馬斯科 (MAS) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Masco Corporation 2008 second quarter conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received a press release and supplemental information, they are available on (Masco's website along with today's slide presentation under the Investor Relations section at www.masco.com) (technical difficulties). Before we begin management's presentation, (the company wants to direct your attention to the current slide and the note at the) (technical difficulties) end of the earnings release which are cautionary reminders about statements that reflect the company's views about its future performance and about non-GAAP financial measures. After a brief discussion by management, the call will be open for analysts questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at 313-792-5500.

I would now like to turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead.

Thank you, Nicole. And thank you all of you for joining us today for Masco's second quarter earnings call. As Nicole mentioned, earlier today we issued our Press Release and some supplemental information. As a result of internal process improvements effective with this quarter's call we're modifying our approach to the conference call. To that point, we no long have provided you with what we call business and financial highlights and we're not going to read a prepared script for this call. Instead we provided in our financial information, a couple of pages of what we call key financial data, and today our presentation will be in a PDF slide presentation format. Hopefully you've been able to access that on our website. This is the first time we're using this format and any feedback that you want to provide is certainly welcome as we try to continue to improve the process to provide you information.

And with that, let's move to slide number three and I'd like to point out that with me today, joining me today are Richard Manoogian, our Executive Chairman and Donny DeMarie our Executive Vice President and Chief Operating Officer. So, again, if you could move to slide three please, net sales from continuing operations were down 15% in the quarter. Earnings per share $0.20 in the second quarter of 2008 as compared to $0.49 in the same quarter of 2007. Gross margins for the quarter were down 230 basis points to 26.5%. SG&A expense including general corporate expense as a percent of sales increased to 18.3%, up 110 basis points. General corp expense was down 30 basis points to 1.3% of sales. Working capital, as a percent of sales, was up slightly during the quarter to 18.1%. We did return $131 million of cash in the quarter to shareholders including the repurchase of 3 million shares of our common stock. We also sold the heating group, which we announced late in April for proceeds of $146 million and we ended the quarter with a strong balance sheet with $850 million of cash and $2 billion of unused bank life.

If you'd flip to slide number four, please. As I mentioned, sales were down 15% and in addition to the continued significant declines in housing starts, which are in the first half of 2008 -- are off 30% and I think even a little bit more than that in the quarter. We continue to see a significant slowdown in European markets and in North American consumer spending. To put that in prospective, our sales to key retail customers were down 13% in the quarter and that follows the first quarter when we were down 10% and the fourth quarter when we were down 5%. And again as we said at the first quarter call that really has impacted all price points, including lower ticket items as well as, we think, even some basic repair and remodel type expenditures. Operating profit was down in the quarter $146 million. Margins were down to 8.1% from 11.7% or a 360 basis point decline.

If you'd flip to slide number five, please. Take a look at sales and operating performance in North America. In North America, our sales were down 19% and again driven by volume declines to new home construction, pricing concessions and a decline in consumer spending for home improvement products. Margins declined in the quarter from 14.1% to 9.7%. Again reflecting the significant volume declines that we've experienced and increased costs for material and energy and other commodities (inaudible).

(If you flip to slide number six please) (technical difficulties). (International sales increased 6% in the quarter) (technical difficulties). (That was driven by foreign currency translation) (technical difficulties) in local currencies international sales were down 6% and again this is the third consecutive quarter that sales in local currencies for our foreign operations have been down (inaudible) in terms of percent decline. Profits from an international prospective were up slightly in dollars reflecting in large part currency translation and we did see a slight increase in margin for our international operations moving from 8.3% to 8.7% on sales, which reflects some selling price increases.

If you flip to slide number seven please, as we've indicated in the past, the company continues to focus on the rationalization of our business and that includes sourcing programs, business combinations or consolidations, plant closures, headcount reductions and other initiatives. And in the quarter we incurred about $15 million of cost related to severance, ERP system implementations as well as plant closures. Since late 2006, we have closed 11 manufacturing facilities and in our installation business we've closed approximately 70 of our branch location facilities and company wide have reduced our headcount by 17,000 employees, which represents about 30% of the North American work force. Approximately 6,000 of that headcount reduction has taken place as a result of 2008 actions and activities that we've had to take. And obviously these are very difficult decisions but certainly consistent with us trying to right size the business in this tough economic environment.

If you flip to slide number eight please. I mentioned gross margins are down 230 basis points in the quarter. Again, that reflects lost leverage as a result of lower sales volume, particularly as it relates to fixed overhead and some of our fixed costs in our cost structure. We also had increasing costs for inputs, material and energy costs along with freight and logistics and are experiencing a pretty competitive marketplace from a pricing prospective. I mentioned earlier that SG&A, although it's up 110 basis points as a percent of sales, again reflecting lost leverage as a result of the decline in sales and decline in volume. We did decrease SG&A by approximately $46 million in the quarter.

