馬斯科 (MAS) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Masco Corporation 2006 second quarter conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received the press release or supplemental information, they are available on Masco's website at www.masco.com.

Statements in the following discussion are made -- 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 rates, fluctuations, and changes in consumer spending, and other factors over which management has no control.

Additional information about Masco's products, markets, and conditions, which could affect future performance, is contained in the Company's filings with the Securities and Exchange Commission, and is available on Masco's website at www.masco.com.

Masco undertakes no 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, securities and -- pardon me -- 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 the GAAP is included in the investor package.

After a brief discussion by management, the call will be opened for analyst questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at 313-792-5500.

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

Thank you, Millicent.

We are pleased to report that net sales from continuing operations for the second quarter of 2006 increased 3% to a second quarter record of $3.4 billion compared with 3.3 billion for the second quarter of 2005.

North American sales increased 4%. Since we have had no significant acquisitions during the quarter, virtually all of that was organic growth.

International sales were flat. In local currencies, international sales increased 1%.

While our earnings per common share were better than expected, net sales growth slowed from the strong 2006 first quarter rate.

Sales of certain products in the second quarter were negatively impacted by slowing housing activity, and, in addition, installation services were impacted by shortages of products and materials.

Retail sales were slower than in recent quarters, due to the moderation in consumer spending as well as a continuing slowdown in our global sales of ready-to-assemble cabinets.

Double-digit sales increases in the second quarter included North American assembled cabinets and non-insulation installed products. Sales of our major faucet brands were up a combined mid-single digit.

As we have indicated in recent quarters, sales of ready-to-assemble cabinets and related products continue to weaken and were down double digits.

Income from continuing operations, excluding charges, was $289 million, or $0.72 per common share compared with $0.62 per common share for last year's second quarter. Income from continuing operations including charges was $217 million, or $0.54 per common share.

In the second quarter of 2006, based on the continued deterioration of conditions in the automotive supplier and transportation products markets, the Company determined that a decline in the estimated value of certain of its financial investments was other than temporary. Accordingly, the Company recognized a $78 million non-cash pretax impairment charge for its investments, primarily Metaldyne Corporation, which was related to a Masco divestiture a number of years ago, and the related Heartland Industrial Partners private equity fund.

The Company's second quarter results continue to be adversely affected by increases in commodity, energy, and freight costs, as well as recent declines in housing activity and a moderation in consumer spending, partially offset by profit improvement programs and selling price increases. The Company has implemented and continues to implement additional selling price increases in an effort to offset continuing commodity and energy-related cost pressures. However, we have still not offset all of the cost increases incurred over the last two years.

Operating profit margins, as reported, were 13.1% for the quarter compared with 14.1% last year. Operating profit margins in the second quarter of 2006 were negatively affected by costs and charges related to the Company's Profit Improvement programs. Excluding these charges of $26 million pretax in 2006, and income regarding a litigation settlement of $3 million pretax in 2005, operating profit margins were 13.9% in the 2006 second quarter compared with 14% last year.

Segment sales for the quarter as compared with the prior year included Cabinets and Related Products sales increase 3%; Plumbing Products sales increased 2%; Installation and Other Services sales increased 6%; Decorative Architectural Products sales increased 4%; and Other Specialty Products sales decreased 2%.

Total key retailer sales from continuing operations increased 1% in the quarter compared with an increase of 9% in the 2005 second quarter and an increase of 7% in the 2006 first quarter. The Company believes that certain products sold at retail in the second quarter were negatively impacted by higher energy costs, which adversely affected consumers, particularly those with lower incomes.

Our liquidity and balance sheet continues strong at the end of the second quarter, with approximately $700 million of cash and marketable securities and $2 billion in unused bank lines. Debt as a percent of total capitalization was 46% at June 30 and 49% a year ago.

In May, the Company's Board of Directors authorized the repurchase of up to an additional 50 million shares for retirement of the Company's common stock in open market transactions or otherwise, replacing the previous Board of Directors' authorization established in 2005. The Company has continued its active share repurchase program and repurchased approximately 10 million common shares during the second quarter, in addition to the 10 million shares repurchased in the first quarter.

In July, we repurchased nearly 4 million additional common shares. At the end of July, we had approximately 41 million shares remaining under our share repurchase authorization.

The Company expects to continue to return a minimum of $1 billion annually to shareholders on average over the next several years, through dividends and share repurchases as part of our ongoing commitment to value creation. The Company has returned 3.6 billion to shareholders over the last three calendar years, including dividends, and 97 million shares repurchased. In the second quarter of 2006, the Company returned 380 million to shareholders and has returned 788 million in the first half of 2006 through dividends and share repurchases.

In terms of current business conditions, even though our July sales are estimated to be up mid-single digit, given all of the current economic uncertainties, we believe it is more prudent to project that our second half sales may only increase by low single digit. The Company previously communicated that full year earnings guidance of 2.40 to 2.50 per common share was based on housing starts declining 5% from 2005 levels. Based on current business trends, the Company now expects that full year housing starts will experience a greater decline than previously forecast of approximately 8%. As a result, our earnings may be closer to the lower end of our guidance range of 2.40 to 2.50 per common share.

