馬斯科 (MAS) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2007 third-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 web site under the Investor Relations section at www.masco.com. This discussion includes statements that reflect the company's views about its future performance. These statements constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These views involve risks and uncertainties that are difficult to predict and accordingly, the company's results may differ materially from the results discussed in such forward-looking statements.

For an explanation of various factors that may affect our performance, refer to our most recent annual report on Form 10-K, particularly the Risk Factors section, and to any subsequent quarterly report on Form 10-Q, all of which are on file with the Securities and Exchange Commission. The company 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.

In addition, we may refer in this call to non-GAAP financial measures as defined by the SEC Regulation G. Accordingly, a reconciliation of the differences between such measures and the most directly comparable financial measures calculated in accordance with GAAP is included in the investor package. The company believes that such non-GAAP performance measures and ratios used in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, the Company's reported results under accounting principles generally accepted in the United States. Additional information about the company is contained in the company's filings with the Securities and Exchange Commission and is available on Masco's website. After a brief discussion by management, the call will be open for analysts' questions. If we are unable to get your questions during the call, please call the Masco Corporation Investor Relation Office at 313-792-5500. I would now like to turn the call over to Mr. Timothy Wadhams, Chief Executive Officer of Masco. Please go ahead.

Thank you, Marisi, and thank you for joining us today for Masco Corporation's third-quarter earnings call. With me are Richard Manoogian, our Executive Chairman, and Alan Barry, our President and Chief Operating Officer.

This morning, we released our third-quarter results. While sales and net income in the third quarter of 2007 were below the third quarter of 2006, reflecting the continued difficult housing and consumer retail environment, our results benefited from new products, market share gains, profit improvement programs, share repurchases, selling price increases, which partially offset previous commodity cost increases, and lower sales volume. As a result, operating margins at 12.2% of sales and earnings per share at $0.57 for the third quarter 2007 were the same as those achieved in the third quarter of 2006. Obviously, we're very pleased with this outcome, given the current housing environment.

Net sales from continuing operations declined 7% to $3.1 billion. North American sales declined 11% while international sales increased 13% compared with the third quarter of 2006. In local currencies, international sales increased 5%. Income from continuing operations was $209 million or $0.57 per share for the third quarter of 2007 compared with $225 million or 57 cents per share for 2006.

Third-quarter 2007 results benefited from a reduction in the company's anticipated income tax rate and reductions of certain variable expenses reflecting lower sales and operating performance. These items aggregated $0.04 per common share.

As part of the Company's profit improvement programs, we have been focused on the rationalization of our businesses, including sourcing initiatives, business combinations, plant closures, headcount reductions which exceed 9,000 and 17% of our North American workforce, and other programs. During the third quarters of 2007 and 2006, the company incurred net costs and charges related to profit improvement programs of $12 million pretax or $0.02 per common share after tax, and $9 million pretax or $0.01 per common share after tax respectively.

Gross margins were 28.2% in the third quarter of 2007 compared with 28% in 2006. Operating profit margins were 12.2% in the third quarters of both 2007 and 2006 and include the negative effect of costs and charges related to profit improvement programs as well as reduced sales volume in both years. SG&A expenses as a percent of sales including general corporate expense were 16% in 2007, third quarter, compared with 15.9% in 2006. General corporate expense was 1.4% of sales in 2007, third quarter, and 1.6% in 2006. Retail sales of paints and stains continued relatively strong in the third quarter of 2007. International sales were also strong, particularly for plumbing products, due to stronger European economies, market share gains, and the favorable effect of currency translation.

Sales changes by segment in the third quarter of 2007 versus the third quarter of 2006 were-- Cabinets and Related Product sales declined 11%. Plumbing Product sales increased 4%, Installation and Other Services sales declined 15%. Decorative Architectural Product sales increased 2%, and Other Specialty Product sales declined 13%. Key retailer sales from continuing operations decreased 1% in the 2007 third quarter compared with an increase of 2% in the second quarter of 2007 and a decline of 2% in the first quarter of 2007. The company's tax rate was 33.1% in the third quarter of 2007, compared with the company's previous estimate of 35% to 36% and the 34.6% rate for the comparable period of the prior year. The company estimates that its effective tax rate on income from continuing operations for the full-year 2007 should approximate 35% to 36%.