If you flip to slide number nine, just wanted to take a quick look at our EPS for the quarter. We did report $0.20, again compared to $0.49 in the prior year, and just to give you a little bit of a flavor of some of the components included in that $0.20, as we mentioned earlier this year, we have a increased tax rate and I'll talk about that when we get to guidance in just a minute, but our tax rate in the quarter was approximately 47% and compared to our more normalized rate of approximately 36%, that represented about a $0.05 impact in terms of earnings. I mentioned earlier the $15 million of rationalization charges, again for severance, ERP system implementation as well as plant closures. Year-to-date that number is about $24 million but that did aggregate about $0.03 in the quarter. Early this year when we issued our guidance, we indicated that we thought we'd be around $0.06 to $0.07 of rationalization related costs. And it looks like at this point that number is probably going to be a little closer to $0.08 to $0.09, and again, representing some of the actions that we've taken including additional severance related costs. We also had $0.01 in aggregate related to financial investment impairments which were $3 million in the quarter and currency losses, which were $5 million. In aggregate that's $8 million and represents about $0.01 in terms of earnings per share.

If you move to slide number ten, in terms of working capital, I mentioned that we increased slightly. We're up about 20 basis points compared to where we were last year in the second quarter, 18.1% of sales as compared to 17.9%. Our definition is receivables plus inventory minus accounts payable in terms of that percentage comparison to sales. Receivable days were up two days as compared to last year. Inventory days were up three days to 54 days and that was in part offset by an increase in accounts payable days from 42 to 44 days in terms of the quarter.

If you move toe slide 11, in the quarter, I mentioned that we have returned $131 million of cash to shareholders. We did repurchase 3 million shares in the quarter. We currently have, at quarter end, 33 million shares remained on our authorization in terms of share repurchase and I would point out that in July, we repurchased about 900,000 shares of our stock. As we mentioned on the last call, management continues to expect to recommend to our board of directors, later this year, that we increased Masco's dividends for the fiftieth consecutive year. We expect free cash flow to approximate $640 million, which is almost twice the annual dividend cost in dollars. We've always said that over the long-term we believe our ability to generate excess cash will allow us to return $1 billion to shareholders on average annually and that there would be some years where we exceeded that amount as we did the last 5 years and some years where we may be less than $1 billion. Our priorities in this difficult market situation that we're in right now, from a capital allocation standpoint, is to first invest in our business. And to continue to fund the dividend. While we continue to believe that long-term fundamentals for our markets are positive, given the uncertain operating environment and the uncertainty as to whether we will see a recovery in our markets in 2009, 2008 dividends and share repurchases may not aggregate $1 billion.

I now want to move to our segments and if you would move to slide number 12 please. And again the information we're going to talk about from a segment standpoint and in fact the information that we have been focused on is as reported information. We have provided you with reconciliations in the information that we send out, some of the schedules, information on segment reporting both with and without some of the rationalization charges but this information will be as reported. In terms of cabinets and related products. Sales in that segment were down 18% and in North America we continue to be impacted by a decline in new home construction. As well as softness in consumer spending and as we've indicated we've seen for several quarters, a slowing for bigger ticket items at retail and a less favorable product mix. On the international side of the business, we had a fairly significant decline in the quarter, which really reflects the end markets in the UK, which is down substantially and that's primarily related to new home construction as well as in our ready to assemble business in Denmark, with Denmark being one of their major markets. Denmark officially is currently in a recession with two quarters of negative GDP. So, again, pretty tough quarter for the cabinet group. Operating profit was down from 13% to 6.1% and again reflects the lower sales volume and under absorption of fixed costs. The product mix we talked about and the lowe results of internation operations.

If you move to slide 13, segment sales for plumbing were down 2% in the quarter. In North America, plumbing sales decreased as a result of lower sales volume at retail and wholesale, partially offset by increased selling prices and we did have a continued strong performance by our subsidiary in Europe, Hansgrohe, which continues to penetrate old eastern European markets as well as Asia and other foreign markets and had an excellent quarter again. So, we did see benefit there. On the profit side, we continued to show improvement in terms of margin performance. Margins increased from 10.9% to 12.5% and I think this is the third consecutive quarter where we've had a favorable comparison from a profit standpoint. We obviously have been more timely and aggressive with price increases to offset material costs although we still have some catchup to do there. We've had benefits from the business rationalization in terms of rationalizing facilities and products, headcount reductions and continued focus on the supply chain. So, again, in plumbing, very pleased with that performance again and in a tough environment.

On slide 14, installation and other services, that segment was down 27% and as you recall, that's 100% new home construction with maybe just a little bit of commercial business, but again down 27%. And in terms of profitability, the first quarter we were negative from a profit standpoint, we were able to turn that around in the second quarter. We made $4 million in profit. We also had about $4 million of costs related to severance ERP system implementation as well as branch closures in the quarter. So, again it was good to see that segment get back in the black.