This guidance only includes share repurchases of 20 million common shares through June 30, 2006, and assumes no additional share repurchases and no further significant commodity and energy-related cost increases, and excludes costs and charges related to profit improvement programs and any other items.

As part of our profit improvement programs, in January, 2006, the Company announced a plant closure in the Plumbing Products segment, a major faucet manufacturing facility in Chickasha, Oklahoma. In the second quarter of 2006, the Company incurred $11 million pretax, $28 million in the first half, of costs and charges related to this plant closure and other profit improvement programs in the Plumbing Products segment.

In addition, in the second quarter of 2006, the Company incurred $15 million pretax of charges related to the closure of a relatively small ready-to-assemble cabinet manufacturing facility in the Cabinets and Related Products segment.

Total costs and charges related to the Company's profit improvement programs are anticipated to aggregate approximately $70 million pretax this year, as we've previously announced. Including the $70 million of anticipated costs, which is $0.11 per common share, and the $78 million non-cash pretax impairment charge of financial investments I mentioned earlier of $0.13 per common share, earnings from continuing operations in 2006 are expected to be in the range of $2.16 to $2.26 per common share.

We remain committed to our strategy of value creation and are focused on the simplification of our business model, cash flow generation, improvement and return on invested capital, and the return of cash to shareholders through dividends and share repurchases. Consistent with this strategy, we are continuing to pursue a variety of initiatives to offset cost increases and increase operating profits, including sourcing programs, the restructuring of certain of our businesses, including consolidations, manufacturing rationalization, head count reductions, and other profit improvement programs.

In 2004, we initiated a profit improvement program with a goal to reduce costs on an annual basis by $200 million by the end of 2007. We recently increased this goal to $240 million, as we continue to find additional ways to reduce our company's cost structure. As we've previously communicated, we estimate that the incremental benefits to be realized this year from this program will approximate $60 million and an additional $70 million in 2007.

Our Asian sourcing has grown from $200 million in 2003 to over $550 million in 2005, and we believe will exceed our $650 million goal in 2006. We estimate that we generally save 25 to 30% on products and components that we outsource to Asia.

Business consolidations, together with divestitures, have simplified our corporate structure and reduced the number of our operating business units. As we previously announced, the Company completed in April the sale of two additional relatively small businesses for net proceeds of $50 million, reducing our operating business units from 67 in early 2003 to 32 at the end of the last quarter.

The increases in commodity costs and the lag in implementing selling price increases in the last two years have masked much of the benefits of our profit improvement programs. Since additional program costs are presently expected to be minimal for 2007, earnings benefits from this program should be more evident next year.

While the cumulative commodity cost increases during the last two years have adversely affected our results, we are making good progress towards offsetting these increases through implementing selling price increases, as well as the contributions from our profit improvement programs.

To summarize, we had record sales in the second quarter; higher than expected earnings of $0.72 per common share before charges; we repurchased 10 million common shares of stock; and we are on target to approximate our 15% return on invested capital goal by the end of this year. We also expect mid-single digit sales growth for the entire year, low single-digit growth for the second half, and expect earnings to be at the lower end of our previous guidance range of 2.40 to 2.50 per common share for the 2006 full year.

Now I would be happy to open the meeting up for questions and comments, and joining me for those questions are Alan Barry, our President and Chief Operating Officer; and Tim Wadhams, our Chief Financial Officer. Operator, we would be happy to take questions.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question comes from Margaret Whelan with UBS.

Good morning, guys.

Good morning, Margaret.

The first question I have is just about the pricing power that you're realizing. When we were all out with you in Detroit earlier this year, I think you said annualized, it would be about $350 million, and I'm just wondering, relative to the increasing commodities, has the potential for pricing power increased, or is it the same?

Yes, Margaret, just to summarize what we've been doing in terms of price increases and what our cost increases have been, we've said previously that last year, in 2005, we estimate that we had about 200 basis points of cost increases, largely commodity cost increases, in excess of price increases. That represents about $250 million of cost increases. Our margins only went down 110 basis points last year, because we were able to offset nearly half of those increases with cost reductions as well as the benefits of the strong incremental growth that we had in sales last year.

Coming into this year, we had an additional 200 million of added cost increases unrealized by price increases. So coming into this year, that represented $450 million of cost increases that we hadn't offset.

We've announced previously that we have implemented or plan to implement $350 million of cost increases during the first half of 2006. We have implemented those price increases. I should mention, those are spread throughout the first half so that we didn't get the benefit of all that for all of the first half.

But having said that, even with that significant increase, we still have not recovered all of the cost increases we came into this year with, and as you probably know, since the first of the year we've even had some additional cost increases in energy-related costs.

So we continue to fight that uphill battle, but the combination of price increases and profit improvement programs, we think we're making good headway in terms of offsetting those costs.

