馬斯科 (MAS) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Masco Corporation 2008 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 website along with today's slide presentation under the investor relations section at www.masco.com.

Before we begin management's presentation, the Company wants to direct your attention to the current slide and note at the end of the earnings release which are cautionary reminders about the 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 analyst's 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 like to now turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead.

Thank you, Pam. And thank all of you for joining us for Masco's third quarter earnings conference call. I am joined today by Donny DeMarie, our Executive Vice President and Chief Operating Officer, and Richard Manoogian, our Executive Chairman.

We are going to go through the slide presentation. If you would please move to slide number 3, please. Obviously in the operating environment we are in, the third quarter was another challenging quarter for Masco. Our sales from continuing operations were down 16% in the quarter. Earnings per share were $0.10 versus $0.56 in the third quarter of 2007. Gross margins declined 270 basis points. SG&A as a percent sent of sales was up 200 basis points to 17.9% and on the plus side, if you will, we continue to do a good job of balance sheet management. Working capital as a percent of sales for the third consecutive quarter continued to mirror the prior year.

We did announce in the quarter, as we indicated previously, that the Board increased our dividend for the 50th consecutive year. That was announced in September. We also completed the divestiture program that we communicated early this year generating $28 million of proceeds in the third quarter, $174 million for the entire plant. And, importantly, we end the quarter with $1 billion of cash on hand and significant unused bank lines.

If you would flip to slide number 4, please. As I mentioned, sales were down 16%. We continued to see significant softening related to new home construction. Housing starts were off in excess of 33%. But, more importantly in the quarter, we saw a significant slow down in European markets and a continued decline in North America for consumer spending. Sales, too, are key. Retail customers were down 11% in the quarter and that's the third straight quarter we have had double-digit declines in terms of sales to key retailers. Operating profit in the quarter was down $175 million on a consolidated basis with margins declining to 7.8% versus 12.3% last year.

If you would moved to slide number 5, please. In terms of North America, our sales decreased 18% and, again, driven by lower sales to both the new home and the home improvement products markets at retail. Operating profit was down from 14.3% to 9.8%, reflecting the lower sales volume as well as increased material costs.

If you would flip to slide number 6. International business. Our sales were down 6% from an international perspective and that includes an 11% decline in local currencies and that's particularly pronounced in the United Kingdom for our plumbing, cabinet, and window related operations. The lower sales volume along with rationalization charges we had in the quarter about $16 million of charges related to business rationalization, about $9 million of those relate to our international operations and that contributed along with the volume decline to a decline in return on sales from 11.7% last year to 6.9% in 2008 third quarter.

If you flip to page number 7. Obviously, we continue to try to manage through this difficult operating environment and just to give you an update in terms of some of the actions that we have taken over the course of the last two years really as we go back into late 2006. We have closed now 14 manufacturing facilities and that includes plants that are actually closed as well as plants where we have announced a future closure. Three of those took place in the third quarter.

In our installation business we closed over 70 branches and significantly reduced the floor space, if you will, in terms of the remaining branches through modification in terms of lease facilities. In addition, we have reduced our head count by 20,000 employees as of the ends of the third quarter. That includes approximately 9,000 employees related to actions that we have taken in 2008.

If you moved to slide number 8, I mentioned gross margins were down 270 basis point from 28.3% last year to 25.6% this year. That reflects the lost leverage as a result of the lower sales volume, higher material costs including mix impact as well as an increasingly competitive market place. I mentioned that even though our spending for SG&A was down $27 million, we were up to 17.9% of sales from 15.9% last year. That also reflects the loss leverage on lower sales and we did have approximately $6 million of increased bad debt expense in the quarter versus last year and a litigation -- tentative litigation settlement charge that we accrued for $9 million. Those two totaled $15 million and without them we would have been at about 17.3% in terms of SG&A to total sales.

If you flip to slide number 9, in terms of earnings per share. I mentioned that we reported $0.10 in the quarter. And wanted to give you a perspective of where we would have been without the implications of tax rate change in the quarter as well as a couple of other costs. You might remember that we indicated early this year that we expected our tax rate to be I think 47%, 48% at the beginning of the year. That reflected the decision that we made to repatriate earnings from foreign operations to the United States to take advantage of foreign tax credits. Because our income has declined in terms of our full-year forecast, the tax rate that we anticipate for the full year now is around 56%. When we apply that rate to our earnings on a year-to-date basis, which we have to do, there is a catch up related to the first half of the year. And so, we have an extra nickel in the tax this quarter because we had to sort of true up the first half.