On slide 15, decorative architectural products, our sales declined in the quarter 11%. And that's again as a result of lower retail sales volumes of paint and stains as well as builders hardware. Operating profit decreased from 21.5% to 18.7% (and that reflects the decline in sales volume as well as increased material costs during the quarter) (technical difficulties).

(Slide 16 we have other specialty product segment and they're sales were down 22% and that's really impacted fairly significantly by our window business both in North America mill guard on the west coast, which) (technical difficulties) has a heavy concentration in new home construction, as well as declines in our window business in the United Kingdom. And again, that economy's very tough. Operating profit was down from 16.4% to 6.7%. Again, reflecting the lower sales volume. The under absorption of fixed costs and increased material in energy related costs and the lower performance of our international operation.

On slide 17 I want to talk a little bit about our guidance before we move into the Q&A. And obviously, forecasting in this environment continues to be a significant challenge. We continue to believe that housing starts this year will range between 900,000 and 1 million units versus 1.3 million in 2007. We also continue to believe that consumer spending and our European (technical difficulties, no audio) results -- we're not really looking for any significant improvement there, compared to the first half of the year at this point in time. Our guidance also reflects increasingly competitive market conditions for our services and products, increasing costs for freight and logistics and other materials including commodities impacted by energy related costs. As a result we continue to estimate that our sales will be down low double to mid-teens in terms of the full year. At the half year we're down 14% on a year-to-date basis. We continue to estimate that our earnings per share will fall in a range of $0.50 to $0.65 per common share. And again, thats -- and there's no change to that from our last quarter. In our earnings per share, we have the implementations or the results of the increase in our tax rate, which we anticipate on a full year basis will be approximately 48% to 49%, and again that increase in rate relates to our anticipation that we'll be repatriating foreign earnings from our international operations to use foreign tax credits, which expire at the end of this year and when you compare the 48%, 49% to our normalized tax rate of approximately 36%, that will reduce earnings by $0.17 on a full year basis. We do expect in 2009, absent any other unusual transactions or tax planning issues to be back at a more normalized rate of approximately 36%. In addition to the $0.17 related to the tax rate increase, we also incurred in the first half of the year $0.05 related to financial investment impairments and $0.03 related to currency losses and when you take the tax rate, the impairment charges and the currency losses, those aggregate about $0.25 per share on a full year basis. We also are reconfirming our guidance relative to free cash flow. We mentioned at the last conference call that we estimated that free cash would approximate $640 million in 2008 and that's before dividends and we continue to anticipate that we'll have a relatively strong year of cash flow generation, not withstanding the fact that it's certainly a challenging year from an (operating standpoint) (inaudible) (technical difficulties). (With that, we'll open up the line for Q&A and I will remind you that I'm joined by Richard Manoogian our executive chair as well as Donny DeMarie our Executive Vice President and Chief Operating Officer) (technical difficulties).

(OPERATOR INSTRUCTIONS) And we'll go first to Michael Rehaut with JP Morgan.

Hi, good morning, everyone.

Hi, Mike.

First question relates to your operating margins and certainly the macro conditions, the higher raw material costs to name just a couple are kind of really impacting the numbers this year. At the same time I'm sure perhaps the extent of how much they've come down, perhaps is not or has not necessarily been in the game plan maybe as you (inaudible) out a couple of years ago into what a trough might be or it's to the extent we're at or near a trough. But I was wondering if you could help me particularly with the cabinet installation services and other specialty. If you could give me a sense of -- if there's a plan in place over the next couple of years to kind of get those margins back to a double digit level or whatever level that your plan might call for. If you could kind of share that with us, if there are -- and as part of that, if there are restructuring actions or sort of incremental actions that you haven't already taken that would allow those units to return to a greater level of profitability. That's my first.

Okay, thanks, Mike. Yes , before I have Donny comment on some of the things that we're doing in those segments, I guess what I would say is that to -- part of your comment was that we may not have anticipated margins this low and this kind of a trough. And I guess one thing I would say is I'm not sure that anybody would have anticipated this kind of a trough. If you look at our business overall and go back to 2006, for example, and if you go to the mid point of our guidance for this year, sales roughly from 2006 would be down 20% plus and that equates to about $2.5 billion and on an operating profit basis when you look at contribution margin as we've said in the past, which kind of ranges between 30% and 35%, we've had a substantial decline and obviously we've worked really hard to offset them. I think we've done pretty good things to mitigate that. Having said that -- so, I guess what I would say is I'm not sure that anybody would have anticipated that kind of volume decline number one, and number two, we continue to believe that when we get back into more normalized environment from a business standpoint, that we could get margins back into the mid to low teens kind of area, but having said that, maybe Donny can talk a little bit -- share with you some of the things we're doing on the cabinet side and on the contracting service side to really kind of look at the foot print as we look at our capacity

Yes, thanks, Tim. Its really across all of the businesses, we're continuing to reduce our cost structure. We're really driving lean manufacturing principals, but we're in the process of evaluating all of our facilities, really with the focus on achieving what we're calling flexible but also scalable manufacturing capability and supply chain. The one constant is change. Ans what we need to learn is we need to be able to maximize our returns at both lower volume without compromising our ability to serve a robust demand whether that comes from the macro environment or increases in market share. One specific example if you look at our cabinet facilities. We are adopting a common box architecture. We believe will give us a better box but allows us to produce any box at any plant which makes our capacity much easier for me to flex up and flex down without adding some of the fixed costs penalties we had today in the supply chain.

