馬斯科 (MAS) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Masco Corporation 2009 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 are available on Masco's web site, 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 use about the future performance and about non-GAAP financial measures. After a brief discussion by management, the call will be open for analysts' questions. If we unable to get to your question during this call, please call the Masco Corporation investor relations office at 313-792-5500. I would now like to turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead, sir.

Thank you, Tiffany and thank all of you for joining us today for Masco's 2009 fourth quarter and full year earnings call. Joining me today are Donny DeMarie, our Executive Vice President and Chief Operating Officer, and John Sznewajs our CFO and Richard Manoogian, our Chairman.

And, if you would please move to slide number three. I would like to start with our fourth quarter. And our fourth quarter results were relatively positive close to what was obviously a very tough year. Markets for most of our products are currently showing modest improvement and when we compare the fourth quarter of 2009 to fourth quarter, 2008, our sales key retailers increased 8%. That's the first positive comp we've had there for quite some time. Three of our five business segments had sales increases and excluding charges, four or five had positive profit improvement. Our international operations had another strong quarter, the second strong quarter in a row and our operating profit excluding impairment charges improved over the fourth quarter of 2008. Admittedly comps in the fourth quarter were easier and we did get some help from foreign currency but it was a very solid quarter for us.

If you flip to side number four, as 2009 progressed, we saw some very nice improvement in some key metrics. Gross profit for the full year was up 100 basis points in the second and the third quarters exceeded 27%. I mention sales to key retailers turned positive in the fourth quarter and you can see as the year progressed, those declines were less. In addition, our decremental margin for the full year was 14%, that's versus a contribution margin of approximately 30%. I think we did a very good job throughout the Company offsetting the volume declines.

Fourth quarter sales, for example, were down $58 million, but profit was up $82 million. And that decremental margin that I mentioned, compares to a 33%, 34% decremental margin in 2008. If you flip to slide number five, take a look at fourth quarter earnings per share. We did have a loss related to goodwill impairment of $0.49. That compares to $1.44 in the prior year, on an as reported basis. Both had goodwill impairment-related issues but excluding those impairment charges, we were $0.02 positive in the fourth quarter of 2009, versus a loss of $0.17 in the prior year quarter. We had rationalization charges in the fourth quarter of 2009 of $27 million. That's down from $39 million in the prior year. Last year, we did have impairment charges for financial investments in the fourth quarter of $0.05, and we benefited in the fourth quarter for both years, excluding the goodwill impairment charge from the analysis. Our tax rates were a little bit lower than the normalized 36% tax rate that we would normally have, and that benefited earnings by $0.02 in the fourth quarter of '09 and $0.03 in the fourth quarter of '08.

If you flip to slide number six, we'll take a look at the full year. Our net sales for the full year were down 18%, excluding the impairment charges for goodwill. We reported $0.11 positive versus $0.20 in the prior year. On an as reported basis, including the goodwill impairments, loss in 2009 would have been $0.41 versus a loss of $1.06 in 2008. Free cash flow approximated $550 million, which obviously is a very strong performance, given the environment, and I would point out that we -- early in the year amended our credit agreement. Obviously if we go back to that period that started mid September of '08 through March of '09, it was rather gloomy, rather tough period.

We were focused at that point in time on liquidity, debt covenants that type of thing and just wanted to remind everybody that we did successfully amend that agreement and there's some covenant analysis in the appendix. The -- one of the key points I would like to make is we ended the year with $1.4 billion of cash on the balance sheet. If we flip to slide number seven, I mentioned the $0.11 versus the $0.20 in terms of EPS excluding the impairment-related charges. Rationalization charges for the full year 2009 were $94 million. That compares with $78 million in 2008. We did have a reduction in impairment charges for financial investments from $0.10 to $0.02 and, again, the tax impact in 2009 compared to a normalized 36% tax rate again excluding the impairment charges was a favorable $0.02 impact and last year, you might remember that we had a very high tax rate. I think 57% on that same proforma kind of basis without the goodwill impairment which related to the repatriation of foreign earnings, which cost us about $0.16 on that same basis.

If you flip to slide number eight, and talk about total Masco. For the full year, we were down 18% as I mentioned, that's $1.7 billion in terms of top line decline, and that's due to the declines in new home construction market and declines in the home improvement markets. We were able to offset some of that impact with new product introductions and with promotional activities, as well as market share gains. Our margins were down from 5.9%, to 4.1%, and that reflects the lower volume and related under absorption of fixed cost, less favorable product mix and increased business rationalization costs. And again, we partially offset that with improvement in the relationship between price and commodities, as well as cost reductions. I mentioned our decremental margin, a little earlier of 14%. Our profit was actually down $240 million and on $1.7 billion, decline in sales we would have expected with a contribution margin of about 30% to be down about $500 million. So you can see that we offset about $260 million of that through cost reductions and improvement in the price commodity relationship.