And in addition to that nickel, we had extra penny of rationalization-related charges that we didn't anticipate in the quarter and we also had a penny related to investment impairment and currency transaction impact. And to give you a perspective of where we thought we would have been back in July. If you take that $0.05 and the two pennies I just mentioned, we would have been around $0.17 which pretty is consistent with our, we don't provide quarterly guidance, but with our internal estimate of where we thought earnings in the third quarter would have been.

If you flip to slide number 10, I mentioned working capital a couple seconds ago. Here you see the various components and again the fact that we continue to do a good job at the business unit level of managing our balance sheet and managing our working capital. And, again, the guys are doing a good job from that standpoint.

If you flip to slide number 11, in terms of cash return to shareholders, I mentioned the dividend increase earlier. In the third quarter we repurchased 1 million shares of our outstanding common stock. That was done in July. On a year-to-date basis at the end of September we repurchased 9 million shares of our common stock. At this point in time we have approximately 32 million shares left in terms of the authorization for share repurchase that the Board enacted a couple of years ago.

If you flip to slide number 12, I want to talk a little bit about the segments. And I want to point out that all the segment information that you see here is basically as reported on a GAAP basis. We do provide information in the investor package by segment related to some of the rationalization costs that we incur so that you can see it both with and without. Cabinet sales in the third quarter were down 21% reflecting lower sales volume to both new home construction and consumer spending at retail in terms of repair remodel activity. In addition, international cabinet sales were down, particularly in the United Kingdom which is pretty much 100% dedicated to new home construction. The sales decline with the under absorption of fixed cost, mix and lower performance of our international operations contributed to a margin decline from 14.3% last year to about 3.9% this year.

If you flip the slide 13, plumbing product segment. That segment was down 7% in the quarter and reflected lower sales volume in North America both at retail and wholesale which was partially offset by selling price increases as well as reduced local currency sales of international operations. Those volume declines certainly contributed to a decline in margin from 11.6% to 10.9% but the more important aspect in this particular quarter was the fact that we do, in this segment, have about $7 million of restructuring and related costs and charges of which about $6 of which are international. If you were to pro forma this segment, in terms of adding back charges that we had last year along with the charges that we incurred this year, the margins would have been pretty comparable, 11.9% to 11.8%. And I think even with that volume decline we experienced, I think that is indicative of some of the work that the fellows have been doing to rationalize the business and we're really starting to see a little bit of benefit from that in the plumbing segment obviously.

If you go to slide 14, installation and other services. This segment was down 29%. As I am sure you are aware, this is tied basically 100% to new home construction. Operating profit was down, reflecting the lower sales volume, lower selling prices and increased bad debt expense. I would say in this segment, particularly when you compare it to other entities that have similar footprint, if you will, we continue to do a very good job of rationalizing this business. Even with a 29% volume decline, I think our decrimental margin was only about 27% in this segment. The folks continue to do a good job rationalizing the branch locations as well as our product portfolio.

Move to slide number 15, decorative architectural products. Sales in this segment were down 4%. That reflects lower sales at retail for both paints and stains and builder's hardware. That volume decline along with higher material costs and program related costs for the builder hardware portion of this segment contributes to margin decline of 24.4% last year, down to 21.1% in the third quarter of 2008.

In our last segment on slide number 16, other specialty products. Sales were off in this segment 19%. That really represents sales to new home construction both in the wester part of the United States and for the UK, United Kingdom, window business which is pretty heavily involved with new home construction in the United Kingdom. The lower sales volume under absorbed fixed cost as well as increased material cost contributed to a decline in margin from 14.5% to 8% in the third quarter of 2008.

Now, I want to moved to slide number 17 and talk about our guidance for the full year. I would like to start by pointing out that forecasting in the current environment we are in is extremely challenging. As we indicated in the press release, since mid-September we have seen a significant fall off in terms of sales activity and most of that has been related to our European operations as well as our repair remodel activity in terms of North America and really evidenced of a slowing consumer. As we indicated, we expect sales to be off 20% in the fourth quarter. In October, which obviously is not closed yet, appears to be tracking pretty consistently with that 20%. We continue to believe that housing starts will be in a 900,000 to a million new starts in 2008. That is versus a million three last year but at this point in time we are seeing some additional slowing in new home construction.

I think the best way to maybe think about our guidance is to go to slide 18 which really is set up to help you understand the change in our guidance from the previous guidance. Back in July when we met with you we were anticipating that our earnings would be somewhere in the neighborhood of $0.50 to $0.65. Since that point in time and really driven by the late third quarter and fourth quarter declines in sales, we currently anticipate that we will see an additional sales decline from what we expected back in July of approximately 3%. That equates to $325 to $350 million in full year sales and when we apply a contribution margin to that of approximately 35%, that equates to about $0.20 plus or minus in terms of earnings per share.

