馬斯科 (MAS) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2009 second quarter conference call. As a reminder today's conference is being recorded and simultaneously webcast. If you have not received the press release and the 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 the note at the end of the earnings release, which are cautionary measures about statements that reflect the Company's views about its future performance and about non-GAAP financial measures. After a brief discussion by management the call will be open for analysts' questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at 313-792-5500.

I'd now like to turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Please go ahead, sir.

Thank you, and thank all of you for joining us today for Masco's 2009 second quarter earnings call. I'm joined today by Richard Manoogian, our Chairman; Donny DeMarie, our Executive Vice President and Chief Operating Officer; and John Sznewajs, our Chief Financial Officer.

If you would please move to slide number three. Well, second quarter was a tough quarter, obviously, with sales off 23%. Both our top line and our earnings were a little better than we anticipated. We continued to see volume declines in new home construction and home improvement markets in both North America and Europe. We had the negative impact of currency translation of approximately $80 million in the quarter.

From an income perspective we reported $0.15 per common share of income for the second quarter of 2009. That compares with $0.20 in the prior second quarter of 2008 and we'll talk about EPS in a second.

We continue to do a good job of working capital management, balance sheet management, working capital as a percent of sales and trailing 12 months continued to improve and we're really pleased that gross margins in the quarter increased. They were up, benefiting from both the impact of - positive impact of price commodity relationship as well as cost reductions that we've been pursuing. In addition, from a free cash flow standpoint, we've increased our estimate for the year from $300 million to $360 million and very importantly, we ended the quarter with $900 million of cash on the balance sheet.

If you'll please flip to slide number four. I mentioned EPS of $0.15 versus $0.20 on a reported basis for the quarter, and in the second quarter of 2009 we had $22 million of rationalization related charges, that's about $0.04 a share and that compares to $15 million and $0.03 in the prior year quarter. We also had a little bit of impairment related to financial investments, some accelerated stock based compensation, each of those cost us about $0.01 in the quarter and they were offset by currency transaction gains, so those essentially netted out.

As we mentioned earlier this year, tax for the year is going to be somewhat unusual in terms of relationship. We had $63 million of pre-tax earnings in the quarter and only $1 million of tax. Had we had a more normalized 30% tax rate for the quarter, we would have reported about $0.09 of earnings.

At the same time last year second quarter we had an inflated tax rate. You might remember that we had an increased tax rate last year for the full year and during the quarter of the year. That related to the repatriation of foreign earnings. Last year's tax rate was 47% and if that had been normalized we would have been about $0.25 of EPS last year so really if we had normalized tax rates $0.09 and $0.25 in terms of comparative EPS.

If you flip to slide five, I mentioned our sales were down 23%. That's about $600 million, again, volume declines in both new home construction and home improvement markets, we talked about the negative impact of currency translation. I would also mention that our key retail, our sales to key retailers were down 7% in the quarter. And for those of you who have followed the Company over the last several quarters, you know that our sales to key retailers have been down low double digits during that time frame so we saw some pretty good improvement relative to that metric. Our margins were down from 8.1% in 2008 second quarter to 5.5%. That's a decremental margin of 17% in the quarter and again, the underabsorption of fixed costs because of the significant volume declines, as we mentioned earlier, were offset by the positive relationship between selling price and commodity as well as benefits from our cost rationalization.

I want to point out that that decremental margin we're very pleased with, the 17% in the quarter. You might remember last year the decremental margin in 2008 was about 34% and we had several of our operating segments that were in a 40, 50, 60% decremental relationship ,if you will, relative to the decline in sales and the decline in operating profit. And those segments have improved as I'm sure you saw from the detail that we provided.

In the first half of this year for example, our decremental margin is about 22%. I mentioned it was 17% in the second quarter. Cabinets have improved from 50% last year from a full year basis down to 27% for the first half of this year and that's with the increased rationalization charges. Our decorative architectural segment which was 60% down last year from a detrimental margin standpoint is actually up very nicely incrementally this year and we'll talk about that in a few minutes, and our other specialty products which last year was down about 40% from a detrimental standpoint has improved in the first half of this year of 21% just to give you a little bit of perspective.

The commentary that you heard relative to the consolidated numbers on this slide really is certainly appropriate for subsequent slides and segment slides. I don't want to repeat that so we'll just kind of skim over it. It is on the slides as we get to them.

If you flip to slide number six, just taking a real quick look at North America, our sales were down in North America 21% with margins down from 9.7% to 7.3%. Internationally our sales were down 30%, that's 18% in local currency, and as I mentioned we would have about $80 million of negative impact from currency translation. Margins in Europe declined from 8.7% to 6.9%.

