馬斯科 (MAS) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2008 fourth quarter conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received the press release and supplemental information, they're 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 the note at the 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 opened for analyst questions. If we are unable to get to your question during this call please call the Masco Corporation Investor Relations office at 313-792-5500.

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

Thank you, and thank all of you for joining us today for Masco's 2008 earnings call. Joining me are Richard Manoogian our Chairman; Donny DeMarie, our Executive Vice President and Chief Operating Officer; and John Sznewajs, our CFO. And if you would please flip to slide number three, I would like to start with a quick overview of the fourth quarter.

Fourth quarter was a continuation of what has obviously been a very difficult operating environment for the Company. Our sales were down 25% in the quarter. Earnings per share excluding non-cash impairment charges for goodwill and other intangible assets were $0.18 loss and that compares on the same basis with $0.19 of profit, if you will, per share in the fourth quarter of 2007. On an as reported basis, including the goodwill impairment charge, loss would have been $1.45 in the quarter. We'll reconcile earnings per share, talk a little bit about earnings per share in a couple slides. If you would please flip to slide number four.

I mentioned the impairment charge for goodwill and other intangible assets. That aggregated $467 million pretax, $445 million after tax. And I would point out that the majority of that charge related to businesses in the United Kingdom. In the cabinets, plumbing and other specialty products area.

If you would flip to slide number five, I mentioned EPS at $0.18 loss for the quarter. That's a little bit above our guidance. Our guidance that we gave out for the full year, which you could have backed into the quarter during our third quarter conference call, was for a loss of $0.06 to $0.11 in the quarter. We did have $0.08 of rationalization related charges in the quarter, that was $0.02 more than we anticipated when we talked with investors back in October. We also did not anticipate impairment charges for financial investments or currency transaction losses. Together, those three items, the additional $0.02 of rationalization charges, the impairment charges and currency transaction losses aggregate $0.09 and had we not incurred those, we would have been at about a $0.09 loss which would have put us right about in the middle of the range that we had provided earlier. We also anticipated that sales in the fourth quarter would only be down 20% versus the 25% that we actually incurred.

If you'll flip to slide number six, on a full year basis, our sales from Continuing Operations were down 17%. And that equates to $1.9 billion for the full year in terms of reduced sales. Again, from an EPS standpoint, excluding the impairment charge for goodwill and other intangibles, earnings per share would have been $0.18 for 2008 on a full year basis and that compares on the same basis to $1.59 in 2007. Including the goodwill impairment charge, we would have had a loss for the full year of 2008 of $1.08.

We did end the year with over $1 billion of cash. During the year, we did complete a divestiture plan that we announced I think in February of last year, generating about $174 million of proceeds. And that was completed in the third quarter as we previously communicated and we also had a relatively strong year from a cash flow standpoint, generating $560 million of free cash flow before dividends.

If you would flip to slide number seven, mentioned the $0.18 of earnings, excluding the goodwill impairment charge. Wanted to give you a flavor for some of the major items that impacted our earnings in full year 2008 for your modeling purposes. EPS does include $83 million of rationalization charges, that's a pretax number. That equates to $0.15 a share. Impairment charges for financial investments were $55 million pretax, that's about $0.10. Currency transaction losses were $31 million pretax or $0.06 a share. In addition, we had a negative impact from an increased tax rate as we mentioned at the beginning of the year. We did repatriate some earnings from international operations to take advantage of foreign tax credits and as a result, our tax rate was about $0.18 higher than it would have otherwise been at a 36% normalized rate. If you think about all of those adjustments, and the $0.18 that we actually reported, in total that would get you to about $0.65 in thinking about a run rate, if you will, for 2008.

If you would flip to slide number eight, please, this gives you a perspective of our consolidated financial performance in terms of operating margin and sales. Sales were impacted both in the fourth quarter and for the year by the continued decline, the accelerating decline in new home construction and repair, remodel markets that have affected us both in the United States and in Europe. Having said that, I would point out that our -- one of the other key metrics for us, sales to key retail customers were down 14% in the fourth quarter. Every quarter during 2008 we were down double digits in terms of this important metric and finished the year down 12% in terms of sales to key retail customers.

I would also point out that our mix has changed in terms of sales to new home construction versus repair, remodel. We currently estimate at the end of 2008 that we were at about 35% for the full year in terms of sales to new home construction versus about 40% in the previous year and if anything, that ratio is getting smaller or the percentage, if you will, of new home construction related activity is getting smaller. Operating loss or excuse me operating margins were down 460 basis points from 10.2% to 5.6% and that's a GAAP number, excluding the goodwill impairment charge. We had obviously negative impact from the volume drop in terms of our operating profit. We also had under-absorbed fixed costs, a less favorable product mix and a couple of our segments increased material costs which were partially offset by selling price increases.