Sure. Clearly you are, in terms of the margins that we have seen this quarter. I just had a specific question about the Cabinet business. Would RTA, sales being down double digits, I know that you're taking costs out, but what could you do to actually generate incremental revenue?

We're doing a number of things. Our Cabinet group only showed about 3% sales increase for the entire group, and as I mentioned in the conference call, if you take out RTA Cabinet sales, both in this country as well as in Europe, assembled cabinets in North America would have been up double digits. So we're doing very well on the assembled cabinets, but struggling in RTA, which is largely an industry-wide condition, that we've seen declining sales in RTA.

We've been doing a number of things to reduce costs in that group. We're integrating some of those operations with making component parts and other products for our assembled cabinet group and we have picked up some incremental new business that will probably be coming into play late this year or early next year in '07 that will offset some of that lost sales.

But generally speaking, it's a sector that we think is in significant decline and I'm not sure that we're overly optimistic that aggregate sales of the entire industry are going to recover that much. And in fairness, part of that is because we've been -- we and others have been so efficient and making good product in assembled cabinets that the price differential between assembled cabinets and RTA cabinets has narrowed to the point where consumers have traded up to assembled cabinets.

Got it. And where is that incremental revenue coming from, later in the year?

We have significant orders from other customers, but I'm not at liberty to give the name of those customers at the present time.

Would it be new housing or residential?

No, we're talking about on the retail side of the business.

Okay, great. Thanks very much.

And our next question will come from Budd Bugatch with Raymond James.

Hi, Dick --

Good morning, Budd.

-- Alan. Just on Installation Services, can you maybe provide some more color as to what's going on there? Obviously that is an area where there is some concern. Maybe give us most current penetration of installation versus other services, how the paint experiment's going with -- or the paint project with Behr is going and what you see for commodity and getting supply? Because I know that's been a challenge.

I might mention, before we talk about paint and new products, that our Services business did have significant headwinds in the second quarter, largely as a result of material and product shortages. We have been capacity-constrained in our Assembled Cabinet businesses. I mentioned that we're up double digits, both on the builder side and particularly on the installation side. We've had to cut back on taking new orders because of the lack of capacity. As you know, we have an over $100 million expansion program under way in our cabinet business, and we should have significant additional capacity coming on stream late this year or early 2007.

On the Installation side, we continue to be on allocations and we literally had to turn down some significant business that we were not able to fulfill because of the lack of availability of insulation. We actually had to go to retail and buy millions of dollars worth of insulation at a significant cost penalty to us, just to fill existing obligations. But to give you an idea of how tight that market is, again, we would expect that to change some time in the second half of this year.

Since that sector is our higher margin installed product base, obviously that had a negative impact on our overall margins, since our lower margins Other products grew double digits, but those are at lower margins than insulation.

I might ask Alan to update you on the current activities on the painting side of the business, and there we've been seeing some very nice success.

Yes, we're very pleased with the progress that we've seen there. I think at our investor conference earlier this year we talked about getting as many as 20 branches up and running by the end of this year. Because of the early successes that we've had we've now doubled that target and we're looking at getting at least 40 branches up and running. So we are having some initial startup costs in some of the branches, a little bit more than we might have otherwise have anticipated, but overall that program is looking very favorable.

I might just mention for investors who haven't been to our meetings, we average -- we currently have 17,000 full-time installers in the field. We do work on over half of all the homes built in this country. We have 9000 trucks on the road, which, I should add, were penalized in the first half due to higher fuel costs. But because of that capability we can roll additional new products out.

We currently average about $3000 of work in each of the homes that we presently do work. In other words, the million homes, approximately 50% of all the homes that we're presently doing work in. Painting alone is about $4000 per home. So painting alone doubles if we get the work, doubles the work we do in a single home.

So the upside from that is just a very large number, and coincidentally, of course, we're in the business of making paint as well, so we would make a profit not only on doing the work, but also manufacturing the paint that goes into the project.

So just as some follow-ups on that, is there any way to quantify what you were penalized in the quarter in terms of either margin or revenues? And is insulation still about 63% of the installation business?

Normally -- we continue to do well on our diversified product base, and in a normal quarter now, I would say we have other products up to 40% of the total sales, but because of the shortage of insulation, you may see that even skewed a little bit more in the short run, but we hope that that's going to change in the third or in the fourth quarter going forward in terms of having more material available.

And what about the cost to either revenues and/or margin in the quarter of some of the things -- some of the head winds you were facing?

Well, I think when you look at the margins of that group this quarter compared to the year-ago, that would give you some indication of the costs that we absorbed, as well as the product mix change that took place there.

[Inaudible] about 170 basis points?

That sounds about right. So it was a significant penalty that we hope will diminish in future quarters.

Just a couple of other real quick ones. Can you give us a book value, Tim, on the Heartland and the Metaldyne investment and what's remaining in that? And is that shown in other assets?

Yes, that's still in other assets, Budd, and we continue to have a significant investment in Metaldyne. The book right now on those two assets would be approximately 80 million, down roughly from about 140, I believe. Is that -- yes, about 140 last year.

