commodity costs. So, we would certainly hope to have some recovery in those margins.

But I wouldn't want to imply that we're going to get back to all-time highs in margins because some of those benefits and cost reductions we need to reinvest in the business in terms of product development, expansion. And in fairness, we give back to the customers in promotions and pricing allowances and in competitive situations. So, some of it would be used to offset other factors. But we do expect to improve margins. We think they're unduly depressed currently based on the cost increases we've had to absorb.

Ignoring the commodity cost issue for a second, are you sensing that your key retailers are becoming more aggressive on trying to take costs out of their model from you guys and other manufacturers?

No. I would say that the key retailers and key builders have always been very aggressive on doing that. And I think that continues to be the case. I don't think it's been anything that's changed materially in the past year or two.

All right. And then just finally on the manufacturing plant, the plumbing segment that was closed, where is that production going? Is it offshore or other facilities here?

That t was a major -- one of our three major faucet facilities in this country, had over 600 employees. And basically the bulk that volume, some of it will be going to other -- our other operations. But a major portion of it would be outsourced to Asia.

Okay. Thanks a lot, guys.

We go next to Lorraine Maikis with Merrill Lynch. Please go ahead.

Good morning, this is Ken Zener in for Lorraine. You stated that you were looking at a 5% reduction in home sales for 2006. What is your prediction for remodeling growth?

I would expect that remodeling would continue to be fairly good in '06. Our past experience has been in years when housing declines, if anything, remodeling/repair activity tends to pick up a little bit. And the reason for that is instead of people moving, they stay in their homes longer and fix them up more. And one of the biggest problems that we've experienced, the industry has experienced in the past year or two is the shortage of available, skilled workers. So, as housing slows a little bit, that may free up tradesmen who have been working in new construction that will swing over to remodeling work. As well as some small builders who might move over to remodeling work. So, that's been our past experience.

One thing that's a little different in this cycle; is we've obviously seen a great deal of refinancing by homeowners. It's hard to track how much of that might have been spent on remodeling the last few years that without that refinancing is a negative headwind on remodeling. But I think that the remodeling and home improvement expenditures going forward will continue strong. The only area that we've seen weakness is at lower ticket items such as paint where we think lower income consumers, people making $30,000, $40,000 a year who suddenly pay $1,000 or $2,000 of additional gasoline costs or heating costs can be impacted to spend a little less. They have to save that money somewhere else. And in lower ticket items, we think we've seen the impact of that in retail sales.

Right. And -- great. And second question. Could you discuss the factors that contributed to the about 500 base point improvement in specialty products in the quarter?

Yes. Last year in specialty products, we had -- you might remember if you were on the call, we had some additional resin costs that affected our window operations, that was fairly substantial in that quarter. We also had a plant relocation charge in Europe, where we were consolidating, rationalizing manufacturing. As well as I believe a note receivable adjustment that we took. Which totaled I think about 350 basis points in the fourth quarter.

I might just mention as a follow-up, too, although our paint sales are very strong in January and February, again as I say, we think we've had some impact there on lower income consumers in 2005. On the other hand, we have not seen consumers trading down in terms of price points. And we continue to have relatively high sales of higher end products. Our cabinet sales at retails have continued very strong in recent weeks.

Great. Thank you very much.

We go next to the site of Michael Rehuat with J.P. Morgan. Please go ahead.

Yes, thanks. Just on the raw materials, I just wanted to be sure I understood. You are -- because I think in the guidance it mentioned costs flattening from here on in. But year over year, you're still baking in an incremental negative impact from where we're ending this year and above the average of '05?

Yes. As an example, in the fourth quarter, we were hit with increases in insulation prices of 9%. Resin prices, titanium dioxide in the fourth quarter all went up substantially because of refinery shut downs in the Gulf. So, all that is built into the guidance that we've provided. Full year impact of those cost increase says. I should also mention that another factor that's been affecting us is shortage of materials. In the past calls, we've talked about shortage of insulation material. That product continues to be on allocation. We thought it would ease up by now. If anything, it's gotten worse, and even tighter. And we've lost significant volume on our inability just to get material to do the work. So, that continues to be a headwind for us, as well.

