馬斯科 (MAS) 2010 Q2 法說會逐字稿

Good morning ladies and gentlemen, welcome to the Masco Corporation 2010 second quarter conference call. As a reminder today's call is being recorded and simultaneously web cast. 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 Investor Relations section at www. Masco.com.

Before we begin managements presentation the Company wants to direct your attention to the current slides and the note at the end of the earnings release which are the cautionary reminders about statements reflect the Company's views 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 are unable to get to your questions during the call, please call the Masco Corporation Investor Relations office at 313-792-5500. I would now like to turn the call over to Tim Wadhams, President and CEO, of Masco. Mr. Wadhams, please go ahead.

Thank you, Cindy. Thank all of you for joining us today for Masco second quarter 2010 earnings call. I'm joined by Donny DeMarie, our Executive Vice President and Chief Operating Officer and John Sznewajs, our CFO. Please flip to slide number three. Net sales in the second quarter of 2010 increased 2%, compared to last year's second quarter. Income from operations, continuing operations was $0.01 per share compared to $0.19 per share on a as reported basis. I should point out that foreign currency did cost us about 1% in terms of the sales change. I want to talk about earnings per share and margins on a reconciled basis, we will do that in a couple of seconds. We did execute a new credit agreement in the second quarter, a line of $1.25 billion. We also retired $59 million of debt. We ended the quarter in a very strong cash position with $1.4 billion of cash at June 30, 2010. If you please flip to slide number four, I want to look at margins without some of the restructuring charges that occurred in this year's second quarter as well as last year's.

Looking at gross profit on as reported basis our gross profit margin was 26.7%, down 30 basis from 27%, in the second quarter of last year. However if we adjust those gross profit margins for rationalization charges and obviously we got a much more significant rationalization charge this year given some of the things we are doing with our cabinet business, gross margins would have been on adjusted basis for both years 28.4%, versus 27.4%. In addition at the bottom of the slide in terms of operating profit, if we add back rationalization charges in both years and again, these are the total rationalization charges the rationalization charges that were reconciled for gross margin are those charges that affected cost of sales. Also add back one time charges from the second quarter of 2009, our operating margins on comparative basis would have been 8.3% versus 7.3% again, with both on a an adjusted basis both gross margin and operating margin up 100 basis points.

If you flip to slide number five, in terms of earnings per share. In addition to rationalization charges in the quarter we also had impairment charges for financial assets. And that would be true in 2009 as well. If we add those back and normalize our tax rate at 36%, our comparative earnings would have been $0.16 in the second quarter of 2010, compared to $0.17 last year. In addition, I think this is an important point for investors, this year's earnings reduced by $0.02 related to incremental interest expense from the bond issue we had earlier this year. And we also had a swing in terms of currency translation impact. Last year we had gains, of $11 million, this year we had a loss of $5 million, that swing is about $0.03. Our $0.16 includes an additional $0.05 of interest expense and change in currency loss.

If you flip please flip to slide number six, taking a look at some of the trends we have been tracking over the course of the last couple of quarters and again, these on as an adjusted basis we have included the as reported numbers in the appendix. We talked about margins, you can see the key retailer sales were flat, in the quarter, I think many of you know we have announced the exit of certain products related to cabinets if we were to exclude cabinets in both quarters our key retail sales would have been up 3% in the second quarter. As it relates to cabinets at retail we do have a significant launch that will take place for KraftMaid in the fall of this year. Incremental margins were again, very strong in the quarter. We have incremental sales of $35 million with incremental profit of $24 million. With incremental margin of 69%.

If you please would flip to slide number seven, the 2% sales gain was driven primarily by plumbing both in North America and internationally as well as sales of windows and paints and stains. In addition we did have unfavorable currency impact of $17 million. You can see here these next slides presented on a segment basis, they exclude general core related expense as well as rationalization charges. But in terms of profitability you can see a nice increase here from 8.6% to 9.6%, again driven by both volume as well as cost reduction which offset a less favorable relationship between price and commodity. If you flip to slide number eight, North American sales were also up 2%, again, driven by plumbing and paints and stains. We show a nice margin improvement in North America, 8.7% increasing to 9.6% in the second quarter of 2010.