If you flip to slide seven, working capital. Again, this gives you a look at the components as well as the percentage of receivables plus inventories less payables to the last 12 month sales. And as you can see we've made nice improvement in inventory as well as payables and really want to compliment John and Donny, our finance guys, our operating guys continue to do a really good job of managing the balance sheet and we're very pleased with this outcome and obviously that's an area we put a lot of emphasis on.

If you flip to slide number eight, take a look at our segment results for the quarter and I want to start with Cabinets. Cabinets were down 31% in the quarter. That's about $190 million. Profits declined from income last year of $37 million to a loss of about $12 million this year. In this segment we had a negative impact of currency translation of $16 million and we also had increased severance and plant closure related costs from $3 million in the second quarter of 2008 and had about $10 million in the quarter for this year.

If you flip to the plumbing segment on slide number nine, sales were down 24% and again, in this segment we have negative currency translation of $53 million in the quarter. Our profits from an operating standpoint were down from 12.5% to 10.7% and we did have a slight increase in severance and rationalization related costs from $2 million to $4 million in the quarter.

If you flip to slide 10, our Installation related business -- and Donny will talk a little about this in a few minutes. Sales here were down 39% and we continued to do better than the decline in housing starts, which are down about 40% and maybe 45%-ish on a lag basis. In addition, we had a modest profit last year and with the significant volume decline this year, we have a loss of $34 million in this particular segment. We have increased system implementation costs of up to $7 million from $4 million in the second quarter of 2008.

If you flip to slide 11, our decorative architectural segment, we were up 6% in this segment and again this was a bright spot in the first quarter. It's obviously a bright spot in the second quarter. We benefited from new product introductions, promotional activities and had a nice increase in the sale of paint and stains. That was partially offset by a pretty significant decline in sales of builder hardware.

Margins in the segment increased from 18.7% last year to 23% this year and really benefited from the increase in sales and significantly, well, we had a really nice increase in terms of lower program costs related to builders hardware. You might remember last year in the second quarter, we had some significant program costs related to resets for builders hardware so we have a significant improvement in margin in the builders hardware part of this particular segment given the sales decline and a profit improvement.

Just to give you a little bit of perspective in terms of margins for this particular segment and if we look at the first half of the year, margins for our Decorative Architectural Products were 21.7%. That compares to 19.2% last year and as you might recall, we had some sales declines as well as some commodity cost increase last year that had some impact on that margin as well as the builders hardware program related costs that I mentioned.

Just to give you perspective, the 21.7% margin in the first half this year, in 2007 our first half margin was 21.8%. In 2006 our margin was 21.9% so basically the 21.7% in the first half gets us back to where we have been pretty much from a historical standpoint. So I thought that might be helpful for you to understand the margins in this particular segment.

If you flip to slide number 12, Other Specialty Products, our sales were down 25% in this segment and we had reduced sales of windows in both North America, the Western United States, our Milgard operation as well as the United Kingdom. In addition we've had lower sales volume of staple gun tackers as well as fastening tools and we did have a negative impact of currency translation in this segment of about $10 million. Profits were down from 6.7% to 4.8% and we had very minimal charges or rationalization charges in this quarter. I think we had $1 million this year versus zero last year.

If you flip to slide 13, Donny is going to spend a little bit of time going over a couple of the elements we talked about during the first quarter conference call in terms of how we're operating in the current business environment with a focus on cabinets and our contracting service business, and with that I'll turn it over to Donny and when Donny finishes up I'll come back and talk about guidance before we take some questions.

Good morning, and thank you, Tim. We're continuing to really focus on our efforts and operating in the current environment with really the goal of preparing for the future by doing the things we need to do today to drive long term growth.

If you'll flip to slide 14. Within the Masco Builder Cabinet Group, I wanted to update you on a few key initiatives that we've started and have spoken to you about before. Our common base architecture where we can make any brand in any plant is on schedule and we'll complete that in early 2010. Our ERP system implementation is also on schedule and will complete about the same time and I want to remind you that within the Builder Cabinet Group it's really a world class lean organization, but within this segment there's really more we can do. Our retail Cabinet Group has launched a major lean initiative to continue to take costs out of the organization and we're pleased with the early results of those efforts.

On the Installation and Other Services, sales being down 39%, housing starts were down 40% but on a lag basis, a 90 day lag basis which really translates more to our sales, housing starts were down in excess of 45% , so we continue to take share within this segment. And at this level of housing starts it will be extremely difficult if not impossible for us to be able to show an operating profit; however, we're focused on maximizing our cash generation and continuing to do the things we can do to improve results.