Now, in terms of contribution margin, we have seen the decrimental margins on sales declines increase a little bit in the last couple of quarters. I think that's really indicative of some of the variable costs in our cost structure having sort of semi-fixed application, if you will, in terms of certain areas like customer care, customer service, that type of thing, so we could be higher than the 35%. Again, we are doing everything we can to manage through that. In addition to that volume decline, we also have additional costs and charges that are additive to where we anticipated being back in July. I mentioned the litigation settlement, that is about $0.02.

Back in July, we indicated that we anticipated having rationalization related costs and again these relate to plant closures, severance as well as ERP implementation projects we got going. We anticipated those would aggregate about $48 million, that is about $0.08 or $0.09 earnings per share. We currently anticipate giving some of the actions that we have taken, in terms of plant closures, that that is going to be more like $70 million. Again, that is just reflective of what we have currently undertaken. We continue to review the business. It is possible that we could have some additional costs and charges related to restructuring activities as we work our way through the fourth quarter.

In addition, we expect an additional penny of bad debt expense, and then the currency losses and financial asset impairment we had in the third quarter is a penny. And the other side of that is because of our decrease in earnings for the full year, we currently estimate that the impact of the increase in our tax rate for the repatriation of dividends will now be $0.18 as opposed to $0.19 in the previous guidance. When you roll all that together, that suggests about $0.27 decline on a net basis from where we were back in July and again that could move a little bit depending on the volume decline and the implications from a contribution margin. That kind of gets you in to where the change relates to the $0.50 to the $0.65 down to the $0.25 to $0.30. Would want to reiterate that we still anticipate having a strong year in terms of cash flow generation. Back in July we estimated about $640 million. We currently estimate about $600 million for free cash flow before dividend in 2008.

Slide number 19, want to point out from a liquidity standpoint that we did end the quarter with a billion dollars in cash on the balance sheet. We did pay $100 million of debt in October as we indicated previously. I think our expectation is that we ought to end the year in a very strong cash position. I would guess it will be around $1 billion plus or minus. We also have $2 billion of unused bank lines which expire in 2011. Basically, we have available under those lines today given our covenant structure $1.5 billion of borrowing opportunity.

The bank line does have two covenants. One is a debt as a percent of total capitalization which has to be less than 60%. At 52% total debt to cap at the end of September, we have $700 million of cushion related to that particular covenant. There is also a net worth test and that gets reset every year end at 70%. And that gets reset every year-end at 70% of [1231] year-end net worth and at the end of September we had in excess of $900 million of capacity relative to that particular test. Importantly, these two covenants, there is no cross default provisions or impact on any of our other outstanding debt issues. I would remind everybody that we have not borrowed on our bank lines for at least the last seven or eight years. So I would point that out.

On slide 20 we listed our debt maturities going forward. As you can see, there was $100 million due in October. That has been paid. The next maturity is in March of 2010. We have approximately $300 million of floating rate debt due at that point in time, but the only significant debt outstanding in terms of maturity is $850 million in 2012. Again, I think we have got those maturities spread out nicely and particularly given the current operating environment we are in we don't have a lot of debt due again until 2012.

In terms of capital allocation, I wanted to talk a little bit about that on slide number 21. As we said in the past, our focus from a capital allocation, our priority, is to continue to invest in the business. As we go through some of these calls and some of the discussions with investors, we do spend a lot of time focusing on the right sizing of the business, the difficult environment we're in, the actions that we're taking to address that. I think at times that really masks some of the really positive things that are going on inside of Masco. We have some really strong initiatives around brand building, voice of customer, quality initiatives to support our brands. We continue to right size our supply chain and scale our supply chains. Donny has talked about that in past calls. Putting a lot of emphasis on innovation. In fact, some of you may have seen some of the new ads that have out on the Delta's Diamond Seal technology. They have a program, See What Delta Can Do, which we are really excited about.

We continue to look at sustainability as it relates to our products from a green perspective. There is a lot going on inside that we think is very positive and we are really anxious to share that with you at the Builders Show in January where we will be at our booth as well as at a show home. I will talk more about that when we wrap up this call. Really want to make sure that shareholders know that there is a lot going on outside of just really trying to deal with some of the challenges that we have had in terms of some of the volume declines.