If you flip to slide number nine, this shows our North American operations, down 18% for the full year. Margins down from 7.4% to 5.2%, and we did show, as you can see, the lower left-hand corner here some nice improvement in the fourth quarter. If you flip to slide 10, please, our international operations were off 17% for the full year and that includes a 10% decrease in local currencies. In the fourth quarter, we did have a positive comparison in local currencies, and if you take into account foreign currency translation on a full-year basis that reduced sales by $137 million, and in the fourth quarter increased sales by $42 million. As I mentioned earlier, we did have a very, very solid close for our international operations the last two quarters of the year. Margins were up on a full-year basis from 7.7% to 9.9%. So, again, with a sales decline of 17%, that's a really nice improvement and I think in the last two quarters, without restructuring charges, we ran about 12%, 13% in terms of margins. So real nice contributions from our international operations.

If you flip to slide number 11, where we have summary of our working capital performance for the year, again, very, very good performance across the board in all of these categories. We will file our 10-K next week. You will be able to see the cash flow analysis in the 10-K. When you see that, you will see that working capital generated, I think, around $230 million of cash this year in terms of free cash flow, and we will put on the web, once we do file the K, comparative cash flow with '09 and '08. If you flip to slide 12, let me back up just a minute. I would like to compliment our team on the working capital management that they did.. It was a really, really solid job across all of our business units. I think as all of you know, we did a lot of incenting and put a lot of emphasis on cash flow last year and the team really came through and did a great job.

Flip to slide number 12, taking a look at our cabinet-related business. Sales were down 26%, just a little over $600 million. We did have for a full year, the negative impact of currency translation was about $36 million, in the fourth quarter that was a positive 12. We also had a decline in profitability in this particular segment, given the large volume decline. We went from about a 3% positive margin to about a 4% negative margin in terms of ROS. We did have increased restructuring charges related to this segment from 23 to $43 million year-over-year on a full-year basis, and the decremental margin in this segment, excluding charges was 18%, which was a pretty good performance in terms of our our cabinet-related business and they had a very solid fourth quarter. In terms of plumbing-related products, sales were off 15% for the full year, $438 million.

We had lower volumes in both North America and in international markets, but we did benefit from new product introductions and some increased in promotional and advertising-related activities. We also had a negative impact in this particular segment on-- related to foreign currency of $90 million for the full year. Positive impact of $36 million in the fourth quarter. Margins improved, notwithstanding the fact that we were down in sales from 10.4 to 10.8% and the decremental margin in this segment was only 9%. So a very good performance by our plumbing-related businesses. Installation and other products, on slide number 14, sales were off just a little over $600 million, down 33%. And that compares to starts being off 39% and starts when we lag them a quarter which really is more directly related to our business of 43%. And we think we are picking up some nice market share in this particular segment. We went from a modest profit last year to a pretty significant loss in this particular segment, rationalization charges were up about $9 million year-over-year and our decremental margin of 21% was a little bit below our contribution margin in this particular segment.

You flip to slide number 15, decorative architectural products, which includes our paint and builders' hardware. We did have an increase in this segment of 5% year-over-year. Increased sale of paints and stains were more than offset the lower retail sales of builder hardware in this segment. Sales of paints and stains benefited from new products as well as promotional and advertising-related activities. Margins ended the year at 21.9%, and that's a nice improvement over 2008, but it's also very consistent with where we have been historically in this segment. Back in 2007, full year margins were 21.6%, and in 2006 -- I'm sorry, 21.7%. In 2006, they were 21.6%. So, again, a very nice year with our paint-related business. And we also saw some nice improvement in terms of profitability as we mentioned earlier in the builders hardware related category.

You flip to slide number 16, other specialty products. Sales here were off 18%, about $130 million, and we had lower sales volume of windows in both North America and in the United Kingdom. And we also had lower sales of fastening tools. Again, those were partially offset by some increased sales of energy efficient windows and some market share gains in the UK. We had negative currency in this segment of $25 million for the full year, and in the fourth quarter that was about a push. Margins were flat, notwithstanding the fact that we were down 18% at 4.1%, and the decremental margin in the segment was approximately 8%. If you flip to slide 17, I'm going to turn the presentation over to Donny to talk a little bit about what we think is a very exciting process that we're engaged in with our cabinet-related businesses, Donny?.

Thank you. Tim, and thank all of you. I would like to bring you up to speed on what we are doing with our cabinet platform in North America. If you can, flip to slide number 18. Give you a little history of the cabinet platform, it was really a series of four acquisitions. We acquired Merillat back in 1985 and added KraftsMaid in the '90s, Quality in 1997 and then Mills Pride.

In 2004, we made a decision to combine the retail cabinet businesses into the Masco retail cabinet group and the builder businesses into the builder cabinet group, looking to realize some efficiencies and then I think as some of you have followed us over the last couple of years realized work we have done within that segment to rationalize our capacity, we have -- we have either settled or idled six plans during the last two years and we are in the midst of an ERP implementation at the builder cabinet group and moving to a common architecture within Merillat and Quality. As we spoke at each of the successive calls and conferences, there was a lot of work to do in this segment. And each successive event allowed us to go deeper to address our cost structure and manufacturing efficiencies and today is really the next step in that process.