Okay. Thank you very much.

Or as of 3-31. Excuse me.

Okay. Thank you.

And our next question will come from [inaudible] with Deutsche Bank.

Thanks, good morning.

First question, I just wanted to follow up on the shortages of the insulation. With housing starts having pulled back a bit here in the second quarter, would have expected to see some relief in terms of the insulation shortages. I know insulation, installation, it's pretty late in the construction cycle, but wouldn't we expect to see a relief on that situation sooner rather than later?

Well, the other factor that's resulted in insulation being tight, besides the high level of housing in the last few years at higher levels than anybody expected, has also been because of energy costs going up, consumers have been spending more money to reinsulate or increase the insulation of their homes, so retail demand, which we're not involved with, for insulation, also has gone up significantly, sapping the supply that was available.

But I agree with you and what I said on the previous conference call, I will be very surprised if sometime in the second half of this year the reduction in housing starts -- and we had started this year projecting that housing starts would be flat in the first half, down 10% in the second half. Well, as you know, housing starts now have been down 4% in the first half and since we're lowering our estimate for the entire year to 8%, that assumes a 12% decline in the second half, with perhaps an additional 5 or 10% decline in '07.

In that environment, it is very difficult for me not to expect that insulation will become more available, which helps us not only in the availability of material, but we are the largest buyers of insulation in the world, buying many hundreds of millions of dollars of material, and normally, if anything, we would get a discount on top of the availability of material that we've lost in recent years.

So that, plus the fact that if housing slows, it's hard to imagine that doesn't take some pressure off of commodities as well, because a lot of commodities go into housing. But there's a lot of speculation as to whether that's going to happen or not happen, and I'll leave that to everybody else to make their own judgment.

Okay, great. And just a second question, on working capital as a percentage of sales, you've seen some pretty significant improvements in that, just in managing working capital over the past couple of years. But it seems to have leveled off somewhat. Is it fair to say that most of the efforts you made to improve your working capital are behind you, or is there still further improvement that could be made there?

Yes, we think there's still some further improvement in a few areas. As we've indicated in the past, we wouldn't expect to see the significant declines. We think incrementally we can do some things in the inventory area as well as the payables area. So I would say that we would expect to continue to improve. We're always striving to improve, obviously, but I think it's going to be much more incremental, if you will, as opposed to the significant declines you've seen in the past.

One of the things that effects us a little bit is our sourcing program and the plant closure that we have going on at this point in time. Inventory, I think, is up a day, quarter versus quarter, but we would expect to get that back down over the balance of the year.

Okay, great. Just final quick question. Richard, did you mention the number of shares you repurchased in July?

Yes. We repurchased nearly 4 million additional shares in July.

Okay, great. Thanks.

And our next question will come from Michael Rehaut with J.P. Morgan.

Hi, good morning.

Good morning, Michael.

Just a couple questions. First, I was wondering if you could go into -- I'm sorry if I missed this before -- the Decorative operating margins had a nice improvement year-over-year, more than we were looking for. I was wondering if you could describe if that was more from either volume leverage or raw material stability.

Yes, first of all, there are a number of different products included in that segment, but that segment was particularly hard-hit in 2005 by commodity cost increases, particularly with the hurricanes that hit late in the year and the spike in energy-related and refinery-related costs. So we have implemented price increases. We are only recovering a portion of the cost increases we've incurred in the last 12, 18 months, but recovering at least part of that has resulted in margins getting back towards where they were in previous years, although we're still not back up to the former levels. But we are making progress.

So you feel a low 20-ish-percent margin is sustainable, that being with the more stable raw materials side?

Well, I qualify that with that -- some products in that sector have the strongest quarters in the second and third quarter, and therefore margins in those two quarters might be higher than the first and fourth quarter. So you would have to factor that in your calculation.

Okay, thanks.

And then on SG&A and corporate expense as a percent of sales, were slightly up year-over-year this quarter following several quarters of getting some positive leverage. I was wondering if you could comment on that and if you see over the next year or two some incremental opportunities for positive leverage in those areas?

Yes, Mike, I wouldn't read too much into that. We're up I think 20 basis points, SG&A. If you look at the six-month number, I think it's flat with last year and I think the general [corp] is 1.6 versus 1.5 last year. There's a little bit of timing that gets to us in terms of certain costs, and as we continue to work on some of the consolidation programs, some of the cost programs, I think you'll see those ratios come down a little bit. But, again, we've had some pretty good improvement, as you indicated, and more of that will be somewhat incremental going forward.

Okay. Thanks, Tim.

And just one last question on the gain of -- on the financial assets sale, certainly was a little bit more than we were looking for, and I was wondering if you could just review the state on the balance sheet in terms of what's left, a little more comprehensively, and if you expect those gains to -- or losses to continue to percolate on the other net line.

Yes, there's about -- after the impairment charge and the activity for the quarter, Mike, there's probably about 430 million of assets. That will be broken out in our 10-Q disclosure. And about 100 million of that would relate to marketable securities. The rest of it is private equity funds and some of the direct investments we have, which we've always said will take us a little longer time to monetize.