We continue to put a lot of focus on working capital and cash flow. The share repurchase program, I mentioned that we repurchased a million shares in July. That is on hold at this point in time for the near term. Obviously liquidity and dividends are on top of mind for investors and we certainly recognize that. Our Board recognizes that and that's why we increased the dividend for the 50th consecutive year. That really reflects the fact that we do have a strong cash position, that we expect to generate a lot of cash in 2008 and that we continue to believe that the long-term fundamentals and business prospects for Masco are positive. As we have stated many times in the past, want to remind everybody that our first priority obviously from a capital allocation standpoint is investing in the business and second is to fund our dividend. With that, Pam, I think we want to open the lines up for Q&A. I want to remind everybody I am joined by Donny DeMarie, our EVP and COO, and Richard Manoogian, our Executive Chairman.

(OPERATOR INSTRUCTIONS) We will take our first question from Bud Bagatch with Raymond James.

Good morning, everyone, this is actually Chad filling in for Bud. Can you hear me okay?

Yes. Hi, Chad.

You talked about sales kind of falling off at the end of September and continuing to be difficult in October which, unfortunately, is a sentiment we have heard echoed from a lot of our other consumer oriented companies. Could you, I guess specifically in regard to key retailer sales, could you put some numbers behind that for us? What were the trends like in September versus the quarter? Did it actually worsen in October or how should we think about that?

I don't really have any specific numbers around that for you, Chad. What I would say is what we saw in the second half of September pretty much across the board from a repair remodel standpoint has continued into October. The one exception there might be pain. Pain was a little bit stronger in October than it would have been in late third quarter. Otherwise pretty much the same kind of scenario. Again, as we said before, that tracks -- October pretty well tracks with the 20% decline that we estimate for the fourth quarter at this point.

I think you said earlier bad debt expense was $6 million in the quarter and I believe on the last call you said you internally planned for around $20 million for the year. Is that still sort of the case and could you maybe comment on the financial health of your customers?

Sure. I will, before Donny talks about what we do to monitor bad debt. Bad debt was up about $6 million in the quarter, and originally this year we anticipated that our bad debt expense would be pretty comparable to 2007. We originally estimated on the builder's side of the business that we would be around $22 million. On a company-wide basis, I am not sure we gave that number out but I think we estimated at that point we would probably be around $26, $27. Those are pretty comparable with where we ended up last year. At this point in time, it looks as though on the builder's side of the business we will be around $24, $25 million in total in that from a company wide standpoint will be around $34, $35. And that would be about a $2 million increase on the builder's increase on the builders side of the business, Chad, and about a $7 million increase all of which that took place pretty much in the third quarter. I will let Donny talk a little bit about what he and our CFO, John Sznewajs do on an ongoing basis to monitor our receivables with our builder customers.

Hi, Chad. Just wanted to say John Sznewajs, our CFO, and I review monthly the top 100 builders accounts receivable portfolios very much engaged to look at their credit worthiness. Our business units are focused on it as well as our group president. It is a difficult environment. We have seen an increase in some bad debt exposure. We think we managed it well and think we have it under control. I would say, too, Chad, we deal with builders of all size and deal with a very large number of builders, so we don't have any real substantial concentration in any one particular builder from a receivable standpoint. So that's pretty well disbursed in terms of risk management there.

Thank you very much, guys. Good luck for the rest of the year.

We will take our next question from Michael Rehaut from JP Morgan.

Hi. Thanks. Good morning, everyone.

Good morning, Mike.

The first question is just on the restructuring actions. You kind of summarized what you have done more cycle to date and said that you are going to take about $70 million now for the full year in terms of expense. I was wonder, kind of two parts to this if I could and as my first question, I guess. One, what did you do in the third quarter itself in terms of actually closing down plants and branches? And if you look at the $70 million that you are spending this year, what do you expect that to result in terms of cost savings and when do you expect to see that hit?

Okay. In the third quarter, Mike, we did announce the moth balling of the Ocala plant in our cabinet group and as well as the closure of the [Adrian] plant in our builder cabinet group. Again, that will be phased in late first to early second quarter of next year. So we did recognize some costs associated with that. In the window business we had one plant closure there and the redirection I think of another plant to a distribution center. So, we have got that activity going on. And in Europe we had, as I mentioned, particularly in the plumbing segment several actions to address head count as well as manufacturing and distribution footprint. So all of those too many place in the third quarter. There is typically a lag effect in terms of when we see the benefit. And we have not at this point, Mike, done anything to quantify when we would expect to see that going forward, but rest assured when we look at these activities we do look at them from a savings standpoint and I think the best example we can kind of give you is when you look at our plumbing business, I think investors have been pleased as we have with the performance of plumbing over the last three or four quarters from a return on sales standpoint. As you know, we got much more aggressive in plumbing much earlier than some of our other businesses because even when business was pretty good a couple of years ago, we weren't performing at a level that we anticipated or really expected in the plumbing segment and we talked a little bit about some of those changes. I think you are starting to see that kind of flow through the system at this point in time. We would expect to update investors probably some time next year in terms of some of the changes that we made Donny has talked in the past and may want to talk about some of the modifications we are doing in our cabinet manufacturing as well as some of the activity that is going on in the installation business.