And what are you seeing in those prices since the end of '06 in terms of, I would say, if you could just run through some of the top ones, TiO2, insulation, copper on the plumbing side and maybe a couple the key other ones. And does that give you confidence that at least for the first couple of months of the year and maybe going forward that some of these material costs have indeed stabilized?

Well, you mentioned copper. And I forgot to mention that in the things that I mentioned going up in the fourth quarter. When we had our third quarter conference call, as I recall, copper was at $1.60. And I said then that it was hard to imagine it going higher. Well it's at $2.20, $2.30 now, so it did go higher. But having said all that, we do feel -- and I'll repeat what I said before. We do feel that based on the present high levels of costs that we have now, even if you annualize that, that we think a major portion of those costs we will have offset with price increases by sometime in the second quarter of 2006.

And when have those prices increases been implemented, Richard?

Well, we've been implementing a number of increases on a regular basis. But I would say we've accelerated our price increases in the first half this year. And that's based on either prices that we've already implemented or discussions we've had with customers where we're comfortable in saying we think we will recover a major portion of those costs.

So, at this point those increases are going through, the customers are largely accepting them?

Again, I don't want to talk about individual customers or industries because that's a problem for us from a customer standpoint. But I would just say that we are comfortable based on what's happened that we will recover most of those costs.

Okay. And lastly, just on the cost of the profit improvement initiatives. $70 million, you've indicated is primarily related to the -- is it just the faucet plant, or are there -- is this -- how much is related to the faucet plant, perhaps other plant closures and other areas of this overall program?

The faucet plant is only one element of the $70 million, although a major portion of that. And it represents a number of actions across a number of different companies and businesses. But a major portion of the total $70 million is within our plumbing segment. And frankly, we'll give out a lot more detail on our costs and where it's being implemented and where we see the benefits being at our investor conference in March. So, we'll have a lot more information for investors at that conference.

Okay. But just in the meantime, would you characterize most of the costs relating to either plant shutdown or headcount reduction, is that fair to say?

I would say the major portion of the $70 million is related to plant closures or headcount reductions. That fair, Alan?

Yes, it is.

Great. Thanks a lot.

We go next to Armando Lopez with Morgan Stanley. Please go ahead.

Hi, good morning, everyone. A couple quick questions. I guess first on the guidance, how much of -- are you expecting in terms of financial asset sales or from financial asset sales?

We have a relatively small amount in the guidance related to asset sales. I would say it's probably $0.01 or $0.02 a quarter or probably closer to $0.01 a quarter. Because our marketable securities portfolio is fairly small, so the remainder of our financial assets throw off about $0.01 a quarter.

Armando, we were able to take about $190 million-plus out of the portfolio this year including gains. Which is, as you know, consistent with what we've been communicating in terms of our strategy.

Financial gains would be down substantially from the amount we had in 2005 in terms of our guidance going forward.

Right, right. Okay. And then second, how should we think -- you guys have divested a number of businesses now. How should we think about the portfolio going forward? Are there still other opportunities here, do you think? Or, you know, are you pretty much pruned it down to where you think it should be?

No, we continue to evaluate our portfolio of companies. And I would be surprised if we don't have some additional, modest-sized divestitures to report during 2006.

Okay. Great. And then on the installation side of the business, you talked about still being on allocation. How are you thinking about raw material costs on that side? You've mentioned you were getting pricing. Are you expecting that to moderate somewhat in the second half, as well?

We're not counting on moderation. We're counting just on a leveling off. As we've said in the past, we probably have a bigger lag in the installation business because that's with new home builders. And typically, the home builders ask us not to implement a price increase until they sell a home that they haven't already sold so they can roll the price increase into their selling price. And because of the demand for housing, that lag has become more like six, nine months, whereas historically it was more apt to be three to six months.

Okay. Okay, thank you.

We go next to Peter Lisnic with Robert W. Baird. Please go ahead.

Good morning, everyone. On the cabinet front, if you look at margins what they've done over the last four quarters, it looks like the fourth quarter we saw maybe a little bit of acceleration in kind of the margin decline. Just wondering what's going on there because there wasn't too much mention about wood costs?

Two things would be affecting margins in cabinet. One is that included in our cabinet group, our European companies. And because of currency changes and also some lower profits in Europe and slowing sales in Europe, that would would have had a modest negative impact on margins cabinets in the cabinet group.