Working capital at September 30th, 2007, defined as accounts receivable and inventories less accounts payable, was 17.7% of the last 12 months' sales, compared with 17.6% a year earlier. For the 12 months, ended September 30, 2007 and September 30, 2006, return on invested capital as reported was 8% and 12.4% respectively. For the 12 months, ended September 30, 2007 and September 30, 2006, return on invested capital as reconciled was 10.4% and 12.9% respectively. During the third quarter, the company retired $300 million of 4.6% notes due August 15th, 2007. Debt as a percent of total capitalization was 49% at September 30, 2007, compared with 46% a year ago. At the end of the quarter, the company had a strong balance sheet with approximately $700 million of cash and $2 billion in unused bank lines.

During the quarter, the Company repurchased seven million shares of company common stock. In the first nine months of 2007, the company returned approximately $1.1 billion to shareholders through dividends and the repurchase of 29 million shares of common stock. In October, we repurchased an additional one million shares. The company has returned $4.8 billion to shareholders over the last four calendar years, including the repurchase of 126 million common shares and dividends. The company expects to continue to return a minimum of $1 billion annually to shareholders, on average, through share repurchases and dividends as part of its ongoing commitment to value creation.

Economic conditions remain uncertain in a number of the company's markets. Housing starts have declined dramatically in the last 18 months due to prior excessive speculative buying, reduced affordability, excessive inventories of homes, and less attractive mortgage terms. The sub-prime mortgage issues that have plagued the new home construction and credit markets in recent months have made it more difficult to obtain a mortgage, adding to an already difficult housing market. As a result, the company, as previously communicated, reduced its full-year 2007 housing starts estimate to approximately $1.35 million from $1.4 million, and the company expects further declines in housing starts over the next several quarters.

In addition, the company continues to see a moderation in consumer spending for certain big-ticket home improvement items such as cabinets and currently estimates that the Company's fourth-quarter and full-year sales will decline mid to high single digits compared with the same periods in 2006. While forecasting future business conditions in the current environment remains challenging, the company currently believes that its stronger than anticipated third-quarter performance should result in 2007 full-year earnings, from continuing operations, approximating or modestly exceeding the high end of its previous guidance of $1.55 to $1.65 per common share. This guidance includes net costs of approximately $75 million pretax, $0.13 per share common-- $0.13 per common share after tax, compared with $0.12 per common share in the company's previous guidance related to plant startups, severance, systems implementations, and other initiatives.

Given the difficult housing environment, we are very pleased with our third quarter operating performance, particularly our operating margins, which approximated last year's third-quarter operating performance on sales that were down 7%.

While we expect market conditions in our industry, in the next several quarters, to be even more challenging, we are confident that the continued focus on our strategy of concentrating on organic growth, improving returns, and generating superior cash flow, together with the leveraging of the combined market strength of our retail service, distribution, and installation capabilities, brands and scale will allow the Masco team to continue to drive long-term value for our shareholders. We are currently in our planning process for 2008 and beyond and will provide our 2008 forecast and guidance during our fourth quarter earnings call in February 2008, as is our usual practice.

Now, I'd be happy to take questions or comments. Joining me are Richard Manoogian, as I mentioned earlier, Masco's Executive Chairman. And Alan Barry, Masco's President and Chief Operating Officer.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) At the Company's request, we would appreciate if you would limit yourself to one question, with one follow-up. (OPERATOR INSTRUCTIONS) We'll take our first question from Budd Bugatch with Raymond James.

Good morning. First, my congratulations to you and your team for a pretty good margin performance and cost control in this environment.

Thanks, Bud.

I'm trying to reconcile, though, the guidance even at the high end to -- to the margin performance that you've experienced here. You were flat year-over-year on divisional operating margin in the third quarter, and yet, using, kind of, your guidance for sales and for margins for the fourth quarter to get to even the top end of your guidance implies a decline in overall operating margin at the divisional level. Down about 130 basis points from the 10.4, excluding charges, of last year. Help me get here, Tim, as to what you might be seeing that would get you to be that -- that cautious.

Well, the -- I think, Bud, there might be a little disconnect there. The margin that we had on a reconciled basis in the fourth quarter of last year was 8.7%. And the feeling that we have is that we should, based on what we know right now-- We would expect to approximate that, give or take a little bit.

I think if you do the math-- Obviously, if you take the top end of our guidance at 1.65 and we're at -- 1.43 year-to-date that's $0.22. In there is $0.03 related to profit improvement programs. And we also have, or anticipate, about $0.01 of negative implication from a higher tax rate in the fourth quarter. So, hopefully, that helps you a little bit in terms of the reconciliation you're trying to get to.