If I switch over and deal more specifically with your installation questions. Really have done a nice job on the installation side of continuing to reduce their cost. And really the next (inaudible) for us, is really optimizing our product portfolio and what we're focused on there is let's really emphasize those products where installation -- where those products are creative to the overall results of the installation segment. So, we'll be getting out of some products where we don't believe that the installation of those products is a value-add and we'll be optimizing the products and really growing at a more focused and accelerated rate. Those products where our margins tend to be better. We'll be moving the dedicated cabinet facilities back to the builder cabinet group. We believe that gives them opportunity to focus more on the actual cabinet installation as it relates to their other channels to market and paint is another product that we've mentioned earlier that given the economy we're going to stop the rollout. And what we've really challenged the paint people to think about is how do we expand that to include more of the existing pro contractors and really a broader effort to leverage the existing channel with what we believe is a better product for the propaner as well as a better homeowner solution. So, as we look at our businesses (inaudible) and there's all kinds of things we can do but those are a couple of examples in two of the categories you mentioned. Yes, the other thing I would add, Mike and you were asking more segment specific but as we indicated in the slide presentation, we have taken out another 6,000 heads this year and again just in terms of trying to react to and right size as quickly as we can respond to the environment. One thing I would mention is that in addition to some of the business unit activities that Donny talked about. We have done some things at the corporate office level. Over the course of the last couple of years and more recently here just at the end of April, we've reduced about 80 positions. We have instituted a wage freeze here at the corporate level and also we've done some restructuring of executive compensation. That includes reduced base pay and with more emphasis on variable compensation tied to performance, which we certainly think is a positive step and one that will help us manage this corporate cost structure and our estimate is that over the course of the last couple of years, given the actions that we've taken, that we've either been able to reduce or avoid about $40 million of cost. So, we're really trying to look at everything across the board, across the company as aggressively as we possibly can and obviously with the velocity of the sales change that we're dealing with. That (certainly is a challenge) (technical difficulties). (I would mention that just as a data point for folks, we did see a significant decline in general corporate expense this quarter) (technical difficulties). (There is severance in there but the other thing that we benefited from was a reduction in stock-based compensation) (technical difficulties). (So, I thought I would point that out so folks are aware) (technical difficulties). (That's tied to our stock) (technical difficulties) price and really reflects Phantom shares and/or stock appreciation rights that effectively get market-to-market at the end of each quarter.

Okay, so I appreciate all of that detail, Donny and Tim, I just guess before I ask my second question just so I understand, some of the incremental cost savings and actions that you've done this year like the 6,000 employee headcount and I'm sure some of the facilities that you've closed occurred this year. And can you give us a -- can you give us a number in terms of what the incremental benefit might be in '09 because I assume that this happened throughout this year and -- on an annualized number it's different than what we might have seen in the numbers this year.

Yes, there would be a difference this year but other than what I could give you relative to the corporate office I don't think we have any quantification of that at this point in time.

Okay. Second question is just on balance sheet and a lot of focus, a lot of questions that we've got have been surrounding the dividend and you addressed that in your comments but just wanted to get a sense of where you're comfortable on a net debt to cap ratio. In the second quarter you're at 45%, which is actually slightly below where you were a year ago, but certainly cash inflow continues to be under near term pressures. So, is there a number that you don't want to go above and would you shift your priorities more towards debt reduction near term given the continued tough conditions?

Well, Mike, gross debt to cap is about 51% and I think that's flat with last year and pretty much in a range that we've been running over the last several quarters. A couple of things on debt. We do have $100 million of debt due in September of this year, which we plan to pay out of corporate funds or cash flow if you will. The next debt requirement that we have is 2010, when we have about $300 million of floating rate debt due, which we'll probably refinance. The only significant debt we have due is not until 2012 and that's about $850 million. So, I think we did a pretty good job of taking advantage of market conditions and timing in terms of issuing some of the debt that we issued over the last three or four years and I would attribute that to luck as opposed to anything else, but having said that, we've got it spread out pretty good and we've got relatively favorable interest rates. I think our average interest is about 6%. We wouldn't anticipate leveraging up at all. I think that we're relatively okay with the 51%. Our rating is important to us, we're currently BB plus. Or BBB plus, excuse me. But I think going forward we probably would want to stay relatively in that range and as we've mentioned many times, we're not real capital intense. Over the course of the last five calendar years, we invested about $1.5 billion in CapEx, another $300 million roughly in displays and as we've said many times, we think our capacity is structured at this point where we can (inaudible) very effectively serve a market that would be in a (1:5) to 1:8 kind of range in terms of housing starts and a market that might show a 4% growth in home improvement really (inaudible) expenditures which has been sort of the traditional growth rate over time. So, we don't see a lot of major capital required going forward. So, I think from a balance sheet prospective we're pretty comfortable with where we are at this point in time and don't see any issues going forward.