Some of those things are product rationalization where we are eliminating those products that are not accretive to our operating profit. We continue to look at our hub-and-spoke business model, that's where we can take costs out of our back office by consolidating our locations and leaving our workforce local so we continue to serve all of the markets that have a significant number of housing starts. And our ERP system implementation which has been a heavy drag on earnings in 2008 and 2009 will complete in 2010.

Flipping to slide 15. Talk to you about some key innovations that we've launched and real the impact they've had on our organization. I'd like to start with Delta, our Diamond Seal technology which we launched late in 2008, and this is the technology where water does not come into contact with any metal once it enters the faucet. This valve uses a patented diamond embedded ceramic disc to eliminate the need for any lubricant, it has a longer life and is virtually is a leak free product.

Within this initiative we really promoted our brand. The DST launch was one of the largest advertising campaigns in Delta's history and we continue to invest heavily in the Delta brand. We've had broad customer acceptance of the product and sales of DST are significantly higher than the predecessor SKUs without DST. We've seen a dramatic improvement in quality and really a nice effective innovation to really drive performance.

On the Milgard side of our business, our window business on the Western United States, we really spent a lot of time understanding our voice of customer. And when we did the work through voice of customer, we were the market share leader out West, we had a significant presence on the mid to high point of the window business, but our customer as the housing market had turned had found a more value driven customer and we needed to introduce an opening price point product that still was within the Milgard family. We brought out Simplicity to really meet the needs of our customer. It's an opening price point product, still is a Milgard branded product and allows us to -- allows our customers to stay within the Milgard family.

And also at Milgard we've launched an energy package and those windows within our energy package meets the criteria to qualify for the stimulus money that's available and those sales have gone extremely well. And on the Behr side, really Behr we've launched our premium plus ultra interior paint and primer in one. Sales have exceeded our own internal forecasts for the product and a real example where key innovation will still drive sales and excitement in the aisle. And really wanted to give you a feel on this slide where we continue to invest heavily in innovation and even though we're in the middle of a tough economic period we think it's important to do the things we need to do to win going forward. And with that, Tim, I'll turn it back over

Thank you, Donny. If you would flip to slide number 16, just to take a quick look at guidance before we move to Q&A, and I would remind everybody that forecasting, looking forward in this environment continues to be extremely challenging. Having said that, we currently anticipate that our sales will decline in a range of 18 to 22%. That compares to our previous guidance where we had sales decline in 20 to 25% range. We continue to believe that housing starts will approximate about 550,000 units in 2009. And having said that, we currently anticipate that our loss per common share from continuing operations will be in a range of $0.05 loss to $0.25. That compares to a range previously of $0.15 to $0.35 and obviously the midpoint of the range has come down from negative $0.25 to negative $0.15.

I mentioned free cash flow. We estimate currently that our free cash flow will increase to approximately $360 million from $300 million that we estimated three months ago and that really reflects the midpoint of the guidance range which reduces our loss in terms of net income and also a slight decline in capital expenditures primarily. There's some other ups and downs, if you will.

EPS includes rationalization charges of $0.15 per common share, our EPS range. That's an increase from $70 million to $85 million or approximately $0.13 a share to $0.15 a share. And we also continue to anticipate that pension costs based on -- compared to last year's expense will be up about $0.05 incrementally this year including the curtailment charge that we had in the first quarter.

We talked a little bit about tax earlier. We continue to estimate that tax will probably cost us about $0.04 to $0.06 a share this year. As I mentioned in the first half I think we've got about $0.025 rounded to $0.03 in terms of taxes on a $3 million pre-tax loss, we have a $9 million tax estimate, obviously when you get a round breakeven estimating tax is very challenging. The main issue for us is that we have losses in certain jurisdictions or municipalities that are not deductible against income and other areas. But again that's no different than it was before.

So with that, we'll open up the lines for Q&A.

(Operator Instructions) We will take our first question from Nishu Sood from Deutsche Bank.

Thanks, good morning everyone. First question I wanted to ask was about your guidance. You've improved the guidance by about $0.10. You mentioned obviously sales being the principal driver of that but you obviously had a pretty nice performance in your margins as well. Even looking at the sales aspect of your guidance, your sales are down 24% in the first half of the year and you're assuming 18 to 22% for the year. So it sounds like you're assuming a pretty good improvement in the sales performance in the second half of the year as well. So just wondering what's behind just taking up $0.10, is that conservatism or are you seeing other sources of deterioration in the second half of the year?

Well, the reality, Nishu, is that if you look at the guidance and look at the first half, the second half sales I think really factor out or calculate out to be within about 40 million or $50 million of the first half, and basically we lost $0.08 in the first half. And if you go to the midpoint of the guidance of $0.15 in essence what we're saying is that the second half is going to look a fair amount like the first half. We obviously have better comparisons, if you will, later in the year, just in terms of as you'll recall last year things really started to turn South in September, the third quarter and the fourth quarter were pretty tough. So basically we're not looking for necessarily any deterioration in performance but basically looking at sales relatively flat first half to second half.