If you flip to slide number nine, please. International operations also were up 2%, driven by plumbing products and window sales which offset lower sales volumes of cabinets. Importantly our international operations were up 8%, in local currencies that's a second straight quarter that those businesses have been up 8%. We did have unfavorable currency from our international operations of $24 million. You can see here we had again very nice profit improvement for our international businesses this is a third straight quarter that we have shown some very nice margins in those operations. If you move to slide number 10 for cabinets, our cabinet sales were down, 5%, in the quarter, if we were to exclude the impact of foreign currency, as well as some of the products the that were exiting sales in this segment would have been flat. And on the same basis our North American sales for assembled cabinets would have been up 2%. We had some nice improvement in this segment from a profit stand point. Not with standing the fact that our sales were down. We did have a profit improvement again, on a reconciled basis without restructuring charges and continue to do a very good job in this segment in terms of cost reduction.

If you flip to slide number 11, our plumbing related products had another very strong quarter. Sales were up 8%. We had very good results in both North America as well as from our international operations. And we had very nice margin improvement as you can see from 12.4%, to 13.5%. So very, very good performance by our plumbing business.

If you flip to slide number 12 in terms of installation and other, services. Sales in this segment were down 1%. And when we look at starts, on a lag basis, lag 90 days, starts were up 14.5%. Based on the small number of starts we took a look at our topline on a first half basis, to see if those comparisons made more sense to us. In the first half on a lag basis 90 days, housing starts were down 3.7%. Our segment sales were off 7.5%. When we factor in the significant price reductions that have impacted our business from a competitive stand point that more than explains the difference between starts being down 3.7% and our sales being down 7.5%. And suggest to us that we continue to take share. Major highlight in this particular segment is the profit improvement that we saw. Even with sales off a little bit we did have a decrease in our loss from $27 million to $21 million. And I would point out that the $21 million includes $5 million of P&L impact related to our launch of Masco Home Services the well home related operation. So we are really pleased with the cost reductions and the work that's been done in this segment.

If you flip to slide number 13, decorative architectural products, I had another very solid quarter. Sales were flat year-over-year as increased sales of paints and stains were offset by declines in builder hardware. Margins were down slightly in the quarter reflecting less favorable price commodity relationships. As we done in the past, if we look at our first six months in this particular segment margins are comparable to last year down I think just a little bit from 21.9% to 21.4%. We had some challenges in this segment relative to commodity both in terms of resins and TI02, we believe that the worst is behind us, but supply is tight and talking with our suppliers some of our major suppliers could remain tight for sometime. Cost in this segment are up. Because of our excellent relationship with suppliers we have been able to get the supply we need and anticipate being able to do that going forward. Obviously it helps when you are growing. We are 100% committed to satisfying our customers and the end consumer. As you know I think you know we enjoyed 99.9% fill rates that important to us, maintaining lead time, fill rates and stock position. Both The Home Depot, our major customer for paint and Behr continue to take share, both had a very strong second quarter. We anticipate some margin pressure in the second half of 2010. Given the situation with price commodity relationships however we still expect to have solid margins. We will continue to work with our suppliers and continue to work on productivity within our facilities and operations and our customer. We are very committed to productivity and lean as I think all of you are aware. We will also continue to work to expand our business we continue to innovate, I had a great deal of success with our paint and primer in one, both for interior and exterior applications and continue to do a good job pursuing the [Pearl] paint initiative.

If you flip to slide number 14, other specialty products, showed increase of 4%, driven by increased sales volume of windows. We also had a nice performance in this segment from a profit standpoint with margins up from 5.5%, to 7.2%.

Flip to slide number 15, working capital, we had another very, very good performance, Donny, John, our operations folks across the Company, continue to do a very good job of managing working capital, working capital as a percent of sales, and here we are talking about receivables plus inventory less payables, in terms of dollars declined from 17.8% last year to 16.1% this year. We saw nice movement in both receivables and payables days. Inventory days are up slightly versus last year's second quarter. We look at that as a temporary situation, driven in part by sales fallen off a little bit late in the quarter. And the buy in for certain areas for certain products. I'm confident the inventory days will be worked down by the end of the year.

If you flip to slide number 16, I want to take a quick look at our thoughts about the macroeconomic environment. So far in 2010, our sales have been very uneven. We started January, February, modestly down in comparison with the prior year. March and April as we mentioned on the call last time around were up high single digits. May we saw up just modestly versus 2009. And in June, we were down in terms of our sales low single digits. And the trends in June that we experienced have continued in to July. Looking ahead it's a pretty tough read in terms of the overall market. The tax credit did not seem to drive a lot of activity from a housing starts standpoint and accordingly our feeling right now is that starts will be in a range of 575,000 to 625,000, and that compares with our previous range of 600,000 to 700,000. I think the Blue Chip Consensus right now is 660,000 and I think as most of you know that follow that, that has continued to drop virtually every month over the course of the last six to eight months. From a macro standpoint, we still think that repair, remodel activity, international business, will show some modest improvement year-over-year and again that is on a macro basis. Having said all that we think the second half from a top line stand point looks to be a bit challenging, again, that's not macro specific but that's a macro comment. Our attitude is we will continue to focus on the things we can control.