If you flip to slide number nine, this gives you a snapshot of our North American operations with the fourth quarter down 24% and the full year down 19% in terms of sales, with operating profit off 480 basis points from 12.2 to 7.4%.

If you flip to slide number 10, this gives you a little summary of our international operations. The fourth quarter was down 26% for our international operations. And in terms of sales. And the full year was off about 6%. In local currencies, the fourth quarter declined 14% and on a full year basis, sales in local currencies were down 10%.

We did see a significant swing in the fourth quarter in terms of currency translation. We had a negative impact from the strengthening of the dollar in the quarter of about $70 million and on a full year basis, sales were enhanced by $76 million in terms of foreign translation. For our international businesses, operating margins on a full year basis were down from 9.7% to 6.6% and that's 290 basis points. And that includes a fair number of rationalization related charges. I think in the fourth quarter alone we had about $15 million related to our international businesses.

If you flip to slide number 11, as I mentioned earlier, I mentioned a little bit about the rationalization costs and mentioned that we incurred about $83 million for plant closures, headcount reductions and other initiatives that we've been pursuing. That compares with $79 million in full year 2007. And obviously we've had to make some very difficult decisions, take some very difficult actions to address the environment we've been operating in. As we have done, we'll update some of the activity that has taken place at Masco since late 2006 when our markets started to decline. Since that time frame, we have closed 17 manufacturing facilities. And that includes plants that were either announced for closure or actually closed. Six of those have taken place in 2008. In addition, we've closed over 80 facilities in our installation related business and have reduced our headcount by 23,000 people including 13,000 -- about 12,000 or 13,000 in 2008.

I would like to point out, I think we've mentioned this in the past, that one of the other actions that we've taken is a restructuring of executive compensation to put much more emphasis on variable compensation or pay for performance. That includes base salary reductions on a relative basis including a freeze for a two-year period and I would point out that we did not from an executive perspective earn any bonuses in 2008.

If you flip to slide 12, gross profit in 2008 was down 250 basis points, compared to 2007, down from 27.3 to 24.8%. And again, that reflects the significant reduction in sales volume as well as the other items I mentioned earlier, the under-absorption of fixed costs, et cetera. In terms of SG&A, although our actual spend was down $144 million, SG&A as a percent of sales has gone up from 17.2% to 19.1%, about 190 basis points. We did have about a $20 million reduction in stock-based compensation during 2000 -- or for 2008, compared to 2007. That was offset by increased bad debt expense, litigation expense, both which approximated about $10 million and in 2007 we had a gain of $9 million on the sale of a building. I would also point out that although advertising and promotional dollars are down '08 versus '07, the percent is up somewhat, reflecting some of the new product roll-outs that we've got in a couple of areas.

If you flip to slide number 13, this gives you a perspective in terms of working capital management for the year and you can see that our working capital defined as receivables plus inventories, less payables, went down from 15.4% to 14.7% in comparison to the prior year. I would point out that the drop in the dollar late in the -- excuse me, the strengthening of the dollar in the fourth quarter did contribute about probably 40 basis points to that ratio. I think you can also see that the day for inventory payables and receivables are pretty much in line with the prior year and where they've been historically and I think that's a credit to our operating guys, Donny and John and the rest of the team have done a very good job in a very tough environment, particularly given the velocity of the sales drop and some of the issues around credit and bad debt.

If you flip to slide 14, this gives you a little perspective of our segment results for the full year. And again, the margins here are GAAP margins without the goodwill or excluding the goodwill impairment numbers. And you can see the fairly dramatic declines in cabinets, installation and other specialty. 20, 29% and 23% for the full year. Those are segments that have a fairly significant content relative to new home construction. In the fourth quarter, cabinet sales were down 27%, plumbing products was down 22% in the fourth quarter, after going through the first nine months down just slightly in terms of sales. Installation and other services were off 36% in the fourth quarter. Decorative architectural was off 5% and other Specialty Products were down 29% in the fourth quarter. And one thing that we've talked a little bit about in the past is that our contribution margins average about 30% in a couple of segments that would include cabinets, decorative, architectural and other. We have seen detrimental margins that are slightly higher than that. The cabinets have been impacted throughout the year by significant drops in volume, under-absorption of overhead as well as some mix related issues, movement towards lower price point products. In terms of decorative architectural, the volume drop along with material costs and some promotional related costs have impacted us there and in other specialty, we've had some material related issues as well as the under-absorption of overhead relative to the significant volume drops.