Alright, thank you.

Thank you, Mike.

And we will go next to Budd Bugatch at Raymond James.

Good morning, Tim, good morning, Richard, good morning, Johnny. On Friday when you talk a little bit about gross margin and the loss leverage of sales volume and the increasing material energy costs et cetera. Could you parch that any way, Tim, for us to what were the more important factors and being down $300 million year-over-year on gross margin or gross profit and $192 million in this quarter?

Yes, I think, Budd, the major issue there is the overhead side of things and particularly the fixed overhead side. A little bit in terms of freight and logistics from a distribution standpoint but the biggest issue we face at this point is really on the fixed overhead side.

So, that's all revenue based, right?

In terms of the decline until volume?

Yes, the leveraging --

That increase cost absolutely.

Okay, and are you behind or ahead in pricing versus costing -- costs now?

I think at this point, you know, and if you forget the early period when we -- as we said many times you go back to 2005 when we got the first wave of commodity costs and probably didn't react as quickly as we should have, I think at this point we're in reasonably decent shape. We've got a little bit of catch-up to do in certain areas but we're certainly pursuing that and given this last wave of commodity cost increases, which we've seen, which would relate to particle board for example. Finishing related costs as it relates to cabinets, hardware, brass to a certain extent, installation. You know, we certainly -- components driven by petroleum that might go into paint and/or windows, resins, glass, those types of things. Obviously we've got that certainly in the cross hairs at this point and time and we'll be working to offset those through working with our suppliers, price increases productivity. So, I think we're in relatively good shape. A little bit of catch-up. But that's not anything that I would say that's abnormal. Its just, there's always a little bit of a lag when costs bump up. I think we're in pretty good shape there.

Okay, and related to that fixed cost issue by taking the outlook for the charges up to $0.08 to $0.09, or somewhere where that is after tax, what's the geography of that and what additional actions might you see to account for that rationalization charges going up?

Most of that Budd, (inaudible) as I mentioned that relates to severance. ERP implementation as well as plant closures and most of the increase would be on the severance plant closure side as opposed to the ERP implementation side.

So, some additional rationalization of manufacturing foot print?

Yes, for example in the quarter we had about a $5 million severance at the corporate office and that wasn't anticipated when we gave the initial guidance back in February where we thought we would be $0.06 to $0.07. And again, you know that's kind of tough to estimate but what we're really trying to give you a heads up on is the fact that we'd be up maybe a $0.01 or two.

And whats the pretax number on that, Tim? Or if you have to get back to me on that --

Well, $0.08 would be approximately $48 million for the full year number and we're at $24 million at the six-month period.

So, that's the pretax side is the $48 million.

Yes, that would equate to $0.08 roughly.

Okay, just two other quick questions, your free cash flow you're defining that as cash from operations minus CapEx or is it cash from investing which would include the --

That's cash from operations less capital expenditures.

So, the CapEx for the year is what now -- ?

We originally ran 230, Budd, and that's now down to 210 and we originally had depreciation and amortization at approximately $260 and that number is now down to around $250 so there's been a little bit of movement within the components but not a lot.

So, that would imply cash from operations of somewhere about $850 million (inaudible) to get to that 640 number?

Yes, yes.

Okay, and my last question is you mentioned that stock-based compensation for general corporate expense because that number of $35 million before charges or at the charges that's a pretty severe reduction. What's the continuing number for general corporate expense going forward or does that stock-based compensation issue continue?

No, I wouldn't expect that would necessarily continue but it is -- it depends on what happens to the market price of our stock. If stock goes up, there could be a little additional cost in there. If it goes down, there could be a little bit of a reduction but I'm thinking that tat number is about $160 million, maybe $160 million roughly on a full year basis.

For the GCE?

Excuse me?

For GCE? Excluding stock based comp.

No, that would include stock based comp.

And can you quantify what that stock based comp impact was in the quarter. It's in the Q, Budd, and I don't -- I think it was about $14 million as I --. We'll get it when the queue comes out. Thanks, Tim.

$13 or $14 million, yes. It's in the Q.

Thank you, sir.

And we'll go next to Peter Lisnic with Robert W Baird.

Good morning, it's actually John on for Pete.

Hi, John.