Yes, Mike, if I can. MCS and particularly our installation segment, continues to reevaluate its footprint as well as its product portfolio and those activities are ongoing. They will continue to be ongoing. As the market continues to find new lows, especially on the housing side, it really forces different decisions and we are being very careful to make decisions that make sense today but don't impact our ability to create some incremental leverage on the way back up. They are getting difficult, but we are trying not to leave markets and really leave intact an organization that we think are going to be able to capitalize on the way up.

On the supply chain, when I look at our manufacturing footprint, as we talked about before, we really see this as being able to build what we are calling as flexible but scalable supply chain. Instead of picking a housing start number and building our capacity to that number, we are really looking at a range. As we have communicated previously, we see that sweet spot for us between 1.2 and 1.8 million and be able to optimize our performance in that range. We challenged our group to look at it and think about capacity differently. Some of the activities going on, we talked about the builder cabinet group where we adopted a common architecture on moving towards being able to build both our Quality and Merillat brands in any plant within the group which has allowed us to take some of the actions we recently have taken. We also are working to finish the orders so we have less dependency moving components around.

It makes a lot of good sense. Doing something very similar at Milgard where we announced a couple of closures in the North American window facility and starting to look at that production capacity a little bit differently. So we're excited about the activities that have taken place already and we see we still have more work to do and more opportunity.

And to that point, Mike, we will continue to assess our business and are continuing to assess our business given the dramatic declines we are seeing in volume. I wouldn't want want you to think there won't be some additional actions that we will certainly be looking at going forward. The other thing is, as we said before, as Donny alluded to, it is tough. We have got to address the current market conditions but we have got to make sure we are in a position from a long-term perspective that we don't lose opportunities when the markets return. We don't want to do something today that saves us a dollar that might cost us two or three when the markets come back at some point down the road.

Right. I appreciate that detail. And along the line of that thought process, in terms of kind of step by step but not, I guess to use the political phrase a scalpel but not a hatchet, can we still expect kind of this modest or moderate improvement in installation services? You had a slight loss in the first quarter, kind of scrap back in to marginal profitability in the second and it's a little bit more in the third. Kind of continuing to see that modestly improve and not necessarily a step function back in to a high single digit or low double digit?

Mike, this is Donny. I think what happened at installation services is we had the right forecast in the housing market for really the first seven, eight months of this year was relatively stable at a lower rate. So they have been able to catch up. What you saw in installation services is they have been able to adjust their footprint and their product portfolio to meet their demand. The problem we have going forward is we have a significant headwind going forward. And that is we see another leg down in housing and how far down, we are still going through our process of determining what the start level looks like or at least our projection looks like in '09 and I would anticipate that as we go from our current projection of 900,000 to a million for '09 and come out with some new guidance related to where we think housing is going to be in 2009, those will create new changes for installation services because we will be once again having to assessing that footprint and product portfolio to really address a much lower housing start number. So if housing starts continue to go lower as we see them, at least as we see them directionally going for today next year, I would expect that creates some challenges for the installation services group to then adjust their footprint once again.

One last question, if I could. Technically on the covenants. You mentioned that the net worth covenant test was 70% of equity, am I to understand. And if I did that calculation and you come up with $2.6 billion, is that only a $600 million cushion? I thought you said $900 million. Am I looking at that right?

Yes. What that basically is, Mike, and again I don't have the covenant analysis in front of me. Essentially what happens is at the end of the year we reset that target at 70% of ending net worth. And so that would have been set at the beginning of this year. And the reason we had that provision in is because of the share repurchase program to kind of take that into account. Again, based on what I saw just recently, we had $700 million cushion at the end of 9/30-- excuse me, $900 million of cushion. I had the other covenant in my mind here.

Isn't 70% of 3.7 more like 2.6?

Yes. If that's the way the calculation works. But I don't have the actual calc right in front of me.

Maybe we can go off of it off line.

Yes, I guess it goes backs to 2006. What we could do, Mike, we could tighten that up a little bit for you on a subsequent call.

Okay. Thanks.

900 is the right number at this point.

Our next question comes from Ivy Zelman with Zelman and Associates.

Good morning, everybody. Two easy quickies and then a bigger one. Hansgrohe in the quarter, roughly what percent of the profits? Was it more than two-thirds of plumbing? Secondly, cash. The $1 billion of cash that you have on hand, how much is that is tied up in Europe that you wouldn't be able to access? And, three, your impairment on goodwill analysis related to the $4 billion. How much of that is related to MCS and what is in terms of the analysis would you do to test if the goodwill needs to be charged off?