If you move to slide number 15, I want to talk a little bit about guidance. And needless to say, providing guidance in the environment we're in right now is certainly beyond challenging. Having said that, as we have analyzed our business and reanalyzed our business over the last several months, we currently anticipate that our sales will decline somewhere in the mid-to high teens percent range and to give you a perspective, middle of that would be approximately 16, 17% and that would translate into about $1.6 billion drop in sales. In addition, we anticipate that housing starts for full year 2009 will be in a range of 550,000 to approximately 600,000. And that represents about a 35% drop from the 900,000, slightly over 900,000 that were started in 2008. That puts us in a position where our anticipation is that we will be somewhere around approximate breakeven, to a loss of $0.30 a share in 2009. And that includes rationalization charges of about $0.08 and also increased pension expense of about $0.06 a share. We do believe that we'll continue to generate relatively strong cash flow in 2009 and anticipate that free cash flow after capital expenditures but before dividends will be approximately $300 million.

If you move to slide number 16, I want to talk a little bit about liquidity which obviously is top of mind for investors. We did, as I mentioned earlier, end the quarter with about $1 billion of cash on the balance sheet. We continue to have a revolver in place that expires in 2011 and I would point out that that revolver has no borrowings outstanding at this point in time. The revolver has two covenants and we're going to talk about those in just a second. One is debt as a percent of total cap and the other is a net worth test. As we mentioned in the past, these two covenants have no impact relative to the rest of our debt outstanding. We've got about $4 billion of debt on the balance sheet at the end of December and there are no cross default provisions or other impact in terms of the revolver covenant on any of our other outstanding debt.

If you flip to slide 17, I want to talk about equity first in terms of a fairly significant reduction in the fourth quarter from when we last talked at the end of the third quarter. From that point in time, equity has declined $900 million. That includes the net loss that we incurred in the fourth quarter, which had the goodwill impairment charge in it, as well as a reduction in accumulated other comprehensive income, which is a element of the equity section of our balance sheet. That moved about $300 million plus, driven by two things. One is currency translation, which declined about $174 million and the other is minimum pension liability, the liability increased by $150 million and that really reflects the performance of the investments that we have in our pension fund during the fourth quarter, and both of these elements really arose in the fourth quarter in terms of impact. As a result of that decline in equity, our debt as a percent of total cap, which needs to be under 60%, finished the year at 58%. Obviously, complying with the covenant. The minimum net worth target of 2.8 -- or [2.817] billion, we were able to achieve that but just by $29 million. So we were pretty close on the minimum net worth covenant.

If you flip to slide 18, we'll take a look at covenant status as of January 1, of 2009. There's a couple key points here. One is that we do have an accounting adjustment that increases equity. That's a requirement that we have to reclassify our minority interest that relates to Hansgrohe of $135 million, from deferred income taxes and other long-term liabilities to the equity section which in effect increases our equity by $135 million. That puts us in a position where debt as a percent of total cap goes down to 57%, which gives us borrowing capacity effective January 1, of $486 million or the potential for an equity reduction, which we don't anticipate, of $324 million, which would still leave us in compliance relative to that covenant. The minimum net worth target as we mentioned last time we chatted with you gets reset every December 31. And that reset is 70% of the prior year or the current year total equity.

And as you can see here, that reset puts us in a position where we have $989 million of cushion or head room, relative to that particular covenant. So as of January 1, we're in reasonably good shape with the covenants and I'm sure you'll probably have a few questions about those as we get into the Q&A.

If you flip to slide number 19, this gives you a perspective of debt maturities over the course of the next several years. As we mentioned, we have a $300 million due in March of 2010 and then the more significant debt requirement that we have is all the way out in 2012 of $850 million.

And if you flip to slide number 20, just before we get to the Q&A, I want to talk a little bit about capital allocation. I think that as we've indicated and very consistently we feel very positive about the longer term aspects and dynamics around our business, both in terms of the new home construction as well as the home improvement markets. Having said that, we certainly recognize that we're in an extremely challenging environment at this point in time. And one of the things that has changed pretty dramatically for us over the course of the last three or four months is really our view about 2009. 2009 looks obviously, given the guidance that we presented including the sales guidance, is going to be very challenging and our feeling is that it makes an awful lot of sense for us to focus very much on preserving liquidity, preserving cash, to put ourselves in a position where we can continue to fund our business operations, potentially take advantage of any growth opportunities that might develop over time, and be positioned to handle the relatively modest debt that's due in March of next year.

As a result, management will recommend to the Board that we reduce our quarterly dividend from $0.235 a quarter or $0.94 a year to $0.075 a quarter or $0.30 a year. This will save about $240 million in terms of dividend payments. We continue to believe that the dividend is important for shareholders. We certainly recognize that and but we feel at this particular level, $0.075 a quarter, that's a spot that we think makes sense for us, at least on a near term basis. With that, I'd like to stop now in terms of our prepared remarks and the slide show and move to Q&A. I would remind you that I'm joined by Richard Manoogian, our Chairman; Donny DeMarie, our Executive Vice President and Chief Operating Officer; and John Sznewajs, our CFO.