Hi, John.

Just looking at, I mean, it sounds like the biggest thing driving margins right now is overhead is absorption particularly in something like cabinets, but the commodity cost picture, just if you look at where people were focusing things in April when you gave your guidance last until now, commodity costs have come up a bit and you guys kind of reiterated your guidance. Just -- what's the positive offset or is it just kind of the increases isn't large enough to make you change your range right now?

Well, I think in part we anticipated, for example, oil was trending up at that point in time. It's back now, probably to a level where it was back in late March and April, but I think we anticipated a little bit of an uptick and we anticipate that we'll be able to offset that with -- either through working with our suppliers, productivity or working with our customers in terms of price.

Okay. And then I guess switching gears for the second one. Just, a comment or two you had in your -- in the presentation about kind of price concessions. Just, is that largely within installation or is that in other segments as well.

Yes, I'll let Donny talk a little bit about that, but that's primarily in the installation area.

That primarily effects all of our businesses tied to new home construction which would be our installation businesses our windows business and our builder cabinet group. We also -- we're seeing in the form of price concessions we're seeing higher promotional costs at retail. So, affecting really our retail cabinet margins we're seeing higher promotional activities, that are really being used by the key retailers to try to drive store traffic.

Okay and it's more on the retailer level? It's more of the actual retailer's driving it as opposed to competitors coming in and trying to get volume for their plants so to speak?

We're seeing increased promotional activity of which I think the source is somewhat undefined. I would think at this point it's competitors offering promotional activities that we have to meet for competitive reasons and on the other hand it's working with our partners to really figure out ways in which we both can increase store traffic and potentially raise our revenue.

Okay. Thank you, I'll get back in queue.

And we'll go next to Ivy Feldman with Feldman and Associates.

Good morning, everybody.

Hi, Ivy.

Hi, Ivy.

So, you've mentioned you think theres going to be a slight uptick and -- obviously on the cost side initiatives working with the suppliers et cetera. Can you elaborate? I know you mentioned that you're using starts 900 to 1 million, I think you said, for the back half of the year. Can you also -- I know you mentioned Europe, maybe help us more specifically on your outlook for Europe and then sort of a contingency plan assuming that the market weakness is actually, unfortunately, worse and what the impact you think would be with respect to any change in expectations on and cash flow or dividends or do you feel like there's little that could erode your opportunities or your change in guidance going forward?

Okay, the first part, I think, of your question was raw materials. And yes, we have seen a little bit a tick-up as we mentioned and again it's kind of across the board. Particle board for example, plywood, a little bit of an increase there. Finishing costs as it relates to cabinets. Hardware as it relates to cabinets. All of those have ticked up a little bit.

Actually Tim, I'm sorry -- I thought you were saying that you thought -- I apologize. When you said tick-up, I thought II heard tick-up in the market getting better, I apologize.

No, no, I meant in terms of increasing costs.

Okay.

Yes, that's what I meant, I'm sorry. Just in terms of --

Do you have a view in the second half of the year if it's going to be sequentially equal to the first half or it will be worse and kind of just a more specific outlook and then a contingency plan if it gets a lot worse from whatever your outlook is?

In terms of the raw materials? Or just in terms of business.

Business total, yes, forget raw materials, sorry.

No I apologize. Yes, I think in the second half that it's been tough in the first half and I think our feeling is that where we're at relative to guidance, mid or low double to mid-teens is probably where we're going to end up. I don't see it getting a whole lot worse in the second half at this point. I think potentially some of the stimulus that the government is trying, ought to have a little bit of favorable impact but again that's really hard to say. I think it's worse right now than a lot of people think. But I think our feeling is that it ought to probably stay about the same but Richard may have have a comment on that in terms of his view.

I think, Ivy, our general feeling is that business conditions in our markets are worse than most people feel and if anything continue to deteriorate further and we put into our guidance an assumption that we don't see any significant improvement in those markets in the next six months and there might even be some further modest deterioration.

Europe, Ivy, is probably -- you did mention Europe in your opening question and Europe is probably the one area that is maybe a little more uncertain than to us than anything else because we've seen some just very dramatic declines just in the last couple of months there.