And secondly, we're really running at a capacity constrained basis. A major portion of the capital expenditure program that we have in 2006 is going to be to bring onstream new facilities in the western part of the United States. In the meantime, because we're operating at tight capacity, we're incurring a let of extra costs both operationally and logistically. We're shipping a lot of product from the East to the West Coast. And as a result of that, we're absorbing some margin pressure there from cost standpoint. Which again, once we have capacity onstream, would expect to be alleviated.

The second thing that's impacted -- or third thing that's impacted cabinet margins is the weakest portion and one of the weakest portions of our business is the ready-to-assemble or RTA cabinets. Which again, as I mentioned earlier, is probably being negatively impacted by lower income consumers. That business is fairly weak. And that is dragging down the overall cabinet margins. Our margins on assembled cabinets continue to be strong.

Okay. Fair enough. And if I could switch gears to the installation business. Still on allocation there are still some shortages. Are those shortages due more to material shortages for the actual suppliers, or is it just capacity constraints at their end? I'm just trying to get a sense as to at what point do we get to the point of where this allocation issue goes away.

At this point in time, it's been much more a capacity issue on their part. If you look at the retail side of things, because of the energy costs, a lot of people have been going back to their -- in their existing homes, have been checking the insulation in their existing homes and adding insulation to existing homes. So, the retail market has certainly picked up on that. And a lot of the availability and material have gone into the marketplace. There hasn't been any major, new facilities been brought on-stream for a number of years. And the manufacturers continue on occasion to take particular lines down for rebuilding. The good news is when they take these lines down and when they come back on-stream, they generally come back up with an improvement in the productivity.

Okay.

So, it's just been a struggle for us now for going on two years in terms of getting off the allocation and knowing that we've got enough material to go out after additional customers.

And to be safe, that's probably a reasonable expectation for this year.

The strong housing market has also absorbed a lot more material. And if housing were to slow a little bit later this year, that would help the availability of material, as well.

Okay. Fair enough. Thank you.

Next we have a follow-up from the site of Ivy Zelman with Credit Suisse. Please go ahead.

Hi, guys. Just wanted to follow up on the strength that you've talked about in January and February. Richard, wondered if you could kind of segment between your key retail customers and the new home builder customers, what the divergence would be there if any?

I would say that, again, we can't talk about individual customers, but I would say that thus far in January, we've seen strength on both the new construction side and the retail side.

Okay. So both would be up around that 10% number you talked about?

Well, without putting a number on it, both are relatively strong.

We go next to Keith Hughes, SunTrust Robinson Humphrey. Please go ahead.

Thank you. Your commentary on margins improving year over year in the back half of '06, would that applicable to the installation segment, as well?

Yes, absolutely.

I guess you're assuming even with your view on housing starts you're not going to see a tremendous amount of pressure?

As a matter of fact, if housing eases and the availability of insulation material increases, we would expect our installed sales to rise because we have a lot of builder customers that we can't service right now.

And you're not expecting any real -- you always have pressure from them, but not any significantly more pressure in this little more pessimistic housing scenario on price and margins for the service?

We don't think from past experience, that the fact that housing slows should result in unusual pressure on pricing.

All right. Thank you.

We go next to Steve Fockens of Lehman Brothers. Please go ahead.

A quick question. On the -- I think in the release you talked about capital expenditures moving up from the 280 range to the 420 in '06. And I think you said some of this is timing. How much of that would be timing, and then does an increase to the 400-plus-million range mean that you're going to return less than 1 billion to capital and shareholders in '06?

Almost all that, Steve, is timing. There's probably 100 million related to timing in terms of the impact of going to the 420. In fact, we should be well below 300 in 2007 for CapEx. And second part of your question --?

Did you say anywhere whether you planned or hoped to continue the kind of return of capital to shareholders in '06 that you've seen in the past?

Yes. I would say that some of that delay was caused by approvals to build new facilities out in the West Coast that ran longer than we expected. We've gotten those approvals now. So, we've talked in the past about saying CapEx on average is around 3% of sales. And I think nothing has changed in that number. And if you average the years, I think you'd come out close to that number. And there's nothing in our capital expenditure program, either near term or long term, that we see that's going to have any negative impact on our ability to buy back stock.