I -- I did all that, but I still-- On a divisional level, even with the numbers you had, excluding all the profit improvement of last year, you were at 10.4. And I'm trying to get to that same -- use that as the basis. And I'm --

Yes. Like I said at the beginning, I have a number that's more like 8.7 on a reconciled basis for the fourth quarter of last year.

I was using -- I'm using the number from page 7 of your handout. Total op margin -- divisional operating margin.

Are you looking at just segments only?

Yes. Yes, excluding the corporate charges. Because you were -- You were -- That would--

I was talking all in, but the 8.7 would be after general corporate expense.

Yes, but you did -- You were very good on that expense control this quarter, as well. I think $8 million better than last year, and I was looking even at flat trying to get to that -- get there. So trying to figure out --

As I said, based on what we know right now, on a reconciled basis-- Again, including general corporate, we would expect to be pretty close to where we were last year. And I think if you look in the back of the pass-out from the fourth quarter, I think you see that reconciled -- again, this is a consolidated margin.

Okay. All right. Thank you very much.

Obviously we said, Bud, that we expected to be at the high end or modestly above that.

Yes. My 130 differential was at the high end. That got me to the high end of your number. So that's why I was trying to reconcile the margin differential.

Yes. Okay.

Okay? Thank you.

Yes. We'll see if we can follow up with you offline on that. As I said, I think the way we look at it, the numbers work.

Okay, thank you.

Thank you.

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

Thanks. Good morning.

Hey, Mike.

First question, I was hoping you could just give an update in terms of how you're seeing raw material expense tracking this year versus a year ago. And the contribution -- incremental contribution this year from your cost control or profit improvement initiatives, and as you see the-- If you could comment first on the year over year, on a full-year basis, how it's tracking-- And perhaps if there had been some things on the raw materials side that have possibly evened out on a year-over-year delta basis. This quarter versus last quarter. If that's, in some ways, part of the-- Your ability this quarter to maybe catch up and get back to a flattish year-over-year margin versus the -- versus the decline that you saw last quarter.

Yes. Well, I think, Mike, if you look at the margins-- Obviously, they're pretty comparable to where we were in the second quarter. With sales down about $90 million versus the second quarter. Obviously, the margins are-- Are pretty close to where we were last year in the third quarter. In terms of commodities, as we said at the beginning of the year, we still have what we estimate to be about $150 million to $200 million negative carry relative to pricing. We have been successful this year, as we indicated,in terms of implementing prices. And I think we had about $100 million plus, if my memory's right, in-process at the beginning of the year. And if anything, we might be doing a little bit better than that.

So maybe that negative carry given that some commodities like insulation have backed off a little bit. We've also seen, to your point, some leveling relative to brass. Particle board in Europe is still a little bit of an issue. Glass in Europe for our window group is still a little bit of an issue. Steel in Europe for our heating group is a little bit of an issue. But generally speaking, right now, I think things have been relatively stable. One of the wild cards, obviously, right now is energy. So, from that perspective, I think that we probably didn't see a lot of change quarter to quarter relative to commodities. And that would probably be outside of the plumbing area. The other thing, obviously, is that successful pricing has helped us certainly with the margins.

Okay.

And I don't really have a breakdown on some of the cost containment. I mean, you know or I'm sure folks are aware that we did have significant activity earlier this year with headcount reductions that exceeded about 9,000. We've closed a couple of plants this year. We've also consolidated and closed a bunch of our branches in MCS. And I think what you're seeing in the margin area is a lot of good work that was done by -- has been done and continues to be done by our folks in the field. And obviously we're real pleased with that.

Okay. Thanks for that color. Yes. The second question is on the Decorative Architectural. I mean, the margins there just continue to be very, very strong. Very impressive. And, actually, improved sequentially 3q to 2q. Whereas last year it -- it softened sequentially a little bit, and, so I was wondering if you could give us a little color in terms of, perhaps, how high you could see the margins going over a quarter or two. Are there some secular changes going on that have allowed you to really break through even to higher levels of profitability or is this more of a one-quarter thing and we should be expecting more of like a 20%-ish type margin for '08?

Well, what I would say there, Mike, is if you look at year-to-date, we're at 22.5 this year versus, I think, 22.3 or 22.2 last year. And the little bit of difference you get from the quarter-to-quarter basis in that segment really gets reflected in terms of the timing of some of the promotional expenses that take place.