So, if I hear you guys correctly, it's possible it can get sequentially worse but sort of factoring in pretty much a similar, sort of, same type of environment but not materially worse, I guess if that is correct, Richard maybe you can comment assuming your stark forecast is off by 20%. Does it change your thoughts about being, I guess, aggressive with cash and buying back stock or any thoughts the dividend or cash flow and would it, in a contingency scenario, would it change or not relative to --

I think it wouldn't have a dramatic effect on the perception of cash flow balance sheet for the rest of this year. One reason being that even if housing starts took another lag down, there is a lag effect before that transfers into our business of one to two quarters. So, I think the bigger question mark is '09 and is '09 probably going to be worse than '08? And there are some people and I believe you might be one of them who feel that the risks are on the downside in '09. And I would just say to you that right now, all things being equal, I would agree with that, but I think that if other actions aren't taken the risks are greater on the downside than the upside for even '09 and we're planning all of our cash flow strategies and our dividend policies and other things on the assumption that there might even be some further deterioration in '09. Having said that, my own philosophy is also that I think things are going to be so bad that we will see more positive action taken by the government and that might require a new president and a new administration but talking to people in Congress and other people, I'll be very surprised if things deteriorate that we don't see much more positive action in '09 and a lot of that directed specifically to the housing industry, as one of the key areas thats going to need help and one of the few areas that could really stimulate the economy near term. So, in my own mind I think there's a good chance that '09 could improve from '08 but it's going to take new actions to make that happen and we haven't factored that into your planning.

And one last question because you brought it up, Richard. May be you and Tim want to comment on the current stimulus package that the president is supposed to sign in days. Just any thoughts if you think that will have a positive impact or more neglectable or even could hurt the market.

I think the current housing bill has a limited impact in terms of changing the outlook for '09 or even the balance of '08. I think the one thing it does do is it probably creates -- prevents a disaster -- a greater disaster from happening related to the (GSC's) but in terms of stimulus I think it's more than disaster prevention than really significant stimulus. I think it's going to take significantly more action to really cause a stimulus.

Yes, the one (inaudible) might be whether it has a positive impact on consumer confidence in terms of any action they take which might get the consumer maybe re-engaged a little bit but I think that's a tough call.

Great, thanks, guys.

Thank you, Ivy.

And we'll go next to Susan McCleary with UBS.

Good morning.

Hi, Susan.

I was wondering if you could you just give us some color on what you're seeing in terms of the financial health of some of your builder customers.

Yes, on the builder side, sure, we had, I think, in the quarter about $4 million of bad debt expense. That was I think on top of about two in the first quarter, so, year-to-date we're at about $6 million. We have -- or excuse me, we're at what?

$9million.

$9 million. We're about $9 million. I guess we had $6 million in the first quarter and $3 million in the second quarter so we're at about $9 million year-to-date. That's about half of what we anticipated in our planning for the full year. Last year, you might remember in the fourth quarter we had $12 to $13 million and ended the year of $22 million of bad debt expense. This year in the forecast we had, as we indicated earlier, about 20. So, we're about halfway there. And Don and Johnny -- Donny and John, got it mixed up. John Sznewajs, our CFO are doing a really good job of staying on top of the builder's segment, reviewing the receivables and an ongoing basis. Don, you might want to comment a little bit on that just in terms of your perspective.

Yes, sure, Susan. John and I have spent a lot of time really looking at our top 100 builder customers and really to help with those accounts and managing that receivable. The business units are really doing a nice job here. As the receivables turn. We have relatively short receivable days and as the receivables turn and that credit gets re-evaluated on continual basis. So, we're not continuing to extend credit where the customer is no longer credit worthy. So, although it's a difficult environment and one in which we really have to spend a lot of time on. And we believe that it's not going to get worse from what we projected at the beginning of the year related to our exposure.

Yes, we don't have a lot of concentration, Susan with any one builder. We've got a pretty diverse spread if you will relative to the receivables.

Sure, are you seeing anything though, in terms of the smaller private guys and any incremental difference, maybe over the last two quarters?

I think if anything credit is a little bit of a challenge for them but Donny may have a little -- additional perspective.

I think they were struggling to get credit and access to credit but we certainly haven't seen any uptick. We've seen bankruptcies, but I can't tell you that there's been any real consistency whether -- size has not been a consistent factor. So, we haven't seen any worse than we had seen probably a trend back for two or three quarters now and I can't give you a common thread because it just doesn't exist.

And any exposure there would be very minimal given the size of the builders we were talking about.

Right, okay.

Thank you.

And we will go next to Nishu Sood with Deutsche Bank.

Thanks, hello everyone.

Hello, Nishu.

Hello.

Hi, I wanted to ask first, Tim, you were talking earlier about being scaled for say, in the US from 1.5 to 8 million starts or so. With the reductions, the 30% reduction in your North American work force. The 11 plant closures, I would have thought that by now your capacity would have been for much lower level of starts -- say, in the low ones. So, I just wanted to dig down into what you mean by that when you're saying you are scaled for 1.5 to 1.8. Is that just a case of there's that latent capacity and maybe how Donny was talking about, you could scale up easily. Or what exactly do you mean by that?

Well, what we -- I think if you go back we had about a 2 million start year like back in '05-ish and obviously we had to address the market place at that point in time and had capacity and were stretched a little bit at that point, particularly on the cabinet side. Yes, what I was referring to is that we have the capacity in place and as you know, we're operating relatively inefficiently. Donny talked a little bit about the cabinet business, and some of the things we're looking at there to scale down. But, a lot of stuff we've done is we've take shifts out in order to try to meet the environment that we're in today. What I'm really referring to is we don't have to add a lot of brick and mortar when the market gets back up to a level of 1.5 to 1.8. Again, we're not exactly sure when that is but we think we can handle it. And what I was really trying to get across is that we don't need a lot of capital to do that.