If I can take you to slide 19, as we look at kind of the rationale, yes, the sales have been down significantly. I think we are all familiar with what's happening to housing starts and big ticket items at retail. Although we have been the leader in this industry and have the two strongest brand names, it's relatively an unbranded category. So it leaves a lot of opportunity for us to really come up with something different, and the consumer has a very tough decision here with a lot of complications and really uncertainty about the outcome. So we felt now was the time to make a bold move to really create a game-changing strategy. So if you flip to slide 20, Masco cabinetry will be one organization. It will have the leading brand portfolios on both the consumer and the builder's side. KraftsMaid is the number one brand with Merillat being the number two brand and amongst builders it is the number one brand. We have extensive distribution, networking and manufacturing capabilities.

Operationally, we have demonstrated our ability to be very efficient. Our Culpeper plant was just awarded a top 10 best plant by industry week, along with the awards we have gotten on the Six Sigma, best places to work. We've had superior quality. Our KraftsMaid brand was awarded number one from JD Powers in cabinet satisfaction. We think the combination of these two groups will allow us to get to a lower cost. We are the most innovative and we will continue to demonstrate innovation and talent. Talent will be a big part of this organization. Karen Strauss, would is the President of the Builder Cabinet Group, will be the President of Masco Cabinetry, and Tim Yaggi who is the current group president for North American builder will continue to be the group president over this new organization. Tim, obviously has done a great job for us while he's been here and his previous experience as EVP of American operations for Whirlpool, you know, included the Whirlpool acquisition of Maytag. So Tim has a lot of experience in handling these type of integrations and we are excited about the team we put together. Slide 21, as we looked at this opportunity to combine these organizations, we really felt this integration was about how we go to market and really creating a compelling go to market strategy, although we see the obvious opportunities to take costs out, it was mainly about how we go to market and position our brands to win. The top three consumer purchase drivers in this category are covered by our brand, you know, and the KraftsMaid brand is really positioned as top style and design. Our Merillat is on the top storage and functionality. And the value price point product is really all about durability and value. If I can have you switch to slide 22. You know, we believe the integration will allow us to really out perform the recovery. By having a coordinated go-to-market strategy across all categories will allow us to cover the price point and really Garner a larger share of the wallet across all of the segments. ******

We also believe from a cost reduction opportunity we've earmarked $30 million in annualized savings and we will achieve approximately a third of that number in 2010 and we will incur about $40 million in one-time charges and those will largely be in 2010. We are going to use the cost reduction to really fund further investment in our brands and innovation. Slide number 23, for those of us who had the opportunity to join us at the builders show, you have seen some of the really new to the world type stuff we are doing.

Our virtual selection center is now in the second phase and we are running BETA sites with some of our key customers where we have really solved the process or simplified the process for a homeowner related to selection of kitchens, related to paint, flooring, counter tops, which is a great way to visualize a very difficult purchase decision and then to be able to walk away with confidence that you actually achieved what it was you were trying to achieve and created that really unique experience. Our DeNova countertops is a unique process under which we can template a countertop and deliver a cabinet and countertop on the same day and allows to us make sure that we've got the right fit so it allows us to eliminate any errors related to the countertops.

Not only now do we have DeNova on the builders side but combining them under Masco cabinetry, it allows us to also offer a combined solution to our retail customers and then CoreGuard which was our introduction at this year's international builder's show really challenged the paradigm that the box, the cabinet box needs to be wood. And CoreGuard we have introduced a sink base which is a polymer that's resistant to water, mold, mildew and really solves that under the sink kind of problem that we've all had when you have a leak or something not perform as it's supposed to. So, we're excited about this innovation. These are some examples of the type of work we are doing in new product development and design and I expect to see more of this through the combination of the companies. And with that, I will turn the call back over to Tim.

Thanks, Donny. And if you would please flip to slide number 24, just a couple of comments before we go to the Q&A session. I want to talk a little bit about our perspective on the economic environment as we go into 2010. We do believe in North America that repair remodel activity will show modest improvement this year. We continue to believe that there will still be challenge for bigger ticket related remodeled, repair type expenditures like kitchen remodels and that type of thing.

We are a little bit cautious, obviously as we go into 2010, employment levels, obviously are still very challenging from an unemployment standpoint, credit availability is an issue, home values, consumer confidence, all kind of play in here, but we expect to see some modest improvement. In terms of housing starts, we believe that for the full year, 2010, we are looking at starts somewhere between 600 and $700,000, versus the $554,000 last year in 2009. And we would also remind folks that generally speaking, we have a one quarter lag in terms of the impact on our business relative to housing starts. We continue to be concerned about foreclosure activity, the ability to get financing in terms of new home buyers, but certainly are anticipating an improvement over 2009. We also expect that European economies should show some modest improvements in 2010.