Great. Next, on that regard, when you guys talk about 20 million-plus fewer shares in '06 or 20 million buyback, when we think share count, is that relative to the quarter end of what was it, under 420? Or are you talking relative to the average for the year of 430?

That would be relative, Steve, to the 418 that we ended the year at. That was the end of the year number. So if you assume --

So, you would expect under 400 at year end?

By the end of the year, yes.

Okay.

One thing we'd caution, remember that when we buy back shares we have to weight them by the time period. So, if you buy 20 million shares over the entire year, you can only effectively reduce share count by 10 million. On the other hand, we've said in the past that we typically front load a little bit the buy back into the first half.

Okay. And then lastly, I think and maybe I'm putting way too much in semantics here. But in the past you said, we'll achieve 15% return on capital. And now you say approximate. If there is any risk to hitting your goals, do you view it as more of a -- somewhat more a cautious view of the earnings side, or perhaps greater expansion of the capital base than you may have previously anticipated?

A little conservatism on the earnings side, Steve. I think as we've said in the past, we would -- and in fact at the conference last year, I mentioned that we'd either hit that goal or be very, very close to it. And we still believe that we'll be very, very close to it if we don't exactly get to the 15.

Really, clearly our earnings are below where we would have expected a year or two ago. So, any shortfall, and if there is any, would be relatively small, would be driven by earnings, not by the capital base.

Great. Thanks so very much, guys.

We go next to Nishu Pseud with Citigroup. Please go ahead.

Thanks. Good morning. First question is on the retail inventory corrections or retail that you cited. Could you give us a little more color on that. Do you think it's temporary, do you think it will reverse? And should we take it that most of that was in the paint category?

Again, we don't like to talk about any individual customer. And if I talk specific products, you might relate it to an individual customer. But I would say that any inventory cutting that took place was not all that large and certainly was temporary. And we don't see that as having any ongoing effect.

Okay. And then just a second question. On the cost savings target of 200 million, that you have stated for 2007, does that include or exclude the benefits you're getting from the Asian sourcing?

That would include the benefits that we're getting from the Asian sourcing.

Okay.

And I might just add we set that target of 200 million back in late '04, early '05. And I can just assure you that we are totally committed to achieving that or something even greater than that during that period of time. And we're very hard at work at doing that. And I feel pretty good that the results that we've achieved so far, according to that target.

So, will you be revisiting the kind of sum of that 200 million at the investor conference?

Yes, we will.

Okay. Great. Thanks.

[OPERATOR INSTRUCTIONS] We go to Larry Horan with Janney Montgomery Scott. Please go ahead.

On the insulation price issue, are any of your suppliers sharing expansion plans with you or capacity increases in any way?

Yes, I think we have a good handle on what's coming on board in the future.

You don't have to name company names, but what sort of capacity do you expect to come on in the future and when?

We expect a small increase in capacity in the industry to come on late in the first quarter. Something in the range of a couple of percentage points in the overall industry. By the end of the second quarter, we expect some additional capacity. And late this year, or at the latest early next year, some fairly substantial capacity to come on board.

Okay, thank you very much.

We have a follow-up from Michael Rehaut of J.P. Morgan. Please go ahead.

Just looking at the cash on hand and the cash flow generation, you're talking about after the debt redemption, perhaps still roughly 1.2 billion of cash on hand. You're generating over 1 billion in operating cash flow. You continue to do divestitures. Is there any reason to think, at least for '06, that you wouldn't still be doing 30 million-plus in share repurchase or is this just an area of conservatism that you're currently baking into the 20 million guidance?

Well, of course, obviously, the value of the share repurchase also depends on the share price. But we -- remember that we need some money to run the business, which might be 200 million, 300 million. But I can't disagree with your math.

Okay. Because in the grand scheme of things, going up 150 or so in CapEx, considering again; the cash on hand, the operating cash flow and the divestitures, it's certainly -- you've spent 900 to 1 billion or perhaps a little bit more -- I believe on just share repurchase alone annually over the last years. So, it seems like you still have a lot in terms of your resources today or throughout '06 to continue that type of pace.

Well, that's correct. And also I'll mention that we still have about 500 million in financial assets that we expect to be liquidated over the next several years, as well.