Got it. So, if it -- you know, you don't have to focus too much on the down side, but If it takes a long time to get back up to that 1.5 to 1.8. Are there -- what additional incremental actions does that imply that you would need to take beyond the work force reductions and the plant closures you've already done?

Well it gets back to some of the comments Donny made a little earlier in terms of trying to work some flexibility into our business model on the new construction side and Donny, if you want to maybe --

Nishu, that's exactly right. We have to have flexible solutions that are both scalable up and down and but not only within our factory but also our supply chain. And we really have challenged everyone to think about capacity differently. You know let's not plan to a start number. Let's really plan for the fact that starts are going to be cyclical and we're going to have years around 1 million housing starts and years around 2 million and how do we think about our capacity from a standpoint of how do we flex up and flex down. You know, what we don't want to do is save a dollar today and then ultimately spend $2 to $3 a couple of years from now, bringing capacity back up. So, we're asking them to think about it from a whole different paradigm. And It's been really driven (inaudible) really some great additions and we talked (about the cabinets) (technical difficulties). And whats really sacred, and one of the things we're not going to do is we're not going to do is we're not going to limit out investment in innovation. e're going to continue and invest heavily in innovation. We've got a great pipeline full of exciting new products. We're introducing our diamond fuel technology from delta facet, which is really an innovative, no-lead solution, that we think will be a game changer in the category. And our (inaudible) lighting control system, our radio frequency, energy harvesting, lighting system that we're bringing out to introduce at PCBC. We're also investing heavily in our brands. We have the premiere brands in our category and we're going to step up our investment in brands right now, to continue drive our market share. And we're expanding internationally. We've got Behr selling paint in China through Home Depot and Hansgrohe who's really a repeatable and successful process at penetrating new and emerging markets. So, you know, there's lots of things we can do on the way down but we're really excited about the things that we have going that really lead us to believe we have a very bright future and are excited about all of the initiatives and opportunities going forward.

Got it, and just follow-up question on your key retailer sales. The trends there, over the last two quarters, seem to have deviate from the retailers themselves you know being a little bit worse, at a negative ten, I think, and negative 13 this past quarter. I just wanted to get your thoughts as to why that might be. Is that an inventory issue? Is that, perhaps, the categories that you're selling being hit harder than -- I -- you know, just the sales overall (inaudible) retailers? What's driving that?

I think it's broad based in terms of categories. And I think it's related to consumer confidence. There could be a little bit of inventory balance in there that might be impacting us a little bit, but we don't usually get hit with that as much as other people do. But I I think it's just really the consumer pulling back at all price points including some of the lower ticket items. You know, I think there's a mix issue on the cabinet side. To where, we really have increased sales in our in-stock assembled product, but thats been more than offset by sales in our premium product line. Our special order premium product line. So, have a little bit of a mix issue there which effects the overall retail sales as well.

Okay. Thanks a lot.

Nicole, I think we'll cut the questions off here and I do have a couple of closing remarks I would like to make.

Okay, go ahead.

Okay, thank you. Again I would like to thank all of you for joining us today and as we mentioned, we continue to aggressively manage our cost structure and we've worked hard over the past several quarters to offset the impacts of the current economic environment on our business. While these actions have been and continue to be very difficult we expect that additional actions, to address current market conditions, will be even more challenging as we balance what we can do to mitigate the impact of the current market conditions on our near term results and the implications these actions may have on our long term performance. Although the company expects the next several quarters to be very challenging, the company is confident that the long-term fundamentals for the new home construction and home improvement markets are positive. In these challenging times, we're extremely proud of the Masco team worldwide. As they focus on driving solutions for our customers and value for our shareholders. We continue to invest in innovation, product development, expansion into new geographies. Technology upgrades and process improvements pushing hard to take advantage of this cycle. We are putting particular emphasis on strengthening our already powerful brands. We will leverage our environments (inaudible) program and focus on sustainability and green solutions in our product and service offerings. There's a lot of excitement at Masco and we want to share that with you at the 2009 international builders show in Las Vegas. Our booth will showcase our brand supported by new products and innovative customer solutions. On Wednesday, January 21. we will host an investor event, whish will include management presentation. In addition, we have partnered with professional builder magazine to design and build a green show house which will be built to the highest level of our environments (inaudible) program certified green. This home will feature many of Masco's brands and sustainable products in a smart systems based approach to make consumers aware of what is possible today through a Masco branded solution. Think of this as a green coming out party. More information to follow and we hope that many of you can join us. Thank you again.

And that does conclude today's conference. We appreciate your participation and you may now disconnect