And so, again, on a year-to-date basis, this year versus last year, we're very comparable. And I think if you go back and look at the history of margins in that segment, that's always been a very high margin segment for us. We had one exception when we had the hurricane in 2005, which had significant impact on refinery capability and some of the costs that go into the product. But other than that, we've had pretty consistent margins in that segment for many years. At a level that we're currently enjoying. So, I guess I don't necessarily see that changing going forward, And I don't think there's to your point or to your question, I don't think there's anything structural that has any significance or any impact there in terms of that particular segment.

Okay. Thank you.

Thanks, Mike.

We'll take our next question from Peter Lisnic with Robert W. Baird

Good morning, everyone.

Hey, Pete. How are you doing?

Good. How are you?

We're good.

Good. I guess my first question is decorative looked good, but on the other specialty segment, there appears to be some margin pressure there. Can you maybe give us you a sense as to what is happening there?

Well, yes. You've got pretty significant decline in volume. And obviously that -- Well, maybe it's not obvious, but that is in North America, which is primarily related to our window operation. It really reflects the state of the market relative to new home construction, particularly on the West Coast, which is a little bit more depressed than other areas. So we've got the volume impacts of that. We also have, in Europe, a couple of businesses which would include our window group that I talked about a second or two ago, as well as our heating group that -- that shows some decline in margin year-over-year. Again, we think reflecting primarily some of the commodity cost increases that they've had to deal with relative to glass and steel.

Okay. All right. Excuse me. Starting off on that one. If we kind of look at some of these costs that you're taking out, how should we kind of think about the permanence of the savings you're generating? I guess what I'm getting at is if we eventually see a better market ,at some point, do you think you're altering the structural profitability of the franchise significantly, and maybe if it's easier to talk about, your historical -- or you've hit margins in the 14% to 15% kind of range. Is that something that you think you could exceed when the cycle starts to turn in your favor a bit?

Well, what we've said in the past, Pete, is that, we felt that ,over time, given, stability and commodity costs that we could get back into a 13%, 14% kind of range from a margin standpoint on a consolidated basis. Having said that, our focus has really been to improve returns and try to generate operating profit that would add to our returns ,if you will. With maybe,---- you know, margins are obviously very important and always will be. But, really, trying to get more profit out of the asset base that we have in place. So our -- our feeling is we've got a chance to get back to that level. Having said that, I think that some of the things we've done from a cost structure standpoint certainly will help us there. We have combined businesses over the last three or four years. We've done some consolidations. We've -- we've also closed some branches, consolidated some branches in the contracting services business, which is a business that, you know, in a -- in an improved environment we can bring back fairly quickly in terms of developing capabilities. So I think that, you know, it's kind of a combination of both. A lot of what we've done, obviously, has been driven by the environment that we're in and in reaction to it. But if you go back and remember the program we put in place a few years ago, where we targeted, I think about, $240 million of costs to take out of our cost structure-- a lot of that was sourcing. And as you know, last year we closed one of our major North American faucet manufacturing facilities, and have been in the process of rationalizing the supply chain, if you will. Obviously, we struggled a little bit with that last year. But I think you can tell, in plumbing, for example, that from a structural standpoint, the outsourcing there seems to be working. We've seen improved margins the last couple of quarters. And as I think you know, we're very encouraged going forward relative to what we think is more opportunity in the plumbing area to continue to see some improvement.

Okay. Yes, that's a good explanation. Thank you.

Let's take our next question from Dan Oppenheim with Banc of America Securities

Thanks very much. I was wondering if you can just comment in slowing in terms of the larger home improvement projects. Can you give a little more color in terms of what you're seeing through the quarter and also in terms of smaller projects. Do you think that's going to continue to hold up? What are you doing in terms of marketing all those? If you could just elaborate, that would be great.

Well, we have, for several quarters now, seen a slowing for bigger-ticket items and for us really at retail, that's cabinets. What we have been doing is focusing on other price points. Lower price points, if you will from an assembled cabinet standpoint.

And we think we've got some good opportunities there with retail customers. So our feeling right now is that given where the consumer is from a confidence standpoint, given where homeowners are from a value standpoint, relative to pricing and -- In terms of homes, a lot of mortgage resets, things of that nature going forward. Our feeling is that the consumer is a lot less apt at this point in time at least to want to take on a major project. And I think you see some of that same color coming from some of the big box retailers if you will on some of the larger projects in terms of kitchens and baths.