Thank you. (Operator Instructions) We'll take our first question from Michael Rehaut from JPMorgan.

Hi, thanks, good morning everyone.

Good morning, Mike.

First question has to do with your rationalization efforts and how that relates to the gross margins. You kind of laid out that this has been an ongoing effort and you broke out some of the facilities and headcount reductions in '08 but just seems like the margins are obviously falling, still at a pretty precipitous rate, particularly in the third -- in the fourth quarter, and would suggest that the efforts really aren't enough right now in this environment and I know you've talked before in terms of trying to balance cutting too deep in the near term and stymieing what that would do in terms of hurting the ability to recover, but at the end of the day, we're in a, as you've noted, a pretty prolonged downturn, a pretty difficult spot. I was hoping you could give us some thoughts in terms of, why you haven't cut deeper, given that the reality has kind of set in over the last year, that we're not getting out of this any time soon, and what future plans you might have to really take some more aggressive steps to restructure and return to profitability, particularly in the cabinets, the installation and the other specialty, which are really the laggards here?

Well, I guess I would say, Mike, that I really think that we have been fairly aggressive in terms of the actions that we have taken. As you know, as we indicated, we've closed 17 different plants over the couple-year period, two and-a-half year period we're talking about, and I can't tell you exactly how many of those are in the cabinet segment that you alluded to, but a fair number of them are. The headcount reductions represent about 40% of our North American workforce over that same time period and I think you're also aware and Donny will elaborate on this in a second, but we have been very active in terms of changing the manufacturing footprint in the cabinet section as well as taking a hard look at our manufacturing process in our window related business. In addition to that, we're very actively engaged in rationalizing products that we install, getting out of several diversified products, so I think there's an awful lot under way that has been ongoing and will continue to be ongoing. A fair amount of the rationalization charges in the fourth quarter, I think about $15 million related to businesses in Europe. So I guess I -- I certainly feel that we are at a -- on a pretty good pace in terms of trying to keep up with some of the challenges there. But I'll let Donny maybe elaborate a little bit.

Thanks. I think what's important to understand is that our view related to 2009 over the last 90 days has continued to change. So where we thought we had appropriate plans, given the volume, what we anticipated new housing starts to be in 2009 versus where we're at today is significantly different and as we look at that, it takes us a while, there's a lag period between as we revise those forecasts and then we look at what type of manufacturing footprint do we need to serve, a much lower demand. So if I go back to early planning, we had a much more robust opinion on what we thought 2009 to be. We didn't think it was going to be good but we didn't think it would be down into the 550,000 to 600,000 housing starts. So as we changed our view of 2009, that's opened up a whole different look at how we look at our cost base. So you're seeing us look at manufacturing capacity differently. We're understanding that as you take a facility down, you have to look at the entire supply chain because it's not so easy just taking costs out, have you to modify the supply chain. So as you take fixed costs out you'll be able to redirect the supply chain to serve. You can rest assured we're being very, very aggressive. The only thing that in my opinion when you look at a snapshot of end of year '08 and look at some of the gross margin impact of the underabsorbed overhead which is really the biggest factor in there, you have to understand that our view of '09 has gotten progressively worse over the last 90 to 120 days.

I appreciate that. I guess what I want to followup with on that is just that and Tim you've kind of said hey, we've done different things over the past year, we haven't stood still but I think a real problem here, an issue that the Street is having including myself, is that there's a real lack of specificity in terms of what you've done and what the benefits of those actions are. And, so to kind of talk in generalities but not give the detail of what each of those actions are on a more granular level in each of the different segments and also the lack of what the benefits are, I mean, I think that's something that really -- we haven't had over the past year and I think as we're going deeper down the rabbit hole in terms of margins, it's something that if someone is trying to really understand what the rebound potential is and they want to understand what those restructuring actions past and future, how they relate to different segments on a granular level in terms of cost savings, that's just not there at this point and so that's really what I think one of the major areas that we're looking to you for.

Well, I think couple things there, Mike. Obviously, this is a pretty fluid circumstance. I mean, we continue as Donny said to address decline after decline after decline in some of the macroeconomic issues. If you put things in perspective, in 2007, and again, this is a consolidated answer to part of your question, we incurred about $40 million for headcount, severance and plant closures. In 2008, that number is about $70 million. So that's in aggregate about $110 million. We would anticipate and in fact have in our 2009 numbers savings from that. Our anticipation is that we get about a two-year, maybe in some instances a three-year payback. So when we think about 2009, we're anticipating, what, about 50 million, $60 million of savings from the actions that we've taken over the last couple of years and again, that's a consolidated number.