But I think you can expect that we'll continue to make progress on the marketable securities over the course of the rest of the year. Obviously we've enjoyed some gains over the past couple of years, as we've brought that portfolio down. But I would think going forward those should be fairly minimal. You know, a penny a quarter is probably a reasonable amount to include in your modeling.

We did have $0.02 in the second quarter, but, again, I think going forward I think if you had a penny a quarter in your model, you're probably in the ball park until we do bring the marketable securities down, and then it might be a little less than that as we get into the private equity funds, and those will monetize over time. As we've indicated, it will take a little longer.

Okay. Thank you.

Our next question comes from Kenneth Beaner with Merrill Lynch.

Good morning.

Good morning.

I'm interested in the revenue gain in the Decorative, the 4%. How much of that was volume and how much of that was price?

Well, we don't break down price increases by product sector or by customer, but I would just answer that indirectly, in terms of the entire company we don't have an exact number because we're dealing with literally millions of SKUs, thousands of customers, but I would guess that company-wide, our sales increase was probably in the low single-digit area for price increases.

Okay. And then, this is a follow-up, I guess, kind of on your new plant, your new capacity. If you could describe how new housing demand, or the decline that we're seeing, certainly in the second half, which is likely to continue into '07, is affecting the profit and the ramp-up of your current plants. For instance, the Merillat plant in New Mexico, cabinets, nearly all of them go to new housing construction. Can you discuss how you're handling the 20 to 30% contraction in the Southwest relative to your new plant expectations?

Yes, we have two major plants under construction. One is a facility for our retail cabinet business, and the other, as you mention, is a plant for our home builder cabinet business. We are capacity constrained in both areas and at the present time we're incurring significant additional costs because we have to make product in the East and ship it to the West at an inefficient rate. Now, one of the questions you might have is, if housing comes down, do you need that additional capacity? And that's certainly a fair question, but we'll gain from efficiencies and also we have to always think in terms of planning ahead.

When you're a major factor in a market like we are, the leader and represent a significant portion of the market, we have to make sure that we try to build capacity ahead of the need of customers, and because we underestimated capacity the last two or three years, we're behind in that sense.

So we need these facilities. Even if we don't need it in '07, we're sure that with market share gains and growth and new products that we're going to be introducing, we will be using that capacity increasingly as we get into future years.

And also, the other area that we've been held back is on installation work, which is really in the home building side of the cabinet business that you were referring to. And as that new capacity comes on, we think our increased penetration on installation, we'll be able to use that added capacity.

So I don't think we're too concerned about excess capacity over a multi-year period.

But I guess near term, you're saying -- it sounds like you're saying that new capacity could be -- offset the improved efficiency.

Well, any time you have significant new capital programs coming into place, you always have an issue of start-up costs, maximizing the efficiency and utilization of those facilities, but I don't think you're going to see a significant number related to those costs in terms of the next year or so. I think the added need we have for that product and the efficiencies we'll gain should largely offset those costs.

Thank you very much.

And we will go now to Stephen Kim with Citigroup.

Thanks, guys.

I had a couple of questions regarding the Installation Services business, if I could. We're hearing from some of the builders that they have been pretty aggressively going after their trades -- and their suppliers, to try to get some sorts of concessions, given the sharp drop-off in the demand that they have experienced, which is, in many cases, much more severe than the actual starts being reported by the government nationally. And some of the numbers that have been bandied about have been somewhere in the 5% range, in the areas that they have targeted. It would seem that that would be something that probably would have -- you would have encountered.

I guess my question is, in the Installation Services businesses, can you comment on what you're seeing there with respect to some of the larger builders, who I know are not the dominant part of your business there. But nevertheless, if you could quantify it.

And then if you could also maybe share what you're hearing and experiencing across some of your other products, which are also affected by what the home builders might try to do.

Well, you're absolutely right, Stephen. We've probably heard from every major builder, including most small builders, asking for price relief to help them through these difficult times, although obviously they neglect to mention the fact that their margins went up dramatically over the past few years and they didn't necessarily share that with their suppliers.

I'm sure you reminded them of that, though.

But having said that, I would say that that is no different than what we've seen in previous cycles, and what we do in that area is we sit down with the customer and say, look, we want to help you and what we want, though, is something in return so that it becomes a win-win situation. That something might be additional products, it might be additional market share, something that will offset what the costs might be related to additional benefits that we might give to the customer.

So when you add all that together, I do not expect that we will have a significant added cost or margin pressure because of anything we do, because we would expect, given our leadership position and our strong position in some of the categories you're familiar with, that we can turn that as much into a plus as a minus.

Great. Now, is that commentary -- that obviously sounded like a Masco-in-total commentary. And I would imagine your ability to maybe get some additional business from these players might be in the form of additional products, because you indicated in Installation Services, you sort of have a capacity constraint there, which I assume would mean that you really couldn't get additional business there. Is that really what you're talking about? And could you talk about, specifically, the Installation Services business, what we might expect to see in that business on the margin side or the sales side.