You know, our feeling is that it's still a very, very attractive market longer-term. That market has tended to grow at about a 4% compound-growth rate on a real basis. And, you know, we would think that when things settle down a little bit relative to the housing environment that we ought to see some pickup there. And we would anticipate that we'll be very well-positioned to take advantage of that when that does turn.

Thank you. Were you saying -- seeing any difference in terms of within price points? In terms of cabinets, a difference there, you're saying is it going down in price points?

Well, I think there is -- you know, a lot of information that suggests that some of the builders are doing decontenting homes in terms of, you know, trying to move them-- Going to, if you will, lesser-priced amenities in terms of kitchens and baths. And so I think that's probably a dynamic that is out there. But I also think that, just in terms of the consumer at the top end, a lot of people aren't necessarily willing right now to take on a major project. So, you know, we're trying to position ourselves as we always have to be at a variety of price points so that we can take advantage of changes in demand from time to time that may reflect a trade-down or a trade-up.

Thank you very much.

We'll take our next question from Kenneth Zener with Merrill Lynch.

Good morning, Tim.

Hey, Ken. How you doing?

I'm doing all right. Just wanted the big-picture question first. Can you the relate the sensitivity of Masco to change in remodeling and new housing activity? I remember, in the past, it was It was 1% change in remodeling was, I think, $0.04. And starts, maybe 1% change, $0.02 and a half. I think you've changed how you frame that, but could you just review that and expand on that?

Yes. I -- well, let's see. We would -- It would probably be around $7 billion on repair-remodel. So 1% change there is like $70 million profit margin or contribution margin on that, would be about 35% on manufactured products. So you're talking about $25 million, which would be right around $0.04 a share. And I think that's consistent with what you mentioned. So yes, that would -- that would apply. And then, in terms of housing starts, what we've all said is that a -- a change in housing, $100 million -- excuse me-- 100,000 unit change in housing where we have about a content of about $3,000 per home, that that would equate to about 15 cents a share.

Okay. I appreciate that.

It's pretty consistent with -- from where we've been. The other thing that we would point out is that new home construction at this point in time, given the environment really represents now probably closer to 35% of our total sales versus what would have been north of 40% a couple of years ago when the market was very hot. The other thing that's changed a little bits, particularly with currency and also the fact that our European businesses have done a pretty nice job of growth in local currencies, is that our foreign operations now represent about 20% of our sales.

Right. I do appreciate that. And -- because the quarter was so strong, I guess -- it sounded like some of the other questions, the strength of your margins, cabinets, paint are good examples. And what appears to be an abrupt change from the third-quarter strength into the fourth quarter, and with the fourth quarter EPS implies about a run rate into '08. So I guess, in terms of -- if the business was -- you're obviously making good strides doing cost-cutting. But why -- why such an abrupt change then into the fourth quarter on the margins if the costs are out of the system?

Well, I think you've got a couple things going on there, Ken. Number one is seasonality. Usually, the first and fourth quarters of our business are -- are the lowest in terms of sales. And -- and that's been a historic factor for a long time. Obviously, last year, we were down significantly in the fourth quarter. As I recall, I think it was 6%. And as we're currently forecasting right now, we expect to be down mid-to-high single digits in terms of sales this year. So I think that our ability to, as I said earlier-- Based on what we think we know right now, be at about the same margin as we achieved last year on a mid-to-high single-digit decline in sales, we think is reflective number one, of the seasonality-- But also on the positive side, reflects some of the cost reduction activities and the pricing success that we've had during the year.

Okay. Can we compare the seasonality of the quarter to the future a lot different, Because generally fourth quarter at a run rate is 20% to 25% of the next year's earnings. Is there any reason to assume that that would change?

I -- I can't think of a reason that would change at this point, Ken. But as we said earlier, we'll -- we'll be giving 2008 guidance when we get together with when we get together with you in February.

Our next question comes from Armando Lopez with Morgan Stanley.

Hi, good morning, everyone. I guess a couple of quick questions. Tim, huh talked in the prepared remarks about the lower tax rate, and then you had mentioned a reduction in variable expenses. Can you maybe just provide a little bit of color in terms of what -- what those expenses were.