The other thing I guess I would point out, and again, I really believe that we are doing the best job we can to stay on top of things, but one of the things that has changed fairly dramatically and impacted us is the decline that we've experienced on the consumer side of the business. Obviously last year was a pretty tough year but as I think we all know, things really, really fell off late in the year. So we're doing the best job we can to stay after that and I hear what you're saying about specificity. And we'll consider whether or not we can get you a little bit more information on an ongoing basis, but I think in terms of the $110 million that we've talked about, we do anticipate seeing a pretty good recovery on that during 2009. The other thing I would mention too is that the fourth quarter is typically one of our lowest quarters in terms of sales activity, so there is usually a little bit more impact there when you have a downturn like the one we experienced.

We'll take our next question from Budd Bugatch with Raymond James.

Good morning, everyone.

Good morning, Budd.

Also, let me second what Michael said about additional specificity, Tim, that we would love to see some more of that coming forward. And in light of that, I think at the end of the year, by the end of the year I think the new home construction part of the business was running at about 25% to total sales, if that's -- if my memory is right from what you've told me.

I think what we said, Budd, is that on a run rate late in the year, probably 25 to 30%.

Okay. And so my question then comes two-fold. In your forecast, you've given us your underlying assumptions for new housing starts, 550 to 600. What about for single family home housing starts which have been experiencing a lower percentage over the last couple of years? What's your assumption there? And what would be the forecast or the underlying assumptions for key retailer sales in 2009?

In terms of the retail side of the business, Budd, our current estimate is that we'll be down low double digits on the key retail side. And just to give you a little bit more input relative to Europe, our feeling there is that we'll probably be down mid double digits in terms of sales with a negative impact of about $200 million related to foreign currency. Now, that assumes rates approximately where they are at the end of the year. And in terms of single family, I don't know if I -- do we have that with us here?

No.

We'll get back to you on that one, Budd.

Make sure I understand--?

You can assume it's a dramatic decline.

Okay. Make sure I understand what you mean by mid double digits. That's a large range.

Mid teens, I'm sorry, Budd. Mid teens in terms of the European business and low double digits--.

One other question for specificity would be just if you can at some point in time provide a more detailed cash flow statement. I know it wasn't in the package, or at least in the package that I've got, to get to the $560 million of cash from operations.

Hey, Budd, it's John. Our K will be filed on Tuesday so there will be a detailed cash flow statement there and if necessary, if you need something more timely, follow-up with us later on.

You're talking 2008, Budd?

I'm talking 2008 and -- that's correct, yeah, for what you--?

Yes, if you go back to the previous commentary that we've had where I think we were estimating about $600 million back in September, and I think we went through that in a fair amount of detail. We, just in big buckets, we did a little bit less on the working capital side than we might have anticipated. Most of that was related to accrued liabilities and the timing of payments there. And that was in large part offset by some other non-cash charges that related to a couple of dispositions in the businesses that we sold earlier in the year. We will provide more information, as John mentioned, the K will be out just in a couple days.

Yes. In the Qs of '09, if you could expand that format that you've historically had, that would be great as well. Thank you very much.

Thanks, Budd.

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

Good morning, everyone.

Good morning, Pete.

Tim, I was just wondering, you talked about the like the $0.65 run rate for earnings for '08. Would it be possible to give us a bridge to go from '08 to '09? You mentioned pension as an incremental $0.06 hit, the restructuring charge. I'm just trying to get a sense of what the decramental might look like for '09, how material costs and what currency might be doing to the EPS comps?

Okay. Yes, no, that's a good question. I think if you start with that approximate $0.65, Pete, number that we talked about for '08, obviously the mid point of the range is minus $0.15. So that's about an $0.80 swing. And if you look at our sales at $9.6 billion, and take the 16, 17% decline is about $1.6 billion. If you use a contribution margin of about 30% on that, a tax rate of 36% and shares outstanding at $359 million, that equates to $0.80, plus a little bit. So that kind of explains in big buckets that $0.80 change. Having said that, we do have rationalization charges in there for $0.08. We've got additional pension expense of $0.06 over the prior year. And on a tax basis, we're anticipating, Pete, that we're going to spend a little bit of money or incur some tax expense, although I've got to tell you that when you get down around breakeven, predicting tax is very, very difficult. But if we were to assume that that was $0.04 or $0.05, that's $0.20 and that $0.20 basically gets offset by some of the savings I mentioned earlier, as well as our expectation that we will see some benefits from pricing in terms of anniversary, as well as offsets to some of the commodity cost issues that we had to deal with in 2008, particularly as they relate to petroleum-based commodities that go into inputs for paint and windows. So that gives you kind of in big buckets, how we view it.

That is very helpful. I appreciate that one. I guess the second unrelated follow-up is can you just give us a sense as to the dividend cut, made some commentary on the rationale for doing it but how the amount was set, should we think about if '09 is even more difficult than you're anticipating that you eventually go back to the Board and take the dividend off of the Board per se? How do you think about that and what was sort of the rationale to get to the cut that you made in terms of amount?