With that I would like to turn the presentation over to Donny to talk about the things we are doing in the installation segment and cabinet segment.

Thank you, Tim and if we can let's turn to slide number 18. The Masco Business System or MBS is our common operating platform to drive results through our individual operating companies. We turn to slide 19. Through MBS our focus has been on improving gross profit and lowering our fixed cost to create maximum operating leverage. We have aligned part of our initiative competition targets around improving our working capital while using lean principals to reduce cost and create the currency to reinvest in our business. Earlier, Tim has commented on some of the favorable trends.

Slide number 20. I like to spend sometime updating you on the progress and installation and other services as well as cabinets. First we will take a look at installation and other services on slide 21. We have continued to optimize our infrastructure in sense 2006, we are down approximately 30 %, in branch locations, 50% in vehicles, and 60% in head count. Including these numbers are significant reductions we have continued to make in 2010.

Slide number 22. We will win installation services by continuing to reduce our fixed costs, improve productivity and focusing on the profitable sales of installation and select diversified products we are continuing to open new distribution locations for service partners and now have 17 well home locations servicing new markets and expanding channels.

Slide number 23. As things improve we are the largest provider of installed installation in the United States and we have already reduced our fixed cost by approximately $180 million since 2006. Our ERP system will be creating scale and customer service advantage and our well home locations will position us as a leader in retro fit applications leveraging energy efficiency and building science. Competitive pricing will always be important but scale, performance and dependability will drive true competitive advantage in a more normal market.

Slide 24, we move on the cabinets slide 25. We have moth balled or closed eight facilities again, since 2006 and have lowered our head count in this segment by 45%. Slide number 26. We will win at Masco Cabinetry by exiting nonstrategic product lines and focusing on our core assembled products. We will lead the industry in innovation, design, manufacturing and service. Our three leading brands, KraftMaid, Merillat, and Quality address all significant consumer segments and price points and we will expand our presence in the dealer channel. Since we have announced the merger we had over 50 dealers add additional Masco brand to their current cabinet offerings. Slid number 27, Going forward we have already reduced our fixed cost by approximately $140 million. Again, since 2006, and our portfolio of leading brands will drive higher penetration and enable greater customer insight and customer value. We are leveraging our existing customers to drive coordinated counter tops and innovative solutions to both cooking and storage needs. Longer term, we see further opportunities to optimize our production, sales and distribution systems to further improve earnings and asset utilization. With that, Tim.

Thank you, Donny. With that Cindy, we will open the lines for questions.

Thank you (Operator Instructions). First question from Budd Bugatch at Raymond James.

Good morning Donny, Tim and John.

Good morning Budd.

One thing that struck me windows drove some improvement yet we still see deterioration or looks like deterioration in installation services and new housing activity forecast still much more conservative. Can you give us a flavor of what happened there and what caused that.

Windows Budd, we have seen a pretty significant shift in terms of moving from new construction to our repair remodel activity. There has been tax incentives in place which have encouraged window replacement. We seen pretty good activity in the United Kingdom relative to windows. Most of that is on replacement side as well. That would be a little bit of the difference there.

Is that also mill guard.

No not in the UK. That's the UK window group.

Okay. Can you talk a little bit about where you are now in the cabinet integration. When -- are you totally exited down out of RTA?

No but the RTA exit is really the timing is due to some customer related issue as we work through exit plans and the possible sale of that business. So we anticipate that will occur sometime around the end of or Q1 of next that we will be completely out of the RTA. On the integration side things have gone well, may first was the first day operating as Masco Cabinetry. We will be moving in to our new combined headquarters in Ann Arbor some where around October First. And integration seems to be going very well.

The exit of RTA is that domestic or international?

Just domestic. Just making sure I understood that.

We will take our next question from Ivy Zelman with Zelman and Associates.