Well, as -- and you're right. As we ramp up additional capability, additional products -- we talked about paint earlier. We might go to a home builder and say, if you need some help here's what we can do for you, but in return, give us your paint business or give us something else that gives us incremental volume or insulation as material frees up. And we think, as I say, that can be a win-win situation for both of us.

You referred also to Masco-wide and manufactured products, and in many of our manufactured products -- we've often said that our sales to housing represent maybe 40%, maybe a little bit more than that, of our total corporate sales. You know the sales of our Installation segment, so you know that's a major portion of that percentage, so that we do less company-wide, in terms of manufactured products to housing, and a lot of that is through other distribution channels.

So I think the big impact there is in the Installation side and that's where I think we have the most to offer and get additional benefits.

Okay, great.

And last question, our numbers are sort of -- we present our numbers after your restructuring charges and you indicated 70 million, which isn't changed. Can you give us a sense for how the remaining 27 million or so will be parsed between 3Q and 4Q?

At this point, I would say, Steve, if you were to probably split that 50-50,I think that's probably a reasonable estimate.

Okay.

You know, you would be looking at about 13, 14 a quarter.

Got it. Thank you.

As you know, Steve, we can't control some of those accounting charges. Under accounting rules, we have to expense some of them as they are incurred as opposed to trying to set a reserve up for them, so it depends on when certain actions take place.

Right. That's fine. I appreciate it. Thanks very much, guys.

Peter Lisnic with Robert W, Baird.

Good morning, everyone.

Good morning, Pete.

Richard, if I could ask a question about the Plumbing business, it looks like year-over-year your margin's down 110 basis points. Is that a function of higher materials cost, copper and zinc and the like?

That is part of it, because the biggest increases we've seen in '06 of the products that we purchase, commodities, zinc and copper are both up, I think, about 60 to 80% just since January, along with particle board and energy costs. Those are the four areas that we've seen the biggest increases in '06. And we use a lot of copper and zinc in our Plumbing group.

In addition to that, as you know, we have a major outsourcing program under way to convert some of our manufacturing capacity of both finished products and components from this country to Asia. When you implement a program like that, you always run into some inefficiencies during the process.

We're currently, for instance, because demand for some products has exceeded our expectations or production's behind schedule, we have significant air freight expenses and a lot of other things, excess inventory in terms of product that is on the water and so forth, so that our costs during the transition, which might last 12 to 18 months, typically will run higher than when everything is running smoothly, and I think you'll see the better benefits of that program sometime in '07 than you will in '06.

Okay. And if I could ask a question on -- I guess it applies a little bit to Plumbing, but also to Cabinetry. Are you at all concerned with -- I mean, you've got these temporary inefficiencies or hiccups, if you will, regarding being able to service customers and meet demand. Are you concerned at all that at some point share goes away, goes to someone else?

Well, I think in the case of plumbing, I think we've lost some share in some areas because of that exact problem. As an example, some of our competitors are ahead of us in terms of manufacturing product in China, and right now we're short of product in terms of some retail customers, some emerging market customers. We're not able to service because we don't have the capacity yet.

So we've said that in the last year or two, about the only area we think we've lost any significant market share might be in faucets. Some of that is because of the importing of low-end imported product from some of our customers under their own brands. And secondly, because during this transition, we're not able to have all the product we would like to have, there is a temporary loss of market share. I don't think it's a big number, but it clearly does affect our business.

But your expectation is that you'll at least try to get that back?

I would expect we'll get certainly a portion of that back when the capacity comes on stream.

Okay.

And then one more follow-up, if I could. In terms of the price increases that you've put through, the $350 million, I just want to be clear on this. That's the amount you've put through, but can we get a sense as to how much you've realized or expect to realize?

In terms of '06?

Yes.

Or in terms of just --

Well, just -- the $350 million is an annualized number, right?

That's an annualized number, and I can't give you an exact number, but I would say if you sort of spread that over the first half, that would give you a ball park of it. We would have to really go back and it's an awful lot of different products and different customers to try to get an exact number, but it was throughout the entire first half that we implemented some of those increases and a number of them, frankly, only went in in the last two or three months.

But your expectation is that you'll realize 100% of that on an annualized basis --

Well, I'm only talking about price increases that have already been implemented.

No, I understand. I just wanted --

I wouldn't consider it implemented if the customer hadn't accepted it.

Well, that's what I'm trying to get at, is how much has been accepted?

Well, of the 350 million, that's all in place and accepted.

Okay. That's what I wanted. Thank you very much.

And now we will have a question from Ivy Zelman with Credit Suisse.

Good afternoon. This is Justin on for Ivy. How are you doing?

Good.

Good.

In terms -- this may have been stated before, but in terms of your exposure to new residential construction, would it be more or less concentrated to the large public builders than maybe the national average? I think the national average is roughly 30%.