If you flip to slide number 25, we've provided here some information related to segment mix, relative to the composition of our international and North American-related operations, and then the percent of -- approximate percents of new home construction by segment. Just as a data point for the full year 2009, we estimate that new home construction -- our sales related to new home construction approximated 25, 26% for the full year. And if you move to slide number 26, I won't necessarily walk through this information, but we have provided some other financial data for modeling purposes relative to some of the things that certainly would be important as you prepare your models. We would also remind you that if you anticipate that our top line will be up in 2010, from 2009, as you think about cash flow, typically as we have indicated many times, working capital defined as receivables, inventories less payables approximate about 15% of sales. We will continue, obviously, to manage working capital aggressively, but there will be additional working capital required in the balance sheet as business picks up. And, with that, Tiffany, we'll open up the lines for q&a.

Thank you. (Operator Instructions) Our first question comes from Ivy Zelman of Zelman & Associates.

Good morning, guys, this is actually Dennis McGill.

Hi, Dennis.

Hi, guys. Thanks for all the information. One thing that maybe you didn't touch on and was hoping to get some color on it and how you guys are thinking about it heading into the years. Raw materials and what you guys are seeing as far as some of your -- your key raw materials across the businesses and how you would think about that as we head into 2010.

Yes, Denny, I guess I kind of broaden that a little bit. I guess as we think about 2010, some information that we think will help for modeling purposes, rationalization charges, as you might have seen on the data sheet, we anticipate will be down about $24 million year-over-year. We also add about $20 million of other one-time type expenditures, pension curtailment, litigation, acceleration of some stock-based comp. That aggregated about $20 million.

We anticipate going into 2010, that savings related to 2009 activities, together with the $10 million that Donny just mentioned relative to the cabinet integration, that savings related to programs should be about -- somewhere around 50, $60 million, as we go into 2010. Now, again those are actions we took last year that will flow into 2010. In terms of your specific question about the relationship between price and commodity, we estimate right now we've got head wind or exposure of somewhere between 80 and 100 million. Now, that's a little bit of a moving target. Metals have backed off a little bit and most of that does relate to metals-related cost as well as petroleum-based inputs for paint and windows.

In the past, as we have indicated, we have worked very hard to offset those types of things and we will be working with suppliers. We will be working on productivity and we certainly will be considering price-related issues as it relates to commodity cost increases. And I think we have demonstrated that we have done a pretty good job of offsetting those in the past. Occasionally, there's a little bit of a lag to that, or there can be a little bit of a lag both ways. Most of that head wind, if you will, is related to plumbing, and -- but would impact our other segments as well, and the other section that would probably be the most significant would be our decorative architectural products with builders hardware as well as paints and stains. But that gives you a little bit of perspective from what we see from -- in relation to some of the key items for modeling purposes as we go into 2010.

No, that's definitely helpful and the 50 to $60 million you mentioned, that's inclusive of the 10 in cabinets.

Yes, that includes cabs and most of that cost savings from 2009 activity would be in the cabinet segment, as well as the installation segment. Obviously, there's other impacts in some of the other three segments but most of it would be cab and installation related.

Okay. And then my follow-up question, as we look at the international business, it seems to at least have troughed here near term, shown positive growth this quarter and wonder if you could give us maybe the pluses or minuses of what's going on across the different brands there and I guess you feel comfortable that the worst is over, talking about modest growth next year. So maybe just some additional color around that, is it market share gains or are you seeing actual demand across some of the different categories?

Well, I think a lot of it is market share gain, Dennis. We have performed very well in plumbing in Germany, and the project work that we've been involved in in the Middle East has picked up. So, again that mostly is share, because the German economy is not necessarily growing.

In the United Kingdom, we have seen some nice gains in our window-related business, as well as our Bristan business in terms of plumbing. I don't know, Donny, if there's anything that you have that you want to add to that. I think for the most part, it's market share gains, slight improvement in the environment, but I think in the UK window group, for example, we've seen a lot of smaller competitors, obviously, struggling in this environment. I think that's one of the things that been a big benefit in terms of being mart of the Masco family. We have seen that in hot tubs. We talked about that last quarter here in North America as well.

Well, and I would add, Dennis, we introduced the Masco Business System both here and in Europe, and we have gotten a lot of traction related to innovation. We've got some great new products. Our UK window group has taken a lot of share with an energy efficient product. Hansgrohe continues to be a design leader as far as new and innovative faucet design and lean in profit improvement

They have done a tremendous job as far as really taking costs out of their business and embracing lean principles and we've had (inaudible) on events throughout the European platform where they've all participated in each other's events and we've had some management changes over there, which have had a positive impact as well. So all in all, I think it's across the board, just a lot of nice work and a very difficult environment.

Okay. Very good. Thank you very much, guys.

Our next question comes from Peter Lisnic of Robert Baird.

Good morning, everyone.

Good morning, Pete.

Hey, Pete.

I guess I just want to clarify on the 80 to $100 million, can you maybe talk about what's embedded in terms of your price realization expectations in that number. Is that 80 to $100 million a net number?