Well, that amount, Pete, equates to about $100 million, $0.30 a share. And on an annual basis. And it's our feeling that with $1 billion of cash right now, the fact that we expect to generate about $300 million, we thought $100 million was a reasonable number to return to shareholders through the dividend. We think that puts us in a position where we can continue a relatively meaningful dividend, given our current stock price, just in terms of yield. But also puts us in a position where we're able to preserve liquidity and preserve cash going forward. Obviously, the environment is extraordinarily uncertain at this point. I'm sure we'll continue to review our cash position, our liquidity on a quarter-to-quarter basis. Our hope certainly is that at some point down the road in the not too distant future that we can again get back into the mode of increasing the dividend. But given the uncertainty that we see at this point in time relative to '09, that seemed like a prudent place for us to end up.

All right. Thank you very much.

Thanks, Pete.

We'll take our next question from Dennis McGill with Zelman & Associates.

Good morning, guys, how are you?

Good morning, Dennis.

Congratulations on being proactive on the dividend there and not waiting for things to get worse. Can we assume that you'll be proactive on the amendment to the revolver since you're getting pretty close on some of those?

Well, I think, Dennis, that you can certainly assume that we will be thinking and have been thinking very hard about the bank lines that we have in place currently. That does expire in 2011. We have had some discussions on a preliminary basis and I think that you can certainly expect that going forward we will be sitting down with our bank group, which has been -- we've got very good relationships with, they're very supportive and I think our feeling is that we ought to be able to work our way through that in a manner that works for both sides of the equation. I would point out, I think it's important, is that we do not foresee the need on a near term basis to borrow any money. Given the fact that we do have the $1 billion of cash. So from that perspective, there's no immediate need. But certainly we're sensitive to the fact that the covenants are a lot tighter at this point than we would like them to be.

Clearly, probably no need in the near term to draw it but it would be nice to have that behind you and not have it hanging over your head I'm sure. Have those discussions with the bank begun or is that something that's going to start now that the year is wrapped up?

We've had a little bit of dialogue, Dennis, at this point, but I would assume that those will probably pick up pace here in the next few weeks.

Okay. And then my other question, on the $300 million cash flow guidance, could you maybe bridge us from the breakeven level of on the income statement to the $300 million. Is that assuming a benefit from working cap? Do you get a tax refund? Anything that can help us get there.

Sure. Yes, if you go to the midpoint of the range, you're looking at a loss of about $50 million. We expect D&A to be about 240. And I believe we have other non-cash at 100 and-- 160? Yes, 160 on other non-cash. Now, that includes stock based comp, minority interest, as well as deferred taxes. And then we do anticipate about $150 million from working capital management. And that gets you pretty close to the $300 million. CapEx, I'm sorry, yes, CapEx would be what, John, 100 and--?

175.

165, 75.

Okay. Is there any possibility for a tax refund?

That's not in the cash flow number at this point, Dennis and there may be some modest amounts coming back in terms of refund but they won't be material. I mean, we made money in '08 and there could be some areas where there might be small refunds but I wouldn't anticipate given where we have the guidance that they would be significant at this point in time.

Okay. That's helpful. Thank you, guys.

Thanks, Dennis.

We'll take our next question from Ken Zener with Macquarie.

I wonder if you could talk about the paint business specifically and why we saw so much operating leverage there, if you could just expand on that?

In the quarter? And for the year?

Correct. Well, mostly for the quarter.

The issues that affected us there, Ken, would include obviously the volume decline. But we've also seen increased material costs as we've indicated in the past quarterly discussions. As well as some promotional related expenditures and those would be the bigger buckets.

So it seemed like you guys had actually more operating leverage this quarter, even though you had greater volume declines in the first half of '08. Is that really just because of promotional was much greater this quarter?

In that particular segment?

Correct.

Yes. Yes, I think the promotional costs were a little higher in the fourth quarter and yeah, and we did -- we did have a significantly reduced performance in terms of builders hardware as well.

Okay. Yes, because that's obviously a profitable piece. Just looking at the plumbing business, realizing that a lot of it is tied to -- comes out of Europe with the Hansgrohe, just looking at the minority interest component, that fell to 4 in the quarter versus 11 in the third quarter and 10 last year. Is that kind of indicative of a 60% decline in that business and that region? In terms of profitability?

I think, Ken, that currency probably gets to us on that. There's a pretty big drop and that may be applied to the entire account, I believe, including the cumulative balance. That's the impact that gets washed into the fourth quarter.

I appreciate that. Then the last question, do you guys still have around probably 350 in cash tied up in Europe that wouldn't be available for you?

No. We have about 350 in total cash tied up and that includes our estimate that we need about $200 million to run the business on a day in, day out basis, and the fact that we've got about $150 million in Europe, plus or minus, that is not as accessible as the rest of our cash.