Okay, great and second question I wanted to ask was about the ERP implementation. This is something you folks have been talking about for some time now. Obviously affecting the Cabinets Group as well as the Installation Services Group. I was wondering if you could give us more details on the ERP implementation. I know you might be doing that in your investor conference a few weeks from now, but what other divisions is that affecting, what types of changes might that mean for your operations for your results? And Donny, you mentioned that it's a pretty expensive program you've undertaken over the last two years. How much roughly are you spending on this ERP implementation across the Company?

Yes, Nishu, I'll hit the first part of that question and maybe you can follow-up with Maria related to costs. We haven't gone into the full detail of the cost break outs related to the ERP, but what I'd like to do is tell you on the cabinet side is we've started on the Builder Cabinet Group and that ERP implementation really affects that group. So looking at going into a common architecture between the Quality and the Merillat brand, which would then allow us to produce any product in -- any brand in any plant, we had to have a common system. So we had a different need related from the information technology to be able to receive those orders and then dispatch it and then to be able to produce it in the facility which makes the most sense from a shipping point of view, so we launched the ERP initiative at the same time that we dove into the common architecture. So that will complete end of first quarter, maybe midyear next year but on schedule and it will have a big impact on the Builder Cabinet Group.

The only other significant ERP implementation that we have going on is at MCS, and at MCS, that initiative was -- if you'll remember, that business was put together through a series of acquisitions. And really one of the large acquisitions was a roll up of many contractors. And we wound up buying the holding Company, so to speak, or BSI Holdings.

So when we started really consolidating that to make it look like one Company and act like one Company we had as many as 40 independent ERP systems. So the need to move to a modern system where we could put all of the divisions on one system made a lot of sense and it only affects the Masco Contractor Services division within the platform because service partners has been on JD Edwards and really is on a very stable base. So this adds a lot of ability to do realtime scheduling. This allows us to extend where the current system really begins at the end of the job. This allows us to extend into actually doing the estimates, the quoting. We have tools that allow us to look at [procural] rates, bids versus permits, so we think it really improves the efficiency of that operation pretty dramatically.

Nishu, one thing in terms of the cost if you look at the appendix we do have the ERP system related costs broken out in the back that are going through the P&L. What's capitalized would end up in capital expenditures, so in the appendix we've got the second quarter cost for both the Cabinet Group as well as MCS. We don't have the first quarter in here but that was in the package for the first quarter. But we also have both '07 and '08 cumulative in the back of the deck, and I think the costs for ERP implementations in '07 and '08 aggregated about $28 million.

One other point, Nishu, I think it's important really with MCS, their primary competitors being the small contractors, only MCS within this space has the size and scale to make this kind of investment and really will give us the technology that no one else has.

Okay, great. Thanks a lot.

Our next question comes from Sam Darkatsh with Raymond James.

Good morning gentlemen, how are you. Just a clarification question and then a follow-up. The change in your sales guidance, how much of that was because you surpassed your internal expectations for Q2 and how much of that is maybe a little bit more moderation or an improved outlook in the second half, if you could help me with that?

Well, we don't give quarterly guidance as you know, Sam, so I won't necessarily get specific about the second quarter necessarily, but I think if you were to look at it in terms of the midpoint it's about 2.5% improvement. That equates to about $240 million. I would point out that our expectation now in that 240 is that about $100 million of that is a reduction in the negative impact of foreign currency translation. We've got about $165 million in the first half of the year.

You might remember that our original guidance had about $300 million of expectation of negative impact of foreign currency. We've reduced that. That will come in probably just a little bit above $200 million and the expectation right now is that we would see a negative impact in the third quarter, substantially offset by the fourth quarter. But again, it's -- obviously, second quarter did help that a little bit and there is certainly second half anticipation of having a little better sales environment.

So where specifically segment wise are you seeing a little bit more of an improvement versus prior expectations in the second half and also is that paint performance sustainable?

Where we're seeing the improvement, I mentioned the foreign currency, but most of that would be on the retail side of the business just in terms of we've got the builders side pretty much consistent with the same assumption but really I think a little bit better retail, if you will, primarily in North America. And what was the second part of your question?

Well, the retail -- is it a particular segment that you're seeing it in? The improved--?

Yes, that would be primarily in plumbing and decorative architectural.

And then paint?

Well, paint is in decorative architectural.

So you're saying that this is a sustainable trend in terms of the recent outperformance?