Okay. First of all, we wouldn't be giving a percentage relative to Hansgrohe, but it as major contributor to the segment as is Delta Faucet. We do have some businesses in that segment that aren't contributing a lot. Again, we mentioned some of the restructuring charges related to those in terms of the plumbing segment. Second, relative to cash, basically in the $1 billion we estimated that we need about $350 million of cash to both operate the business and recognize some of the cash that is somewhat constricted in terms of European cash. We would have access, Ivy, on that basis to about $650 million but, again, we do have unused bank lines if there is a temporary issue relative to cash. As we go into '09, for example, where working capital might ramp up in the early part of the year. I am not really overly concerned about that.

In terms of the impairment test question you asked, I think we have about $1.8 billion of goodwill associated with the installation business. Total goodwill on our balance sheet is about $4 billion. We have $1.8 billion as I said related to installation. And really, the key is analyzing that will be the five-year forecast we put together. We run that through a discounted cash flow model and in terms of how we look at that as we project it out it is obviously going to be important but my sense is that as we look out to 2012, 2013, I think our feeling would be, again I don't have the assumptions in front of me right now, but we ought to be looking at a much more normalized situation in terms of new home starts. I would guess at that point we would be somewhere in the 1.3 to 3.5 kind of range and obviously hopefully a much more robust situation relative to the consumer.

And our next question comes from Peter Lisnic with Robert W. Baird.

Good morning. It is actually [John Hofhelter] in for Pete. Can you guys just talk about within plumbing, is there a currency benefit on the margin? Just with a dollar appreciating as much as it has in kind of the last 60 days, how much of that is what is happening to your 4th quarter out look or for next year?

No. Margins are not impacted by currency. Typically, the P&L is translated at an average currency rate for the quarter. It's weighted by month. Typically, your sales and your profit tend to come across at the same translation when you translate to foreign currency. In terms of the fourth quarter, we do have based on where the Euro is today, and we also have Danish kroner and pound-related businesses, but those are relatively stable. The Euro is down about 11% today versus the average rate for last year's fourth quarter. That would contribute probably somewhere around $50 million of decrimental sales in the fourth quarter if that stays where it is.

Okay. And is there an operating profit to that impact falling off?

Yes. That would be at the normal margin for our European businesses and those margins have tended to be, even though they were down in the third quarter, have tended to be around 10%. If we lose about $50 million of sales related to currency translation, we would drop about $5 million of operating profit on basis.

Thank you. And then as a followup. Just on the comment about pricing pressure. And then your comment about kind of commodity costs continuing to go up in the third quarter with commodity costs coming off a bit. Has your outlook either for the fourth quarter '09 changed a little bit?

Well, we are still experiencing, when we think about last year, we still are experiencing higher commodity-related costs. And that is particularly true in terms of petroleum based inputs for paints and stains as well as resins for even vinyl windows. That continues to be somewhat of a challenge even though oil is down. Typically, there is a couple of quarter lag for us to see the benefit, if you will, of lower commodity of costs and we currently continue to pursue pricing related to cost increases and I think sometimes we get a little hung up on just raw materials. Obviously there are other aspects of the business, everything from insurance, freight, transportation and other expenditures that certainly work into that equation as well. So, I think it would be a couple quarters before we see any relief if commodities stay where they are today.

Our next question comes from Nishu Sood with Deutsche Bank.

Thanks. Good morning, everyone. Just a followup there on the commodity cost issue. I was just wondering if we could get an update. You have given us some good quantification of that over time. I think it is about $650 or $700 million in cumulative commodity cost impact that you described and pricing actions, I think you said, have recovered about $500 million of that. I was just wondering if you could give us an update on those figures.

Yes. What you're referring to for others is that when we go back to first wave of commodity cost increases in late '04, early '05, as we said in the past, our reaction time was relatively slow and we really did not get on top of that as quickly as we should have from a pricing productivity work with vendors standpoint. We have indicated that even though we were much more aggressive and much more timely in late 2005, early 2006 and believe that we have implemented probably on a gross basis $550 to $600 million of price increases, we still had a negative carry of $150 million plus or minus. I would guess today, Nishu, we are not necessarily like we did in the past, but as we said to folks, we have done, we think, a pretty good job of staying current.