Great, thanks.

We go next to Shaumo Sadhukhan with Basswood Partners.

Hi. So, in terms of where your margin stands now, you're maybe 150 to 250 basis points below what's sort of a normalized average margin might be if you look at the last four or five years. And there's maybe an additional 100 or 200 basis points to where peak margins were at one point, maybe five years ago. I'm wondering if there's anything out there that you see that would prevent you from at least getting back to sort of maybe 14 or 14.5? What the average margin might have been historically over the last few years?

The only thing I would mention is that keep in mind the mix between our segments and products, as an example, our Masco contractor services, are growing very rapidly in noninsulation products. And we've mentioned in the past that those tend to have a margin of closer to 10% to 12%. But on the other hand, generate a return on assets of 80% to 100% because they don't require a great deal of additional capital. So, with the increasing focus we have in the Company on return on assets and return on invested capital, we're putting less emphasis on specific profit margins and more emphasis on the increase of absolute profits. So, you can't totally compare the future with the past. But clearly, we expect to recover some of the margins that we've lost the last two, three years. And I think you will see that in '07 and beyond.

So, let me just maybe ask the question a different way. If you look at the sort of segment breakdown, in the segments where you've lost margin due to cost increases, you would expect in those segments, right, so that would eliminate the mix shift. You would expect over time to sort of be able to recapture, at least to get back to sort of the average levels for those segments, margin that you might have lost due to cost increases? And those would phase in over time?

Yes. In general, that's true. But as I say, in certain segments where they're putting emphasis on growing rapidly in areas that have very high returns on assets, they may actually come in a little lower on margins. But I think it increases the absolute profit rates.

Okay. Thanks.

Operator, we might have time for a final question.

We'll go to Michael Rehaut for a follow-up. Please go ahead.

What do you know? I got a third one in.

Remember that, it might not happen again, Michael.

It hasn't happened in the three years I've covered you.

I think the weather may have cut down the number of people on the call.

I just wanted to bear down on insulation. And the 11% growth in the year, despite -- I'm sorry, in the fourth quarter, despite still being on allocation, I was wondering if you could give a little bit more detail in terms of what the insulation side is versus the noninsulation products and what each segment grew at? And then I have a follow-up on this topic.

Yes, I might mention that I believe in 2004 noninsulation products were about 36% of our sales. Those products are growing double digits and continue to grow double digits, probably represented about 38% for the year. And probably at a run rate in '06 of 40% or better. So we continue to see strong growth in the noninsulation products. Also, keep in mind the 11% sales growth does include price increases. So, some of that is also accounted for by increased selling prices.

Do you have an idea of what that was, the price increases?

I can't give you that offhand because it would cover so many products in so many different markets. But a fair amount of it would be represented by a price increase. I think net-net our sales increase of insulation was probably low single digits. Would that sound about right, Alan?

In dollars.

In dollar terms. Down in units. We're actually down in units in the last year or two because of shortage of material. And we estimate that if material were available, our sales would be significantly higher in that segment right now. Not only because of insulation sales, but it also would open the door for us serving other products to other home builders. But having said all that, we're growing double digits in the other product areas.

And just lastly, given your size, doing 1.5 billion or so or more in installation, are you surprised that you don't have more strength in terms of getting a bigger share of the allocation or are the Owens Corning and Johns Manville of the world just more focused on satisfying of the home centers? Or how does that work and why haven't you been able to exercise more leverage there?

Well, some of those questions you almost have to ask them for an answer. But I think that if we didn't have the size and scale, we probably wouldn't have as much material as we have right now. Because the entire industry is on allocation. And I think our big suppliers know that a time is going to come when allocation is not going to be there. And we are the largest buyers of insulation in the world. And for that reason, I think they probably give us more material than they otherwise might give us. But having said that, it's not enough.

Right. Thank you.

And the other, as Alan mentioned, is partly because demand is much stronger right now both on the retail side. And if you take how much housing has increased over the last few years, that demand is a lot more insulation material. And everybody is getting more energy conscious. So, including our efforts, there's more insulation going in the average home than used to be the case, as well.

Great. Thank you.

Okay, operator. We thank you all very much for being with us and look forward to talking to you again at our next call. Thank you very much.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may now disconnect your lines.