Well, we don't give quarterly guidance and we're not giving segment guidance but we're really pleased with the way that segment performed in the second quarter. Again, we all know that it's very difficult but we've got some new products coming out there. We've done a nice job with promotional activity so I think that we'll continue to see some good opportunities there just in terms of new products. We had a load in, in the second quarter, which helps the second quarter a little bit with the new product that Donny mentioned, premium plus ultra interior, so yes, we can keep the momentum going there.

Thanks, Tim. Very helpful.

Yes.

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

Good morning, everyone.

Good morning, Pete.

I guess the first question on Cabinets, it looks like somewhere around $400 million might be the new establishment of the breakeven point for that business, but you mentioned some of these initiatives you're going through on the builder side and then also on the retail side with some lean programs. Can you maybe talk about how much more you could lower the breakeven point and what some of the benefits from the lean at retail might bring to the table?

Pete, we haven't given any targets out on that at this point in time. Obviously, the guys are kicking that off. That's an ongoing process as I'm sure you're very much aware with a commitment to continuous improvement, Kaizen programs, Six Sigma approaches and that type of thing, and at this point we haven't given out any targets, necessarily. We do have an Investor Day coming up in September and we would anticipate getting a little more detailed at that point in time but we do think there's a lot of opportunity there and in fact there has been some nice improvement in that particular segment so far.

I think the key here, Pete, is that we believe there's more we can do. We clearly see opportunities as we get to the common architecture on the builder side, and on the retail side we've really been heavily focused on lean and taking costs out and we've been very pleased with our ability to really attack the cost base.

Is there more opportunity on the builder side or on the lean at retail side?

I'd say both. I think there's a lot of opportunity. Donny talked about the common architecture on the builder side but yes, we think we can continue to improve both sides of that. And don't forget we have some European businesses too that are in the Cabinet Group that have had a pretty tough time this year so far.

Okay, and then just on the price of material which you mentioned throughout the presentation. Can you give us a sense as to how the expectations there have changed?

At this point we continue to believe we'll benefit by about $120 million for the full year.

Okay, that is helpful.

And that's consistent with what we mentioned on the last call.

Thanks.

Thank you, Pete.

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

Hi, good morning everybody.

Good morning, Steve.

Could you quantify a little bit more the Op margin improvement? Everybody has really been -- it seems like your guidance is awfully conservative for the second half. And if you could just talk about your operating margin improvement in the second quarter versus the first in terms of what we're, if you could rank order the drivers as far as volumes, mix shift, and the raw material and the rationalization that you've been going through for the last several quarters?

Yes, well volume certainly is up. The first quarter normally is the lowest quarter from a sales standpoint so volume certainly contributes. We mentioned, Stephen, on the last call that we estimated that we had about 20 million to $30 million of positive impact from the combination of the relationship between price and commodities as well as cost cutting. In the second quarter that number was probably somewhere around 70 million to $80 million so we did see an acceleration. We continue to estimate, well, let me back up.

At the end of the first quarter during the call we estimated we would see about $200 million of benefit in the year, $120 million related to the relationship between price and commodities and about $80 million related to cost reductions. We now think that number might be a little closer to 220 and with the increase primarily on the cost side, and we probably had a little bit more of a positive impact in the second quarter than we might have anticipated, particularly as it relates to the cost improvements coming through. But again, that number was probably 70 million to $80 million and we compare it to 20 million to $30 million in the first quarter. And I think that probably helps you with some of the understanding.

Mix would not have changed. You mentioned mix and I don't think mix would have changed that dramatically although decorative architectural obviously was up 6%, I think it was up 2% in the first quarter. So from that standpoint, we had a higher margin and so obviously that had some impact just in terms of operating margins.

Okay, that's extremely helpful, thank you. And I know I asked you this question before. On the Installation business, you're now at a 10% negative op margin and I know on a hugely depressed volume basis, but still no writedowns on goodwill, et cetera. I guess can you give us a better understanding of why we're not seeing that or how you all are looking at this?

Sure. Basically, Steve, that is an annual test that we do that is performed in the fourth quarter unless there is a trigger, what's called a triggering event that might cause you to look at one of your business segments earlier than that. So we do an annual test every year in the fourth quarter and that test is based on a five year discounted cash flow model. And there was a fair amount of disclosure in the 10-K this year in terms of methodology and assumptions, and basically one of the key issues there is really the terminal value when you do that calculation, and when you get out into the fifth year and as I think I mentioned on the fourth quarter call, the assumption that we had made when we did that calculation last year was that housing starts were going to be back at about $1.5 million, 1.550 million, I believe. And again, that's in the 10-K.