Yes, sure. What that represents, Armando, is obviously every quarter we go through, you know, an analysis of all of our accruals. And in the third quarter, in looking at some of the expenses that we had accrued for variable programs with customers that might be incentive programs where a customer might have an opportunity for a rebate-- If you will, based on volume, as well as looking at some of our performance relative to bonus opportunities for our employees. In looking at that, we came up with some adjustments, if you will, to reflect the current operating environment that we're in. And that probably added about a penny and a half to the quarter versus what we might have anticipated at the beginning of the quarter. Okay, that's not necessarily a comparative number to -- to last year. But a number of -- based on what we anticipated. In addition, we picked up about 2.5 cents related to the tax rate as a result of a change in tax rates in Germany, which had an implication to a deferred tax liability that we had set up, as well as accrual to taxed return adjustments. In other words, where we had accrued liabilities for a certain tax situation-- That once we finalized taxes with certain taxing authorities, we could adjust, and have to adjust, into either income either up or down. Those discreet events have to be recognized in the quarter. And as I mentioned, we're anticipating , in the the fourth quarter, that our rates are going to be a little above the 35%, 36% that we expect for the full year. And that should cost us about a penny in the

Okay. All right. Great. And then in terms of the capital allocation and you guys have been good about returning capital shareholder and buyback and dividends, just to -- the billion dollars that you talk about on an annual basis, is that -- that continues to be an average number, so it could be more or less? And --

Yes, yes. That continues to be an average, Armando. And it -- and it could be more or less, yes.

Okay. And then the return on capital target, the -- I think it's the 18% target that you guys have laid out, how -- how should we think about that from a timing perspective?

We'll give you some more color on that when we get together next year. We're going to have an investor conference sometime in the first quarter. We originally had targeted that for 2010. And in this quarter's package, we basically indicated that we're still committed to get to the 18%, and we think that's something get to. But given the uncertainty in the markets we're dealing with right now, our feeling is that we need to take another look at the actual timing of that, and as to when we might be able to get there. Obviously, we're doing everything we can to manage the denominator in that equation through the share repurchase program and the return of cash to shareholders. We still expect this year to have good cash flow. We should be around $800 million, as we were last year. Again, with reductions in working capital and capital expenditures offsetting the -- the decline in operating performance. So, you know, again, we're very focused on that, and very committed to continue to improve returns. It's just a question now that given some of the uncertainty in the markets as to when we think we can get to that level.

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

Thanks, guys. Congratulations on a good quarter.

Thanks, Steve.

I wanted to ask a follow-up, I forget was asking about the existing home market and the new home market. Can you comment on what is your -- On what your impression is as to which you may see move first? Is it your opinion that your sales and business to the new housing side of the market may improve before some of the larger ticket items like you're seeing in cabinets and kitchen and bath remodeling picks up, or is it your view that perhaps both of those should move up simultaneously?

Steve, this is Richard. There's a number of different factors that affect that. I think one on the home improvement side, consumer confidence is an important element as well as what's happening to housing transactions. And right now, I think consumer confidence is slipping. But one of the other drivers of existing home sales is new home sales. And one reason why new home sales are down are because -- because people can't sell their existing homes. So existing home sales typically drive home improvement sales more than new homes. In other words, when you sell your existing home, whoever buys that home doesn't like your kitchen and bathroom, wants to redo it, and if you're moving to another existing home, you don't like the new kitchen and bathroom. So when the system slows down and mortgages slow down, the whole process affects both areas. And the recovery of one isn't necessarily directly tied to the other. You could see one improve without the other but there is that overlap between the two.

Okay. And is it your view then that the -- the consumer confidence in this cycle may rebound sooner than the rebound in actual housing -- new housing purchase s?

Well, I think we're seeing a slowdown in consumer spending on high-ticket items for a variety of reasons. And if the economy stays strong, then I think at some point, you're more apt to see home improvement sales pick up, go back to their historic growth levels, sooner and faster than new home construction might pick up.

We'll take our next question from Nishu Sood with Deutsche Bank.

Thanks. Good job on the quarter, guys.

Thank you.

First question was on the cost-saving initiatives. I mean, if we look to this quarter's margin performance projecting it out, I mean, one of the -- one of the obvious candidates for what drove your margins is the extensive cost savings you're pursuing. But it's a pretty broad range of things. You're talking about business rationalization, the sourcing, the headcount reductions. I imagine you're going to give us a lot more details at your analysts day in the first quarter of next year. But I was wondering, in the meanwhile, if you could help us understand where most of the dollar savings are coming. For example, I noticed that you gave a figure on workforce reduction, which I'm not sure you've done before. Is that where most of the dollar savings are coming this quarter, and what should we expect over the next few quarters?