Yes, that's a net number, Pete, and we do anticipate having some price improvement this year. It's relatively modest, compared to last year at this point in time, but having said that, to the extent that we need to, we will certainly be pursuing price.

Okay. Fair enough. On the -- on the savings that roll into 2010, you mentioned the $10 million from cabinets but I would assume that there would be -- I mean if I just look at the cabinet business from third quarter to fourth quarter, the incremental improvement in operating income suggests that there's some structural improvement going on there. I guess I'm a bit confused. Or maybe you could add some color as to what else rolls in from '09 activities into 2010 on the savings side of the equation.

Yes, what I mentioned there, maybe I wasn't clear, Pete, but what I was trying to convey is that the 50 to $60 million includes the $10 million of savings that Donny talked about with the integration of the cabinet business into Masco cabinetry. So that is part of the 50 to $60 million and as I mentioned, most of that 50 to $60 million would be related to cabs and installation.

Okay. Thank you. That is helpful.

Okay, Pete.

(Operator Instructions) Our next question is from Budd Bugatch of Raymond James.

Good morning, Tim. Good morning, Donny, good morning, Richard, John.

Hey, Bud.

Yes, a couple of questions. For a long time we have talked about the 2014 view of the 1.5 million housing starts and how that has played into the long-term view of Masco and I want to make sure or talk about whether that's still intact. I think you review that as the fourth quarter comes up and it factors into your -- your assessment of your goodwill. Obviously there was some change in that or can you refresh us as to how you are thinking about that today.

Yes, we will let John take that on, Budd. There's a very extensive disclosure in the 10-K that will be out, I think Tuesday or Wednesday of next week. And -- but John can kind of walk through the analysis on that.

Yes. Thanks, Tim. Budd as we look at our goodwill data analysis and our five-year forecast, just to refresh everyone's memory, what we do is we go to some outside economists not -- forecasts are not developed here. (inaudible) put us is that 2014, for goodwill testing purposes we had 1.6 million housing starts that we use in that terminal year to do our testing, and for actually the component of the inputs we provide our business units to provide their long range plans.

That's up just very slightly from the number that we gave them last year which was 1.55 million starts in -- for the fifth year of the long-range planning process. So we -- and we feel pretty comfortable-- but as a result, as you mentioned, we ended up with $262 million of goodwill impairment charges. That breaks down into about 220 to $225 million or so in our other segment and about $40 million in our plumbing segment. The plumbing segment is related to one of our European operations and the $200 million in other related to our fastening tool business here in North America.

And if I could sneak in a question about the -- is there a sensitivity to that? And if the skeptic says it's not going to be 1.6 million, it's like 1.3 or 1.4 million housing starts, what's the sensitivity of your goodwill impairment to a lower estimate?

Yes, well, we want some disclosure on that as we did in last year's 10-K. As a result, a couple of business units are within a 10% of being impaired, but there are a lot of factors that go into that, as you well know, depending on which variables may change, and then we do have one that's less than 10% as well, one business unit that would be within 10% of being impaired.

John, you mentioned the methodology to get to the 1.6.

The discount cash flow methodology.

No, I mean in terms of picking the housing start number, relative to using an outside--

Yes, did I.

Okay.

And just for my follow-up, you have decided not to give specific guidance on sales and earnings going forward, and increase a disclosure. Could you maybe perhaps give us some disclosure on that as to what your thinking is, as things are starting to improve, walking away from guidance and then is some of that additional disclosure, perhaps as an example in operating income walk in decorative and architectural where the incremental margin was approximately 100%. What were the puts and takes on going from that this year?

Well, in terms of the decorative architectural --

Yes, sir.

The puts and takes in there, as we mentioned before, would be primarily improvement in the relationship between price and commodity. There's a little bit of cost savings in our segment, and also significant improvement by our builder's hardware related business which had some program-related costs last year that we talked, about I think earlier in the year, Budd, in the second quarter.

Could you quantify some of that, Tim, and the volume and price?

Budd, we don't get specific about those -- as we have said in the past, we start talking about price, that gets a little bit customer specific and we would rather not get into that level of detail. And that's certainly important to us and to our customers.

And just if you would, touch on the philosophy of why you walked away from specific guidance then.

Well, our thought process, Budd, in terms of talking with investors is that there's a desire for additional information, and a lot of investors haven't necessarily found our guidance to be all that helpful or valuable, and I think our thought process is when you think about the fact that we do disclose our results in five different segments which is pretty extensive compared to most folks, the macro factors for our business are pretty well known, I think by enhancing some of the disclosure, that, we certainly are providing adequate information for folks like yourself and others to do their modeling.

I actually agree with you on all of those points. So good luck on the year.

Okay. Operator, we'll take another question.

Our next question is from Keith Hughes of SunTrust.

Thank you. This is a question on the installation division. You have gotten out of a lot of trades this year, so even if we go into a year with higher housing starts in 2010, could we still see revenues below that? Because just because you exited so many things, so many unprofitable things that you have done in the past?