If you take our Installation business, we think that the percentage penetration we have with some of the larger builders is actually below what we think the opportunities are for us. And, as you know, we've entered into national contracts with a number of the large home builders. We have a number of other ones that are prepared to enter into contracts with us that give us significant incremental volume over and above what we have presently, but that requires us to do their insulation work and we can't get material.

So all things being equal, we think as big builders continue to grow we have some significant upside opportunity there because our penetration among the big builders still has some significant upside for us.

But in aggregate, with your total new construction exposure, if, for example, the large builders were to maybe in a short-term decline more so than the national average, would that have more or less of a disproportionate impact on you guys?

We would currently be doing less with the large builders, but I would be very surprised if the large builders declined more rapidly than all home builders. I think they will continue to gain market share at the expense of small builders, but that's just a judgment.

Okay.

And, again, another question on pricing. But in general, when you go to the table and negotiate pricing with a retail customer and/or a new construction customer, has the negotiation become any more difficult with either of those channels, or the same?

No, I would say it's always been very difficult and I have to say, with some of the large customers you have to sit down and in very much -- in very -- detail, show where your cost increases took place and justify them.

Having said that, we are still trying to recover back cost increases. So even if some commodity costs backed off, we think we still have a ways to go to get back to even. And as I say, that's masked a lot of the profit improvement and other things that we've done within the Company.

Okay. And next, on installation, I guess you're expecting some incremental gains in maybe your non-insulation products. But have you at all moderated or changed your long-term -- I think it was a double-digit growth expectation for that segment, or is that still intact?

No, we still expect that we're going to grow double digits. What we've said is that we expect to grow low single digits on insulation, excluding the shortage situation, and double digits in other related products, and when you put the two together, we expect to grow double digits on average over the next five years, or as far out as we can see.

Okay. So there's no change there?

And that's an average number, that's not in any given year, but we think we can average that.

Okay.

And then final question, in Paint. With the Installation Services business, would your -- the actual manufactured paint products, would that accrue to the Decorative Architectural products, or would all of it flow through Installation Services in the future?

Labor -- first of all, labor is a major portion of the total package, but typically we flow the sales through the Installation group.

Okay. Thank you very much.

We'll go now to Armando Lopez with Morgan Stanley.

Thanks. Good morning, everyone.

Good morning.

A couple of quick questions. I guess, first, you guys have done a -- taken a lot of restructuring actions over the last couple years, and I was just wondering if you could talk a little bit about maybe how your cost structure or how you see the cost structure changing, or how it's different today versus maybe what it was in prior cycles. I think you used to provide some data regarding, like, every X-percent change in housing is worth X cents to the bottom line. How is that changing now, with the actions that you've taken?

Well, from a numbers standpoint, what we've said is if you take full incremental charges, or profits, every 1% swing in housing starts is $0.025 a share to our bottom line. In the case of all our other products, every 1% swing is about $0.04 a share impact to our bottom line because of the proportional representation they have in sales and the somewhat higher contribution margin we would have in other products versus installation services.

Now, having said that, nothing is ever the same, and in difficult environments, you might do more aggressive cost cutting, in strong environments you may be spending money on other programs, but that's a ball park in the short run.

I think from a Masco standpoint, I think Masco is a much stronger company today than we've been in previous cycles. We have very strong positions in the marketplace. A lot of what we're doing has real value to the customer, such as our Installation Services. We've transferred our operations into platforms, global platforms, where we're now getting synergies from activities we're doing around the world. We have a much more active cost reduction program and efficiencies within the organization. So I think all that should do well for us in the coming cycle, more so than in past cycles.

Okay. And as you think about the levers that you have, Richard, like where -- like, to accelerate taking costs out of the business, if you wanted to accelerate taking costs, where is the biggest lever that you have at this point that you think?

Well, we've already implemented major cost reductions that are, I think, just beginning to show up. We think there are additional operations that we can do. As we've said before, we're looking at additional divestitures that we can make ourselves more efficient. We think there are additional businesses we can consolidate. We think there are things we can do in terms of sourcing to continue to bringing our costs down, unified purchasing programs that we're implementing to bring our costs down. So there's a lot of things going on within the Company.

Now, I don't want to deemphasize the headwinds we're up against. If housing goes down 10% next year, as I mentioned, that's $0.25 a share in earnings that we have to make up through market share gains, through additional products, through other product opportunities, growth opportunities. So the next 12, 18 months could be challenging for us. But having said that, I think we have a lot of momentum in this company that's going to pay off in the long run over a multi-year period.

Okay.

And then on the Installation Services side: when you look at the growth in that business, how much of the growth is from just having a larger number of homes that you're working on versus growth from increasing the average ticket per home, if you will?

Well, I think the larger amount of growth is the increasing the ticket per home, because we have been working in a million homes now for probably a number of years. So we do increase that number, but the bigger increase is coming from additional products and services and capabilities that we're rolling out.

Okay. And then one last one --

I think one of the other things that we've mentioned is that in past presentations, we're averaging $3000 a home. Just the present skill sets that we have, if we were doing that, all of those skill sets in a home, that opportunity is $20,000 a home and we think we can branch out into even additional skill sets beyond the ones we're presently in. So a lot of upside opportunity for us.