Well, we did give out the workforce reduction number earlier and that certainly has been a contributor. But I think the other thing there that I would throw into the mix is pricing. You know, we have -- you know, we were a little late as we've indicated, and we are a little bit behind. But more recently, I think we've done a very good job.

If you go back to early '06 and through the nine months this year. from a pricing perspective, I think we've done a nice job And I also think, as I mentioned earlier, , some of the issues around the supply chain relative to plumbing, that has started to shake themselves out a little bit. You know, have been helpful. So I -- it's really hard to kind of pinpoint one item. I mean, we've had a program, as you know, for the last three or four years that included, the reduction in the number of businesses from 67 to about 30. So there's been a lot of consolidation there. There's been some inefficiencies, I'm sure, early in that process that we've been able to wring out of the system. We also have had the headcount reductions. We've closed some branches, closed some plants. So I think all of those are making a nice contribution, you know, to

Okay. So -- anything stand out kind of more than anything else? Or is it --

Well, I would say probably the sourcing, which was always the biggest part of that construction program. Probably that. Getting more rationalized over the last couple of quarters, you know, that was a kind of a bumpy ride for us last year, as I think everybody knows. That probably is one that I think would be one of the major contributors.

And the pricing increases, recovering only thus far by a portion of the commodity cost increases. But you're talking hundreds of millions of dollars in cost increases we're beginning to recover.

Yes.

We'll take our next question from Stephen East with Pali Capital.

Good morning, everyone.

Good morning, Stephen.

Tim, if I could get one clarification, I think, on Ken's question about your earnings sensitivity. When you talked about starts, $100,000.-- If a start declined 100K at 3,000 per home-- You said it was about $0.15. I was thinking should we not take half of those starts and generally about half of those homes, and I was coming out more with like an eight or nine-cent impact?

Yes. That would be right, Steve. If you take 100,000 at 3,000, that's $300 million. At 30% it's about $90 million. That's about 15 cents. So if you were looking at 50,000 homes, you would be -- you'd be about seven, eight cents, yes.

Remember, though, that you're referring, I think, to Masco Contractor Services, and we have other products that go through to the home builder through other channels. So that I think the 3,000 is an average for the whole company across 100,000 units, as well.

Okay.

And again, that's before we offset anything, Steve, with -- You know, profit programs, share gains, new products that we can puts through, you know, the MCS channel. But just on a macro basis, we've used that as a rule of thumb obviously for quite a while.

Okay. And then the other question I had was if you look at actually two questions embedded in this. One, the trends you were seeing Masco overall, sequentially through the quarter, and in October, and then on MCS at the end of the second quarter, you felt that it had basically bottomed. But of course the housing market then took another leg down. How are you looking at that business now from a trend perspective with revenues and not margins?

Well, what -- what we said back in the second quarter was that we had seen some stability and some flatness, if you will, relative to that business. You know, really, given the environment. And we were pleased with the margin that we achieved which was a little bit above 8%. And I think we indicated that we felt like we could for the rest of the year anyway be in a mid-to high single-digit-type scenario relative to margins in that group. Obviously with declines -- continued declines in new homes, it's going to have some implications. The other question you had is on October, and on although we've obviously got a couple of days left, our view right now of October is that it looks to be down mid-single digits in terms of sales relative to last year. So that's a little bit stronger than what we closed the -- the third quarter at. And October, generally, is a pretty good month in our business anyway.

Okay. And on the MCS, you all have talked several times about the big builders being much weaker than the smaller. Any movement at all between those two, the -- in the dynamics?

No. I don't think so, Steve. I think as we said last time, our business is down about 40% with the big guys. And, you know, probably a little less than 20% with some of the local regional guys. So, no, I think that dynamic stayed in place in the third quarter.

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

Thank you. Just wanted to build upon that last answer. What do you think your mix is right now among small and regional builders versus large builders within Masco Contractor Services?

I don't know that we have given that information out, Keith. And I'm not sure that we would want to get that out at this point in time.

Maybe another way to answer that is if you go by what the public builders have announced in terms of their sales decline and compare that with the decline in the overall industry, I think it would be pretty clear that the large public builders have lost market share as a percentage of the total industry from the peak they got to the 25%, 27% of the market. So I think some of the larger builders are seeing bigger declines in sales than many of the smaller regional builders. Within Masco Contractor Services, the -- you had modest year-over-year margin compression. Was that primarily on the gross margin line, offset by SG&A, or how did that work out in the quarter?