Well, Keith -- Keith, it's Donny. The things that we have exited tend to be small ticket items or very, very small market share, where they were done in a few markets where there really wasn't any critical mass assembled and our thought when we did that was that at is 1.8 to 2 million housing starts we could make those kind of issues work.

But at the lower housing start numbers, it's very difficult to make some of those trades work on an individual branch by branch location. So we've gone back to really look where we had the critical mass and where scale really gave us some cost efficiencies and those areas we think that -- that the product mix we have today is actually better and we think by focusing on those areas where we have scale, and really have a little bit higher market share, we think we will be able to do quite well.

Is the -- would you anticipate the losses to come down pretty substantially as early as the first half of 2010, given the work in which you see them building right now?

No. Keith, the problem is on a lag basis, the start number, when we lag it, it's going to be a very difficult first half of the year and then most of the uptick that we're going to see in going from where we are at today, to the 6 to 700,000 will really occur later in the year. And if we were going to lag -- we are talking about a mid single digit increase on a lag basis. So we think it's going to be a difficult environment, more difficult in the first half than second half, at least as we currently view things, but it's going to be a difficult environment during 2010. Now, having said that, we are going to continue to do everything we can to take costs out without impairing our footprint because we think it's absolutely critical that we leave our footprint in place to be able to serve in the market as it recovers.

All right. Thank you.

Our next question is from Dan Oppenheim of Credit Suisse.

Thanks very much. I was wondering, in your numbers you show a modest increase in the CapEx in 2010, versus 2009, but still a very low level. As you think about the environment, are you to see some improvement in the sales activity are there other projects would you take on or is that a fairly stacked number (inaudible) 2010.

Yes, I wouldn't necessarily see that number going up at all, Dan and there may be a little bit of opportunity to maybe -- maybe reduce that a little bit. So I think, if anything, the chances of it being less than the 190 that you saw are probably higher than certainly it being above that number.

Great.

Based on what we know right now?

Terms of the improvement with key retailers, what would you say is driving that? Is it on the plumbing side? Is it -- would you say -- have you seen anything in terms of inventory restock yet, if you haven't, what do you expect as you deal with them, in terms of where you think they are and what's likely in 2010.

Well, I think the biggest driver there has really been new products, market share gains, I mean, we have introduced a new paint product premium plus ultra interior which is a primer and paint in one. And that has done very, very well. We've also had some nice new faucet-related products. So I think primarily innovation, which has been a real driver for us, as well as some market share gains. I don't know, Donny, is there --

I would add that we are doing the hard work and winning the aisle. We've got good products and we invested a lot of money in our brands. You probably couldn't have watched TV without seeing the --a Behr-branded commercial or Delta's messy hand commercial. We talked about how the touch 2O, we are having a hard time keeping that in stock in all of our retail outlets. We have done a lot of nice work in really bringing the brands to life and bringing new product and excitement into the aisle and we are committed to doing what we have to do to winning the aisle every day.

Dan, I don't know if you had a chance to get to the IBS this year or not, but we had a very dynamic display, and had some really great traffic there, and some really neat innovative opportunities. And, going forward. Donny talked a little bit about the Corguard for cabinets but innovation is something that we are really pushing hard throughout the entire organization.

Great. Thanks very much.

Our next question comes from Saul Ludwig of KeyBanc.

Hey, good morning. Parts of this discussion (inaudible) and raw materials. For 2009, what did you achieve in price and what did you benefit from raw materials?

Not the net number, but what were the two components and then I have a follow-up. We don't have the components at this point. We have been giving the net number, Saul, for the last four quarters and that's the way we have constructed the data.

And the net number for '09 was?

The net number for price commodity would be right around, I think it's about $140 million and savings would have been on a net basis, about $110 million in terms of cost savings.

You mean cost savings other than price and raw materials?

Yes, exactly Yes, from some of the rationalization actions that we've taken over the course of the last several years. We did announce at our investor conference and we are right on track for that, that the -- if we go back to the end of 2006, and compare our fixed cost structure with where we ended 2009, on a gross base, we've taken out about $400 million in terms of fixed costs. On a net basis, when you allow for some investments in start-ups and a couple of other activities and acquisition of countertops, that net number is a little bit north of $300 million. So that might give you a little bit of perspective on that as well.

So just to make sure I get clarity. In '09, price versus raw materials was $140 million favorable.

Right approximately, yes..

Right. For 2010, you expect it to be 80 to $100 million negative.

We currently have head winds of what we think will be 80 to $100 million. I'm confident that we'll be able to offset a significant portion of that. We are starting to see metal costs for zinc and copper which are very important to us back off a little bit. We've got conversations going on with suppliers, certainly price is an opportunity as well, productivity. So we will, I'm sure, offset a significant portion of that.

Well, not to -- and we wouldn't want you to comment on future price actions, but here we are as of February 11th, have any price increases, either for your plumbing-related products where you thought you had the great pressure or in paints and stains, have any price increases for this year been implemented as of this date?

Yes. Yes.

Could you quantify those a little bit?

No.