So what we've told investors is that as we start to put that analysis together again this year in the fourth quarter, the key drivers of that are basically going to be assumptions as to what we think housing starts will look like over the five year period with that fifth year being very important in that calculation. And so at this point in time, again, we haven't really performed that exercise at this point, and from our position right now, it would be pretty hard for us not to see a start number that probably is going to be around 1.4 , 1.5 five years out, which we think is reasonable. Last year, we didn't pull that number out of the air. We basically went to Global Insight and some other consensus opinions, if you will, from economists, took their number, discounted that. And from that standpoint, we continue to think that we'll probably have a number in that range.

The one thing I would mention to you is that if you think about the longer term, you think about demographics, you think about household formations, we continue to think that the fundamentals are favorable. I think the Harvard Joint Center for Housing studies recently estimated that household formations would, in the decade 2010 to 2020, would approximate I think 14 million if my memory is right, and maybe with an average of 1.6 or 1.7 per year, obviously a big driver in terms of new home construction. So from our standpoint, at this stage again, we've got to get into the detail but wouldn't necessarily anticipate that we're going to have a major issue based on what I think those projections will look like when we get to the fourth

Okay and just one last question. The bearish argument, one of the bearish arguments around your equity is the liquidity, that type of thing. Have you all had any thoughts, conversations about going out and re-funding your debt, et cetera, extending your maturities?

Well, as we've mentioned, Steve, we've got $300 million due next March and we're positioned to pay that down with cash that we will generate. We continue to expect we'll end the year with $1 billion dollars of cash on the balance sheet so we're prepared, we would like to refinance that if we can do that attractively. If we can't we'll pay it down with cash from the balance sheet.

The next major issue is 2012, when we have $850 million due. And would we consider buying some of that in early if we can find an attractive price? I think we would certainly take a look at that. Just in terms of the financial markets, we've got to think three years out that we ought to be able to refi that on some reasonably attractive terms.

But again, I think we generate a lot of cash. We'll continue to generate cash, we've got some financial investments that potentially can be monetized in a more attractive environment, we've got bank lines in place right now, we've got $1.2 billion roughly of undrawn bank lines. So I think we've got a fair amount of flexibility there and again, but certainly we're very focused on the balance sheet. I think on a longer term basis we certainly would like to get debt down at 57% of debt plus equity at this point in time. And I think as we think about the longer term, getting that down to somewhere between 45 and 50 is probably the right place for us to be. But at this point, not a lot of concern about the 2012 maturity but certainly, it's on the radar screen.

Okay, thanks.

Thank you.

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

Good morning, everybody. It's Dennis on for Ivy. Just quickly, on the comment you made in the slide deck about the promotional activity in decorative architecture in the paints and stains, can you just go into that a little bit?

Sure, Dennis. The paints and stains, we've launched our premium plus ultra interior and that's really a successful continuation of a family of products we brought out last year on the exterior. And what you wind up getting with this product is you get the superior hide characterizations and allows us to hide the deeper colors and you get a paint and primer in one. And what we find from a consumer's point of view is it takes less coats to get the job done so it really makes painting the home simpler. Now, the excitement in the aisle was a pleasant surprise for us because there's higher price per gallon on this ultra interior so really showing if you have the right innovation and you're addressing the consumer need that you can continue to up sell consumers even at a difficult time.

So you're saying promotional, you're saying marketing aspects, not necessarily discounting?

Yes, there was more emphasis on advertising is I think what we were referring to when talked about promotional activity. There were several spots on TV as well as other media.

Got it, okay. On the installation services side you mentioned, obviously, at today's levels of housing start it is going to be incredibly difficult to be profitable. Can you give us some sense on maybe a range or some indication of where starts need to return to for you to have a shot based on the systems you're putting in place now?

Dennis, we continue to look at different ways to take costs out and as we modify our product portfolio through the rationalization, it's a little bit of a moving target but we believe that we could really -- our breakeven point in that segment is somewhere between 700,000 and 800,000 housing starts. So to the extent we continue to take costs out, we continue to move that down.

And that's come down. We don't have a figure but that's come down fairly dramatically.

And again, Dennis, that's an area we'll spend a little bit more time on in the investor conference when we meet in September.

Okay, very good. And then just one last quick one. Can you walk through the major components of your $360 million cash flow guidance between the non-cash items, working cap and I think you said you brought down maybe your CapEx expectations, where that is for the year?

Sure. Dennis, it's John Sznewajs. The big buckets are net income of about $55 million loss, depreciation and amortization of approximately $255 million, our other non-cash, which includes stock based comp, minority interest and deferred taxes and some other things in there of about $150 million. Working capital generation of $160 million offset by CapEx of about $150 million, so that total is 360.