Okay. Great. Thank you very much.

Thank you, Ken.

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

Thanks. Good morning, everyone.

Hey, Nishu.

I was just looking at the flow of restructuring expenditures over the past couple years. As you mentioned, it's been about $80 million a year in 2007 and 2008 and then from what you're expecting from your guidance, it's going to drop to $44 million in 2009. Should we read that as there's less need for restructuring now, which would come as a bit of a surprise I guess, given how much the environment has deteriorated or is that just more of an initial estimate of how much you might end up incurring in 2009?

Yes, that's a good observation, Nishu. I think the answer to that is that we can only accrue or estimate for you things that we have undertaken as opposed to things that we might anticipate doing. So I think it's very fair to assume that as time goes on, given the operating environment that we're certainly in and kind of getting back to Mike's question earlier, that there will be additional actions taken during the year. I can't tell you obviously what those are at this point in time, but I think the likelihood of us having additional restructuring related charges there is certainly more likely than less likely.

Got it. Second question I wanted to ask was on your portfolio of businesses, there's been some stability in terms of divestitures over the past few quarters. Given the deterioration here, given the year end review that you've just completed on your goodwill, has anything come to light, just I guess as you look across your portfolio of businesses, or changed in your thinking, so what might we expect for this year in terms of portfolio, reconfiguring it?

No, is nothing imminent at this point. We obviously do the review the portfolio on an annual basis as a minimum but at this point in time there are no additional plans to divest of anything. That does not suggest that there may not be opportunities going forward where it may make sense for us to consider additional divestitures, but at this point there is nothing in the hopper.

Thank you very much.

Thank you.

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

Thank you. First question, you had referred to $200 million in cash you needed to keep on the balance sheet to sort of run the business. That was for Europe; is that correct?

No, that would be both Europe and the United States, Keith.

Okay. Second question, you had $460 million of goodwill write-down in the quarter, primarily in the UK businesses, as you mentioned. You still got a lot of goodwill in the United States on businesses and given the severity of this decline, particularly in the home building piece of your business, I'm pretty puzzled that you didn't have to take a goodwill write-down. Seen other industrial companies take a write-down just because their stock price is down. Can you give us any insight what's going on with your auditors and that calculation?

Sure. We do a discounted cash flow model and it is a five-year model and as you're aware, the assumptions that you make, particularly in the terminal year, are extremely important to the value that you -- that results from that analysis. And in terms of the installation business, there's a couple things there that I would point out. One is that we have assumed for purposes of this analysis that housing starts get back to the 1.5 million five level in 2013, which is the fifth year that was in this analysis. We have also assumed that as we continue to rationalize the contracting service business, that in terms of the diversified products, that we will be closer to historical margins when we get to that point at roughly 1.5 million. And when we do the math on that, we come out with a valuation that supports the goodwill number.

Okay.

Now, that 1.5 million is a number that we based on analysis from a variety of inputs and discounted in terms of what I think global unsight or -- yes, a couple of sources, in terms of looking at projection that's are out there. So we did discount the number but we do feel it's a reasonable approach and our auditors have reviewed it. It's the same approach that we've historically applied over the last four, five years since that test was put in place by the accounting regulators.

They have not talked to you about an impairment due to the equity value of the Company? I've seen that with others in the industrial world.

That is part of the test and we did go through that part of the test and there was no indication that we had an issue there.

Okay. And I guess final question on the -- you talked about the rationalization of the installation business and you have some information in the slides. I guess question for Donny. Moving forward, we briefly discuss your event at the Builders Show that you're going to be doing less trades in the future. Just wondering if you could give us sort of an overview of what do you think, when we ever get to the bottom of this mess, what installation service is going to look like in terms of number of trades it serves and what sort of its mission is going to be?

Thanks, Keith. I think installation services when we get to the bottom of this, we're really looking at significantly less trades. As we went through the analysis, that trade that we were performing had really grown up into the -- actually, we had identified 40 different trades we did at one location or another, but really 20 that had more proliferated the group. We now are sitting and our current thinking would be that we're going to do about eight to ten trades. We also believe that it's important that we continue to serve the entire market. Historically, we had always been very, very strong with the small and mid and regional builder and had moved heavily into the big builder as they continued to take share. I think we need to be focused on all segments. So where we bring value to the big builder, I think that's great and we need to make sure our programs reflect that and treat them differently. But we also have to continue to serve the small builder where really our footprint gives us a significant advantage over the -- over our competition. So we're confident that installation services can return to historical margins. We think installation will be a bigger part of that and so that's kind of where our thought process is today, Keith.

I'm sorry, installation would still be the largest? Installation of insulation, would that still be the largest?

Yes. Absolutely.