Okay. Thank you very much.

Thank you.

Our next question comes from Ken Zener of Macquarie.

Hi, good morning. This is Rodney on for Ken.

Hey, Rod.

So it would appear that the Hansgrohe business contributed about half of the profit in plumbing, and with international sales making a comeback, could you expand on trends in that business and perhaps any momentum you would expect to see into 2010 or at least the first half?

Yes I'm not talking specifically Hansgrohe but I'm talking about international -- the international plumbing operations. We saw as the year went on that the project work that was being done in some of the areas of the world, primarily in the Middle East, really started to come back. We saw the project work get stronger. We've done a great job within continental Europe in growing our market share, both with our Bristan operation in the UK and Hansgrohe throughout continental Europe has done a really good job of growing their share. And we introduced a lot of new products last year that have done really well. So we had a lot of momentum coming out of 2009, that we hope continues into 2010.

Okay. Thank you. And just on cabinets, it looks like sales were flat sequentially, versus the typical dip in the fourth quarter with margins improving sequentially as well. I just wanted to clarify. That was a sales shift to a higher price point, or higher volumes in the fourth quarter specifically?

Margins and caps.

In terms of margins. Margins, lower G&A cost in Q4 versus Q3. You also had some place efforts from some overhead savings in the period as well.

Again, there's been a lot of activity in cabinets from a cost reduction standpoint. Donny talked about some of the plant closures and I think we started to see that really kick in in the fourth quarter.

Okay. But on the top line, it was pretty flat. Typically I noticed the sales go down in the fourth quarter.

We did some successful professional activity, a couple of retail accounts in the fourth quarter that drove some pretty good sales with those two large customers.

We also had positive foreign currency in the fourth quarter as well. I think I mentioned that earlier when we went through the slides.

All right. Thanks, guys.

Thanks, Rod.

Our next question is from [Megan McGrath] of Barclays Capital.

Hi, thanks. I wanted to follow up on your comment around the large products -- the projects, potentially lagging in 2010. I wonder if you could give us any historical context there, past recessions, what it -- is it following the same pattern, what do you think we need to get some of those larger projects.

Yes, Megan. We, I don't think have ever seen a recession of this magnitude. Typically in the past, when -- as we have commented many times when housing has been off, repair remodel activity has typically picked up, but, with unemployment rates where they are, with home values declining, which-- it's started to stabilize, obviously at this point in time, the access to credit, I mean this has been a relatively unique environment. I think the other thing you have to think about is that when you go back four or five years and think about the equity extraction that took place on folks refinancing their homes, taking a lot of that money and putting it into projects, there may have been a little bit of pull ahead, and at this point, there could be some deferral of some of those bigger projects as we go forward, but I think as -- as credit eases up, as employment levels start to increase going forward, I would -- I would expect we would get back into a situation where we'll see more of that type of activity.

Okay. Great. Thanks. And then on your paint margins, you mentioned in your commentary that where you ended for the year was pretty consistent with where you had been long term historical. You did mention in 2010, that there might be some head winds there from commodity costs. Anything else we should think about from a modeling perspective on the margins in the decorative arts segments.

No, I don't think so. I think the -- we obviously had a very strong year on the top line. I think you are familiar, Megan, with the new product introductions that we've got out there, as well as the pro paint initiative that's going on. I think that we certainly anticipate having another strong top line related year.

Great. Thank you very much.

Thank you.

You are our next question comes from [David McGregor of Longbow Research].

Yes, good morning, everyone.

Hi, David.

Just a couple of questions, I guess, first of all, with respect to the cabinet business. I realized the principal motivation for integrating these businesses was cost savings and pursuing efficiencies, but does this create any near term top line opportunities, market share, otherwise, and then the second question, it's the third year of CapEx being below depreciation and I realize you don't need a lot of new bricks and mortar at this point but just to go back to the earlier question about CapEx, expand on that a little bit further. You must have some capital programs-- discretionary capital programs coming up here fairly soon or maintain your competitive position. I wonder if you could speak to that a little bit. Thank you.

David, I will take the first part of that. On the cabinet side and hopefully we did a decent job through the slides, and I want to revisit this. This was not about cost and efficiencies, and cost takeout. Matter of fact, it was anything but. We have put these businesses together because we felt we had a compelling go-to-market strategy and as we looked and did the research and really understood the consumers' experience with our product and understood that the top three purchase drivers were around style, functionality, storage, and durability and value, we had three brands that lined one that perfectly, but being run as independent businesses, they all felt like they had to expand to be able to capture more of the -- more of the consumers and appeal.

So by really combining this into one organization, and allowing us to stay true to the those brand promises, it allows us to really develop deeply those brands and to develop them within their targeted consumer segments and then to really invest in innovation and to drive differentiation. So this was all about go to market and clearly, we think there's big opportunities to gain market share across all of our channels. So it's really about how we go to market.