I don't have that in front of me. I would guess that that that's -- our direct margin has stayed pretty consistent, I can tell you that. So it's probably on the fixed cost side, the SG&A side.

Like everyone else in that industry, we do have pricing pressure from customers. But we tend to offset that with asking for additional volume from the customer and conversely, we are getting breaks from our suppliers of materials that partially offsets the pricing pressure. So that, combined with new products, increased market penetration, I think they've done an outstanding -- And cost reductions, I think the contractor service has done an outstanding job in holding margins and costs in a very difficult environment.

I agree.

Yes. SG&A there has declined in proportion to sales. We've done I think a pretty good job of bringing that business down.

Finally on this topic, you talked about you had closed some location necessary that division. Is it a -- locations in that division. Is it a meaningful number of locations?

It's in excess of 30. And there's probably more facilities associated with that than just the branch number, Keith.

Okay. And you were upwards of -- I can't remember-- 300? Is that correct, or is that --

We used to have about 300 installation branches.

Okay. Thank you very much.

Can we take one more question, operator?

We'll take our next question from [Alexis Sorgus] with BNP.

Hello, this is Alexis Sorgus from BNP Paribas in London. Refocusing a little bit on Europe if I may, on the plumbing business here. Perhaps you can comment on how things are going. Obviously, headline numbers are pretty healthy. But, I'm just wondering whether you see any signs of a slow down in this market. And particularly in Germany, if you can --zoom in and zero on -- down on that market, that would be very helpful. And maybe look in from there on the Hansrohe AG point of view. Anything which is useful for you. Just to get some color on the plumbing business in Europe.

Yes. As we've said before, our plumbing business in Europe has been quite strong. And particularly Hansgrohe as you mentioned. And they continue to have a very, very good quarter, both on the top line and in terms of profit contribution. And to your specific question about Germany, most -- A lot of their growth has been outside of Germany. In terms of their business model, they have really targeted some of the old Eastern Bloc countries and have made some really nice inroads in terms of export opportunities in those -- in those regions. Germany, as you know-- The economy there has been pretty slow for an extended period of time. And I don't really have the numbers at my fingers here relative to our success in Germany. But I think, if anything, I guess over time, we probably have found that a more-- A softer market than we have other regions of Europe.

Right. By the way-- Not on this call, but would it be possible to perhaps get some color for Europe somewhere? Is it -- You reckon I can call your Invest Relations and they can--

Yes. Absolutely. Why don't you give us a ring, and we'd be happy to help you better understand what we're doing there.

Right. But, you know, in terms of the big picture, you're saying that the growth is more driven by the new markets. The new Europe so to speak, rather than, you know, old Europe --

Yes --

And Germany --

[We're] also growing. We've got a presence in Asia, as well.

Right. Okay. I understand.

We can definitely -- When you get a chance, give us a call we'll try to provide a little bit more insight into your question.

Okay. Good quarter. Thank you.

Okay. Thank you. And thank all of you for joining us today. To recap, in the third quarter of 2007, net sales declined 7%. And year-to-date we have returned approximately $1.1 billion to shareholders. We continue to operate from a position of strength on a number of fronts. For example, we estimate that approximately 90% of our sales are from products enjoying a leadership position in their respective market niche. Approximately 50% of all new homes built contain Masco products or services provided by a Masco company. And we continue to invest in new products, services, and market expansions. While our results for the first nine months have been better than we anticipated early this year, the near-term outlook for our markets continues to be uncertain. We will continue to do what we can to mitigate the impact of the downturn while positioning ourselves to take advantage when the markets recover. To that point, we're very pleased with our third-quarter margin performance reflecting the profit improvement initiatives we have been pursuing. Having said that, we are also extremely proud of the efforts and dedication of our employees around the globe. We have a great team and in this tough environment, their commitment to our customers and shareholders is demonstrated day in and day out. We believe that their dedication, combined with our leadership, products and brands positions Masco to deliver future value for our shareholders. To that point, I would like to take a few seconds to recognize our President, Chief Operating Officer, Alan Barry, who is participating in his last quarterly earnings call. And who, as you know, will be retiring at the end of the year. Alan has made an outstanding contribution to Masco's success during his 30-plus-year career. And his leadership has been instrumental in our strategy development and implementation. Alan has also been very active in our succession planning and in the development of our management team. I know from your comments that many of you join us at Masco in thanking Alan for all he has done and wish him well. Again, thanks for being with us today.