And probably, Donny, a bigger share than it is today in terms of the total business.

We've already seen it start to stabilize and move back the other but we would see that as a larger share than where it is today.

It had traditionally, it had gotten down to about half because I know you had gotten into other businesses, so greater than half, would that be what you're talking about?

Yes, absolutely.

I think we've got time for one more question.

We'll take our final question from Dan Oppenheim with Credit Suisse.

This is actually [Mike Dahl] on for Dan.

Hey, Mike.

How are you?

Good.

Just wondering, to go back to your kind of your assumptions on starts here, what are the additional steps that you can take if starts come in below your estimates here? We're already at a run rate of 550 in December and it doesn't seem like there's too much hope for that getting better, just given the demand environment and financing for builders. What are some of the things that you can do there? And then also with the -- with new construction now down to about 35% of your business, is it still fair to assume that 100,000 unit change in starts is impacting earnings by $0.15?

Okay. In terms of what we can do relative to additional actions if housing continues to move south, I think those are pretty much the same things that we've been talking about, continued rationalization of capacity, continued review of our footprint in terms of the installation business. Again, one of the challenges we have is trying to maintain that balance that we've talked about of not wanting to take actions today that can put us in a position where we may save $1 and have to spend $2 or $3 two or three years down the road when the markets come back. You can rest assured we'll continue to work hard to make sure we take the right actions, the appropriate actions that will address the near term and not necessarily put us in a position of hurting the longer term prospects for the business. And so I think, again, it's a continuation of some of the things that we've been doing and as we indicated earlier, when someone asked -- I think it was Nishu asked a little bit about restructuring charges, the likelihood of having more of that type of activity in '09 is relatively high.

Your question about 100,000 starts, 100,000 starts would impact us now at about -- it's probably close to $500 million I'm guessing of sales, roughly. I'm sorry, $300 million in terms of -- okay, 3,000 a start. Is that still a good number to use? Okay, 3,000 a start. And using a 36% tax rate, that would put us at -- well, what a 30% contribution margin, right, which is $100 million. That would put us at about $0.14, roughly, in terms of impact. And there is a lag, though, in terms of the reduction.

Got it. Thanks. Just to get one more in, I was wondering if you could just talk about your thoughts on kind of -- on pricing strategy here. I mean, obviously tough environment but there is going to be some benefit that you see from kind of the lower oil and other materials costs, as we go through the year. We've heard that retailers are being increasingly aggressive as they kind of push to bring the lowest cost possible to the consumer. Can you talk about kind of how you're thinking about the balance there, how much do you want to capture from the lower costs versus how much you're willing to give up to drive better sales?

Sure. This is Donny. I'll take that. Pricing really has held up reasonably well in the quarter, although we did see some increased promotional activities in cabinets which really had an impact on both our top and bottom line. I think we have to realize we're in the early stages of a cost recovery in commodities and given the nature of our supply chain where you've got your inventory, also things that we source, it would be mid-year before we see the full impact of lower commodity costs. You also -- we have unrealized commodity costs inflation, really had an impact in the quarter in both architectural coatings and plumbing segments, so although we do see a trade down to where entry level products are a larger percentage of our current sales, pricing has really held up pretty well due to the fact that we haven't fully realized the inflation that occurred during 2008.

Okay. Is there any way to quantify kind of what you could see there or what you're anticipating in your guidance?

Well, I think what we said earlier, Dan, is that -- or Mike, is that we anticipated offsetting some of the costs that I talked about earlier. And if you recall, that's about $120 million of positive impact year-over-year. Half of that is savings related to some of the restructuring activity that we've done and the rest of that would relate to anniversary of pricing as well as material cost offsets or reductions based on where commodities are going.

Great. Thanks, guys.

Okay. Thank you. In closing, I'd like to thank all of you for joining us today. And if you flip to slide number 22, as I make my closing comments, 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 certainly been 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 current market conditions on our near term results and the implications these actions may have on our longer term performance. Although we expect market conditions over the next several quarters to be very tough, we continue to be confident that the long-term fundamentals for the new home construction and home improvement products markets are positive.

We would also like to thank several of you who joined us at the International Builders Show last month. 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. The IBS show gave many of you the chance to see their efforts and share our excitement firsthand as the Masco brand village showcased our strong brands, innovative products and game changing solutions and as the Masco show home showcased. our environments for living Certified Green program. We certainly appreciate the opportunity to have spent time with you and your comments and feedback. Notwithstanding the difficult environment, we believe that our financial position including cash of over $1 billion at 12/31/08 and our ability to generate cash flow, together with our current strategy of investing in leadership brands, innovative growth, flexible and scalable supply chains will allow us to drive long-term value and growth for our shareholders. Thank you.

That does conclude today's conference. We thank you for your participation. You may disconnect at any time.