Yes, Dennis, there's a slide in the deck, slide 25 and actually the last slide of the appendix that has the detail that John just went through. And as I mentioned on the prepared remarks or the lead-in, if you will, the improvement from 300 million to $360 million is really a decrease in the loss which affects net income by I think about $30 million if I recall and then a decrease in CapEx from 170 to 150. There's some pluses and minuses on D&A, working capital. Working capital will be a little less than we anticipated, given the increase in sales guidance but those are the major pieces.

Okay, thanks, sorry I missed that, guys.

That's okay, no problem.

Our next question comes from Keith Hughes from SunTrust.

Kind of building on one of the last answers, within MCS, you've been in the process of removing numerous traits from the portfolio. Can you tell us where you are on that, when you think you'll be done?

Yes, Keith. Good question. It's hard to judge a point in time because what we've challenged that group to do is continue to evaluate whether or not the individual trait is accretive to their operating income, and that answer tends to be different within some of the operating companies than others, within some of the divisions than others. So if I was going to give you where do I think we're at, maybe a mid point in getting through the product rationalization. I think we're being careful to make sure that we're making good decisions for both the current environment as well as the rebound. What we don't want to do is make decisions today that would impact our ability to really perform on the way back up.

We also have been very, we've also done a deep dive and it's really where do we create a competitive advantage to ourselves related to our scale. So we're looking at a bunch of different attributes other than just singular performance-based metrics to really understand on the way back up how we're going to have a compelling business model that gives us a competitive advantage in the marketplace.

One thing that would be nice for the Investor Day if we had some sort of a feel for the size of this business, with the going forward trades both historically and what you think it's going to look like in the future?

And, Keith, what we've said to that point, and we'll certainly go into a lot of detail at the Investor Day. But what we've said so far and still consistent with the work we're doing today is that we believe by focusing on fewer trades with higher market share expectations of those trades we can offset any of the loss related to some of the smaller trades that we're no longer going to be performing, so -- and we still feel very comfortable with that assumption.

And one thing that I think just to reiterate and point out, Keith, that's probably important here is that we'll be looking at a mix shift back to insulation from diversified products. Insulation has historically had a higher margin just in terms of return on sales.

Why is that? Why has it been a higher margin business?

Primarily because of our ability to buy.

I think in that, if you really understand the manufacturing process, the manufacturers really need to run those furnaces all out. They have very little that they can do to change the overall throughput of those furnaces, so it allows the scale to have some value to a manufacturer related to price, and I think we also are very, very efficient at it. It's how we started. It's a business that really started the whole Masco Contractor Services and so we have a lot of efficiencies that we gained over the year and we're obviously the largest buyer.

All right, thank you.

Next we'll go to Michael Rehaut with JPMorgan.

Hi, good morning guys. This is actually [Ray Horner] on for Mike.

Hi, Ray.

Just want to get a little bit more color on the guidance, given the margins were so strong in Q2, and your improved sales outlook for the back half of the year. What does that mean for margins in the back half? Are you guys expecting some sequential decline in margins going to 3Q and 4Q?

Not necessarily. We don't give margin guidance, typically. I think I did mention, Ray, a little earlier that we currently anticipate that the second half in terms of top line is going to be somewhat comparable to the first half. I also mentioned that we had close to somewhere between 90 million and $100 million of positive impact from the relationship of price, commodity and cost reductions come through. They were a little bit higher in the second quarter.

We might have a little bit of upside to the midpoint of the guidance in the second half but again, it's very difficult to forecast. It's -- especially with a lot of the actions that are going on in the business units, not just the rationalization cost charges and fixes that you're familiar with but a lot of the other profit improvement things that are going on. And the fourth quarter is always one of our lower quarters, typically, as well. So I would say this, that we don't necessarily see any deterioration in the second half and to the extent that we continue to do a little better job on the cost side, there might be a little bit of opportunity for a little better performance in the first half.

But again, we'll wait and see how that comes out. But you got to keep in focus here that we're still looking at major sales declines in the second half. I mean the comps are a little easier but I think we're still projecting to be down 18% in the second half of the year. And obviously that's got significant implications from a volume perspective.

Okay, and then just a follow-up on the pricing. Aside from the paint segment are you guys seeing other pricing pressure or mix shift, customers trading down in any of the other segments, specifically Cabinets and Plumbing?

Well, I'm not sure we've talked about any specific pricing pressure, but we have pricing pressure with a variety of products. There's no question about that. That's been ongoing and it's just a fact of life.

Having said that, I think we've done a really good job over the course of the last three or four years in offsetting commodity cost increases. We've been able to do that. Sometimes there's a little bit of a lag in implementing that but from our perspective we're in pretty good shape; and as I mentioned earlier we're anticipating that we're going to have about $120 million positive impact this year between the relationship between price and commodities. So hopefully that gives you a little bit of perspective.