Okay.

And one last one: Can you just comment maybe on what you're seeing in inventory levels in the retail channel now, and maybe how the trend was in the quarter in terms of order patterns?

I would just say we, again, we don't like to comment on any individual customers, but I would just say based on past cycles, you can assume that any time there's a downturn, customers always look at their inventory levels to see if they are appropriate, given present business conditions. So there may be some inventory reduction, but I don't think it's a major number, a significant impact on us.

Okay. Okay. Thank you.

And our next question comes from Steve Fockens with Lehman Brothers.

Hi, good morning, guys.

Just one quick question: On the acquisition front, or as you look at acquisitions and presuming that potential targets are a little hesitant to adjust their expectations at the beginning of a slowdown, if you guys -- if the housing market comes, as you think, Richard, down 8% in the back half of the year, down another 10% next year, at what point, or over what time period would you start to see acquisition targets starting to look more attractive?

Well, as you know, the main thrust that we have on acquisitions is a bolt-on complementary acquisitions to existing operations. And the one area that we think has the greatest opportunity is in our Installation Services, where we would like to acquire some additional skill sets so that we can do more sequencing of work within the homes so that we stay on the site on a consistent basis.

And there we think there are some additional opportunities, often difficult economic environments create those opportunities being available more readily. Sometimes it might bring the cost of those acquisitions down a little bit, but frankly, often there's a lag of expectations that people have and uncertainty as to what the earning power of an acquisition might be in a difficult downturn. But I would say I would be surprised if the present situation in the next 12 to 18 months doesn't create more opportunities for us than would have been there otherwise at attractive levels.

But again, I think we want to emphasize that we see acquisitions being relatively small compared to our historic pattern and we think that divestitures will largely be equal to acquisitions so that it won't deter our ability to return $1 billion to shareholders from a cash flow standpoint.

And then one quick follow-up. Assuming that -- therefore you're not looking at a softer environment as an opportunity to maybe potentially pursue larger acquisitions?

No, I wouldn't think-- frankly, the -- we know the large companies that are out there, in terms of strategically, we think it's more apt to be interesting for us find small companies that are bolt-on acquisitions. I don't think this environment would change that strategy.

Great. Thanks very much.

Operator, maybe we have time for one more question.

And our final question will come from [inaudible] Wu with Avera Global Partners.

I have a question regarding your move to outsource part of your production. Does that mean you're going to have some kind of work force reduction?

Well, we have already announced that we have plant closures. We just announced that we had one in the Chickasha, Oklahoma plant. I think that involved about 600 people, and so there are work force reductions in that. But having said that, one of the things I would point out is we currently have, I believe, about 1500, 2000 people in China working in our operations. So we have outsourcing both to our own facilities as well as to third party facilities.

But having said that, the ability of us to bring in component parts at lower costs is probably protecting jobs, to a certain extent, in this country. In other words, if you take our Plumbing business, which is the most subject to global competition, our ability to bring in some products and component parts probably means that we'll be able to preserve more jobs in this country than we would have if we didn't have any outsourcing.

So it's really a two-way street and often saves as many jobs as it may cost.

So no major layoffs or [inaudible].

Well, as I say, we continue to review our cost reduction program and often if that involves outsourcing, that may involve job reductions. But I think the other thing we've said is that this year we're going to exceed 650 million in outsourcing. We've said in past presentations that our goal was to get to 750 million within a year or two, so I think that tells you that the great majority of the outsourcing is already under way.

Now, we probably would also have some consolidation of businesses, where we may combine existing businesses or existing facilities, and that could result in some job changes in some locations. So, again, I wouldn't want to say there won't be any, but we've already accomplished or have under way a lot of that program.

Thank you very much.

Operator, just to summarize, in the second quarter of 2006, sales increased 3% to 3.4 billion, with a 4% increase in North America, a growth that was essentially all organic.

We returned $380 million to shareholders through dividends and the repurchase of 10 million common shares, and we ended the quarter with over 700 million of cash and marketable securities.

As we've talked about on the call, we are continuing to simplify our organization structure. The platform strategies we developed are driving synergy and leveraging opportunities, and we are well on our way to our goal to approximate 15% return on invested capital by the end of this year.

And as we've said before, we are proud of the team that's accomplished all of these things in the recent months and years, but we have more to do, and we're focused and committed to continuing to execute our strategy of further simplifying the Company, investing to grow our businesses organically, aggressively managing our business unit portfolio, improving our balance sheet, generating superior cash flow, and returning cash to shareholders through dividends and share repurchases. And as we continue to develop and execute that strategic plan, we really appreciate the efforts and dedications of our over 60,000 worldwide employees.

And we do firmly believe that our strategy, together with our leadership products, brands, services, multiple distribution channels, and price points, do position Masco to deliver long-term value for our shareholders.

So we thank all of you for taking the time to be with us today. Thank you.

I would like to thank everyone for your participation on today's conference call. You may disconnect at this time.