Having said that, as we -- we've moved to a common architecture on the builder's side of the businesses, we are looking at those same type of efficiencies across the platform now. . If we have the same common architecture of Merillat and Quality, can we move to a more standardized architecture within the retail business as well and then how do we really look at the entire supply chain, soup to nuts and really how we purchase and procure goods and then strategically price.

Lots and lots of opportunity both on the cost side and the profit improvement but this initiative was really all about how we go to market. The second part of your question related to CapEx, I'm going to let John comment related to

Yes, David. Your point is well taken. Our depreciation and amortization will be below CapEx -- our CapEx will be below G&A again this year, but if you think of how we invested and where we invested in the '04 to '07 time frame, we didn't build a lot of bricks and mortar. What we're really seeing now that we have the capacity to handle the volume demands really the capital that you are seeing us spend is the innovation and funding all of the innovation that all of our business units are requesting.

So you can see that the $193 million or so that -- that Tim quoted earlier the big chunk of that. Well, there's a little bit of capacity-related, most of that is for new products and tooling related to the new products so we can get those on the store shelves.

Yes, I would add to, that David, as we have mentioned in the past, the only -- there's probably only a couple of potential areas on the brick and mortar side. One might be European faucet-related business. We have mentioned that in the past. The other is as paint continues to grow, depending on the growth opportunities they are going forward, there may be some possibility, but John's point is right on in terms of the investment we made in prior years relative to brick and mortar. We've got capacity to handle significantly higher volume than we are certainly dealing with today.

Should we continue to think of maintenance CapEx as 130, 135, somewhere in there?

Probably a little bit lower than, that David. I would argue it would be more in the 110, 120 range right now.

Thank you very much.

Tiffany, before we take one more question, I want to clarify the comments we made to the first question from Dennis earlier and Pete had a follow-up, just to make sure that there isn't confusion. I mentioned that as we think about 2010, that our rationalization charges are down $24 million. We also have other expenses we had this year. I mentioned litigation, accelerated stock comp and curtailment of our pension plan, there was a cost there of $8 million. Those aggregate about $20 million.

The cost savings that flow into 2010 are in addition to those two items. So in other words, you've got positive $24 million, or positive 20 and then 50 to $60 million, including the $10 million that Donny mentioned, of carryover cost reductions from 2009 activities. So the cumulative number is 95 to $105 million. So I just want to make sure that everybody got that. I -- Donny mentioned here it was possible somebody might have added the 24, the 20, and the 10 and go to the 50 or the $60 million. I want to make sure that everybody understands that. With that, we will take one more question.

And our last question today comes from Nishu Sood with Deutsche Bank

Actually, this is actually Rob Hanson on for Nishu. In the U.S. you have made significant strides (inaudible) in paint. I wonder if you thought about distribution of it internationally and is this even possible given your relationship with Home Depot.

Yes, Rob. We won't comment specifically on relationship issues with a customer but certainly our paint platform is more extensive than just Behr and Home Depot. And we have made strides. We actually are selling Behr paint in China and that is with Home Depot. We are selling Behr in Canada and Mexico, and we have just started selling paint, architectural products into South America with a large retailer down there.

So, our focus is going to be in North America, to grow with the pro. We are really working with Home Depot on a pro initiative and we have done really well, and we also are going to be focused on growing our [Kilz] brand as that makes sense for us here in North America. And outside of North America, we have a lot of focus on continuing to expand architectural -- our architectural coatings business and you are going to see more and more activity from us outside of North America.

All right. And in terms of the -- of more of a modeling question here. In terms of business rationalization charges are you expecting them to be evenly spread out through the year or weighted towards either half?

I think for the most part, they will probably be spread out through the year. I think the cabinet-related items are more in the back end.

All right. Thank you.

Donny talked about. Anything else, Rob?

Okay.

Okay. I've got a couple of comments I would like to make. I would like to thank everybody for joining us again today. We're extremely pleased with our results for 2009, and a very, very challenging environment. And we would like to recognize the Masco team worldwide for their accomplishments which include offsetting volume declines with aggressive cost management, generating significant cash flow, and for positioning their businesses through the implementation of the Masco Business System to win going forward.

Over the last three years, our markets have been decimated by the worldwide recession. Our sales are off over $4.5 billion, almost 40%. Some of our business units are off 60 to 70%. Instead of heading for the exits, we made a conscious decision to invest in our business, and as a result, we have gained more intimate knowledge of our customers and end consumers, created a robust pipeline of innovative new products, driven lean principles into our businesses, including, our processes to drive cost effective quality solutions for our customers and we have continued to add and develop world-class talent to make it all happen.

At Masco, it's all about strengthening our leadership brands and improving our execution. Our strategic intent is fairly straight forward. We want to be recognized as the most innovative building products company in the world. We're committed to that strategy, and we're also committed to out perform the recovery in our markets. We ended 2009 on a high note, and we enter 2010 with solid momentum. We expect business conditions in 2010 to be modestly improved over 2009. Longer term, we continue to believe that the fundamentals for our markets are positive, and we are excited about Masco's future opportunities. Thank you.

This concludes today's conference. Thank you for your participation.