The other thing is that obviously we've got some really strong brands. And with some of the product innovation that Donny talked about, that gives you an opportunity just in terms of bringing out new products that have features that people are looking for, that gives you a little bit more pricing power.

Okay, great. Thanks guys.

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

Okay, and our final question comes from David Goldberg with UBS.

Thanks for squeezing me in on the call.

Hi, David.

How you doing?

Good.

Good morning. First question, I want to go back to a conversation you guys had last quarter about the MCS business and trying to bring more repair/remodel activity into that business and focus a little bit more on that. And just wondering how those plans are going and how that might eventually split out in terms of what's going to be new home construction versus repair/remodel?

David, we continue to focus on opportunities to pursue the retrofit. There's a significant opportunity to reinsulate the existing homes and there's stimulus money available to do that for the consumer. And MCS is really performing as a subcontractor to some of our retail partners who are doing lead generation and offering those services to homeowners and MCS is doing the order fulfillment for several of our retail customers as well as our own activities.

We've been following the stimulus trail and as you know, that's a windy road through many places, through local organizations. And when we met with the group recently we had contacted over 500 local organizations that are involved in this, in getting the money to the market to weatherize homes. So we're on top of it. In addition, we mentioned earlier that we're incubating a new business in the retrofit arena that really is focused more on the whole home energy approach, very similar to our Environments for Living program. And we'll update you on both those initiatives at the investors day on September 17.

That's great. And just to follow-up, I'm wondering as we look forward and think about free cash flow in the coming years, if you can talk about the relationship between free cash flow and starts and if we were to see starts kind of grow slowly/stay where they are for a couple of years, what kind of free cash flow generation would that imply?

Well, I think, David, to put it in perspective, right now, new home construction represents about 25% of our business. And so the real key going forward from that perspective is probably more on the repair/remodel side, the retail side. Having said that, I think from a modeling perspective, whatever your top line assumption is, if you were to think in terms of inventories, receivables/payables, net of payables, averaging just say 16% of sales is probably -- 15 or 16%, whatever your assumption is going forward, that's the amount of working capital we'll have to put back into the balance sheet, Absent any continued improvement in that.

And I would expect that we'll be able to do a little better than that. The guys are doing a great job. We're continuing to really get aggressive on the payables side and the inventory side. There's some additional opportunity there, but just from a modeling perspective I think if you were to use 15 to 16% you're probably in the ballpark. CapEx is probably going to run 2 to 3% of sales and as we've said in the past, we don't really need any brick and mortar. We certainly have adequate capacity to work ourselves back into a much more favorable situation relative to the top line, so I wouldn't anticipate that being significant absent some growth opportunity that might develop.

Got it. Thank you.

Thank you.

At this time I'd like to turn the call back over to our presenters for any additional or closing remarks.

Thank you, and if you could all flip to slide 18, which is basically our promo for our investors day. I'd like to thank you again for joining us. We continue to aggressively manage our cost structure and have worked very hard over the past several quarters to offset the impacts of the current economic environment on our businesses. Although we expect market conditions in the near term to be very challenging, we continue to be confident that the long term fundamentals for new home construction and home improvement products are positive.

That confidence is buoyed by the dedication and energy of the Masco team. We believe we've made significant progress transforming business models to enhance manufacturing flexibility, better understanding of our customers, and ultimate end consumers' total experience with our products, working to enhance the quality and sustainability of our products and processes, driving continuous improvement in lean principles in everything we do, ensuring that our pipeline for innovation and new products and services is robust, and continuing to invest in the development and opportunities for our employees worldwide that are making it all happen.

As we mentioned in the second quarter, it came in a little better than we anticipated a couple months ago. We're starting to see improvement in the relationship between selling prices and commodities and the benefits of cost reduction and profit improvement initiatives our folks are driving across the Company. These actions will not only continue to partially offset the impact of the significant volume declines we are experiencing but importantly, contribute to the ongoing leaning of our cost structure.

Forecasting business conditions continues to be very difficult, particularly given job losses and potential foreclosures; however, there are signs that the economy and housing and home improvement markets may be stabilizing. Government stimulus and liquidity programs are in place. Mortgage rates are at historically attractive rates. Sales of existing homes have ticked up. Home prices appear to be stabilizing in certain markets; and importantly, consumer confidence is improved from where it was a year ago.

There's a lot of energy at Masco and we will share that with you this Fall at our investor conference on September 17. Please hold that date. We will review with you how we are positioning Masco to win going forward. Thank you.

This does conclude today's conference. We thank you for your participation.