We are still in the process, as I said a second or two ago, of continuing to pursue pricing increases in certain areas where we do have significant cost increases and will continue to do that but, generally speaking, there is a little bit of lag but we are pretty much on top of it. So, I would say that there still is probably historically a negative carry for us. I would be a little hesitant to want to quantify it now because some of that would have related to insulation. Insulation costs have come down over time. Our pricing has come down. There is some balancing there. There is no question in my mind that we still have a bit of a negative carry and it is probably $100 to $150 million would be my guess.

Okay. Great. That's very helpful. Follow up question on the business rationalizations. The environment that has been the background for your business rationalizations to date has been principally the housing downturn. More recently, obviously you have seen an intensification of weakness in the US remodeling business and your European businesses. What implication does that have for your restructuring activities? In other words, does it imply additional cuts? Does it imply cuts or consolidation in perhaps different areas, less of a focus on contractor services and more of a focus on other areas? How does that change your thinking on business rationalizations?

Well, I think as we mentioned earlier, Europe is another area where we have seen some decline. We did talk a little bit about having about $9 million of restructuring related costs related to activities in Europe. I would also tell you that we have seen some fairly significant declines in our cabinet business at retail that have really extended over a couple year period. We started to talk about consumers backing away from high ticket large repair remodel activities probably a couple of years ago. In our rationalization there has been a fair amount of work done on the retail cabinet group. And we have also talked about plumbing in the past.

I would say that I wouldn't want to characterize or necessarily agree that most of what we have done has been driven by the change in new home construction. It has really been driven by a lot of factors, including dissatisfaction with the performance of our plumbing related business. As you might recall, even when times were really robust from a top line standpoint, our performance was not where we needed to get. So we have stepped up wherever it seems as though it makes sense and will continue to look at our businesses across the board for process improvement activity, opportunities to improve process implementations, those type of things. So, I wouldn't necessarily want to say that it has been isolated to the new home site.

One quick housekeeping issue, is the tax issue going to carry in to 2009 or will it end in 4Q?

No. It will not carry in to 2009 but I would want to mention to investors that with some of the new accounting rules, there is a lot of volatility in tax rates from quarter to quarter in terms of having to recognize what are called discrete items and so it gets a little bit tougher to actually forecast tax rates because you have to recognize certain things that in the past where you could make some different judgments and kind of smooth those out. They do affect quarter to quarter now. We would not anticipate being in the position. This is really driven more by the repatriation of earnings.

Before the next question, operator, I think I would like to go back to a Mike Rehaut question earlier in terms of our calculation and, Mike, and for the rest of the group. The way that calculation works, Mike, is we take 70% of our net worth at the end of 12-31-07. That was $4.25 billion and 75% of that is about $2.8 billion, and we currently have [37] plus of net worth. That's how we get to the $900 million. You might have been using a quarterly number when you were calculating the 70% would be my guess. Anyway, just wanted to throw that out there.

Next question from David Goldberg at UBS.

Good afternoon.

Good an afternoon.

Tim, I was wondering if you could give us some more details. I don't mean to dwell on the commodity cost issue. You were saying you were still pursuing some increases in commodity costs and some price increases based on higher commodity costs. I am just wondering if you can give us more detail and more color. Can you get a little bit more specific on that? And maybe with that talk about how successful you have been and how that's changed over the past let's say with three or four weeks with what's going on in the broader economy?

We have been successful. As I mentioned earlier, David, going back into early '06 we have been very successful. And for the last two and a half years I think we have done a good job there, and I wouldn't differentiate anything that has taken place in the last couple of quarters. I am not aware of anything that would suggest that we will be less successful going forward. We don't like to talk about the specific customers, generally, in terms of pricing.

But I think you can glean from some of the commentary. We are still at a situation where brass is at higher levels than it was last year at this point in time notwithstanding the fact that copper has backed off pretty dramatically. We also talked a little bit about petroleum based resins that goes into paints and stains as well as vinyl for windows. We have seen some steel price increases that affect our fastening tools. Again, there are some things in Europe that would impact commodities relative to glass. So we continue to pursue those where we think they make sense and will continue to do that.

I appreciate the color. Then I guess the follow up to that is based on what you have seen historically, when we get a couple of quarters out and you start to see the benefit of declining raw material costs, which I think you commented on that before a couple quarter lag, how much of that do you think historically have you guys kept versus having to pass on?

Well, that's always an interesting conversation obviously with our customers and there is a lot of facets to the relationship. We tend to focus on price quite a bit and other aspects when we look as advertising programs, promotional programs, those types of things. And we mentioned earlier, we sort of started behind the 8-ball, if you will, relative to having a negative carry relative to commodity costs. So I think when we look at our cost structure today, I think we have got a better opportunity or hopefully a very good opportunity to kind of hang on to the pricing that we currently have in place.

Thank you.

The next question from Stephen East with Pali Capital.

Good morning.

Hi, Steve.

If we look at the CapEx, what would be the minimum required that you all would need to spend?

We are going to finish Steve, this year probably around $200 million give or take in 2008. I would guest the minimum that we would have to spend would probably be $150 million just in terms of maintenance. There is some in there for ERP systems, a little bit of capital for that, but I would say probably $140s to $150 sort of a maintenance-type level.

As we have said in the past, over the course of several past years and I guess it is kind of obvious given current market conditions, but we have added new facilities in cabinets, paint, plumbing, windows. And obviously we are not running at a very efficient rate currently relative to that. We would continue to be in really good shape relative to bricks and mortar. Depreciation and amortization are about $240 million on an annual basis.

Okay. Not asking you to, well, if you, what scenarios would you look at would you say would have to occur for you all to seriously consider cutting the dividend? I realize that is not a forecast. What would have to unfold in your mind?

I think probably the biggest element to that, Steve, would be our perception of business prospects in 2010. We know we are reasonably certain that 2009 is going to be pretty tough, especially the first half. If there is a stimulus package put in place at the federal level, a lot of us seem to think that's a high probability, we think that would bode well obviously for the latter part of 2009 but certainly in to 2010. The key for us is we work our way through next year. Again, as I mentioned earlier, we expect to end with a healthy cash balance. Even though conditions are going to be tough next year, I would be real surprised if we don't have positive cash flow before the dividend. Again, we will talk more about that in February. I think the gaiting issue would probably be our perception of what 2010 looks like.

Okay. Thanks a lot.

Operator, I think we can take one more question.

All right. That comes from Keith Hughes with SunTrust.

Thank you. Follow up on the last question. Internally in Masco, do you work on a three year or five-year planning process and does it occur at the end of each calendar year? How does that work?

We work, Keith, on a five-year planning process. And that really starts for us typically in the spring. We will start to work on that. And, again, we have really changed that process over the course of the last year or so. Putting a lot more emphasis on strategic planning as opposed to in the past we spent an awful lot of time working on the budget. So we kind of flipped that upside down, the budget for the coming year with a lot more emphasis on strategic opportunities, trying to identify out-of-the-box thinking for breakthrough opportunities and that type of thing. That process really starts in the spring and kind of culminates in the fall with the delivery of that plan and the review of that plan typically in November.

To follow up on the last question, if you -- as you develop these plans coming to the view point that you are going to under earn the dividend in 2010 based on market factors, even though you could pay it, you would still, in a potential scenario, under earn it. Would that be enough for the Board to reconsider the dividend level?

If we are in a cash position that allows us to continue to pay it, we will pull out basically all stops to try to make that happen. That is something that we recognize as very important to investors and I think from a cash management standpoint, we would try to do what we can do. Given that investing in the business is our first priority to do everything we could to keep that going.

Okay. That scenario, you have done over the last five to six years you've done an excellent job returning cash to shareholders in a fairly balanced format. It appears as though cash is still going to come back to shareholders, but it's going to be all dividend for the next several years.

I wouldn't exclude future share repurchases. I think that certainly at this point on a near-term basis we think the dividend is more important than share repurchase. I would think as things get back into a more normalized operating environment that we would certainly consider the application of our excess cash. Keep in mind that's always been about excess cash in terms of potential future share repurchases.

All right. Thanks a lot.

I would like to just make a couple closing comments, Pam. Again, I would like to thank everybody for joining us today. As we mentioned, we continue to aggressively manage our cost structure and have worked hard over the past several quarters to offset the impacts of the current economic environment on our business. While these actions have been difficult, we expected additional actions to address current market conditions will be even more challenging as we balance what we can do to mitigate the impact of current market conditions on our near-term results and the implications these actions may have on our long-term performance.

Although we expect market conditions over the next several quarters to be very challenging, we continue to be confident that the long-term fundamentals for the new home construction and home improvement markets are positive. We believe that our strong financial position, including cash of over $1 billion dollars at 9/30/2008, modest debt maturities until 2012, unused bank lines and our ability to generate strong cash flow together with our current strategy of investing in leadership brands, innovative growth, flexible and scalable supply chains along with a strong focus on cash flow to fund out dividend will allow us to drive long-term growth and incremental leverage for our shareholders.

In these challenging times we are extremely proud of the Masco team worldwide as they focus on driving solutions for our customers and value for our shareholders. As I mentioned earlier, there is 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. 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 for living 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, and we will get more information out to you over the next few weeks. We hope that many of you can join us. Thanks again for being on the call.

Again, that does conclude the conference for today. Thank you for attending, and have a wonderful day.