Good morning everybody. You shown pretty good improvement on the profitability side and obviously you guys are working hard and doing tough things head counts et cetera and taking out fixed costs, what concerns me Tim on the first glance is looking at what had been a good quarter for new construction in terms of completions you mentioned 14.5% increase, I would like to understand the reconciliation that you gave us on why we wouldn't have seen growth in the best quarter for 2010 in installation services and that business from a top line perspective unless you can breakout volume for us versus price I think a lot of us will be confused on that and recognizing that the back half of the year will be much more challenging that's the first question, understanding that reconciliation, if you can break out cabinets as well you mentioned if it wasn't for your exit of RTA product within the home centers you would have been up, understanding the difference between repair and model in outlook you mention big ticket items expect to slow. I don't think a lot of people were expecting big ticket items to increase can you break apart what you are actually seeing at point of sale given that you commented July is trend do you think June was trending downs June was still a good completion month for new construction I think we need some more help here.

I will take the CAB side of that question, Ivy. What we have seen is on the builders side and on the dealers side for cabinets was relatively strong if you will in the Q2. Basically offsetting some declines at retail, we continue at retail to see slowness with big ticket related items obviously retail is the area where we have exited certain product groups. We had basically just in terms of comparing the two sides of that, the builders side and stronger dealer opportunity in the Q2 that would have offset retail side. Ivy, let Donny handle the question on the housing.

When we looked at the housing starts in the quarter, we really a lot of small numbers moving around quickly and swings between multi family and single family and took a look at the full year of 2010 versus full year same period of 2009 and then lag 90 days on the start what we saw was a decrease of be 3.7%, versus segment decline of 7.5%. We haven't given out specific selling price deterioration the segment. But more than offsetting or explaining the difference was what we had in selling price and feel confident on the first half of the year on a lag start basis we were gaining share and when we look at completions I guess our information might be ab little bit different than maybe what you are looking at. We actually had second quarter of 2010 completions down about 4 to 5% from second quarter of 2009. If we look at the first half of 2010 completions versus the first half of 2009 completions, we saw completions down 12.5%, unless we are looking at different information we saw completions down during the same period.

You mentioned 14.5%, that would have been the increase in starts in the second quarter from the information we have.

That makes sense if your think about it year-over-year, completions down year-over-year, sequentially we saw increase in completions. Benefit of the strength of the tax credit when builders saw improvement in starts and growth in starts are you suggesting that there might be benefit in the third or four quarter from the completions you didn't get in Q2 because of the lag affect.

We are looking at, obviously we lag, we actually have the second quarter housing starts that will lag which will impact our third quarter and they came in I believe around 170,000, which are up 20 to 30% over the lagged first quarter, so we are going to be tracking that very closely, Tim mentioned the trend that we are seeing in July and so far earlier in the month, we are not seeing that. That's something we will have to track closely. I will say also on housing starts as we looked at this closely on a sequential basis, Q2 of 2010 versus Q1 of 2010, they were up 9%, and our segment sales up 13%. We feel really good that we are performing in line and sequence with the market our biggest concern will be there should be a significant increase going in to the second half of the year and earlier in the quarter we are not seeing that.

Guess your completion number that you are referring to we were thinking single family up 15%, year over year in second quarter, you are talking total.

We always looked at total.

At this point you are not sure why July would be tracking down because it should be up place based on completions you have yet to benefit from, is that potentially a share issue.

We don't think so. We dived into the second quarter as well as the half year and in both periods we gained share. Nothing indicates to us, we have to remember it's early in July, this business does not report point of sale, so it's hard to get good reads on it during mid month but early on and you have a holiday at the beginning of the month impacts services more than does the other businesses. It's hard to say at this point. We are trying to give you the trend we saw early.

Thanks, guys.

Next question from Peter Lisnic are Robert W. Baird.

Good morning this is Josh Chan filling in for Pete. I was just wondering how much price cost unfavorability did you experience during the quarter if you are willing to quantify that?

We had about $20 million, Josh, of unfavorable price commodity relationship in the quarter. That would have been impacting the installation segment as well as the decorative architectural segment and to a lesser degree our plumbing segment. I would point out that we had cost savings of approximately $20 million, on a net basis which offset that negative price commodity relationship.

I was wondering is higher commodity costs or lower pricing which one is a bigger factor.

Well, basically it's both. But we don't really break out price specifically. We deal with a lot of large suppliers, a lot of large customers and don't get in to specific discussions about price and or cost related to vendors.

Okay, I understand that. On your out look for decorative architectural you said the worst is behind you in terms of cost pressure.

In terms of availability, we were talking Josh in terms of availability of resins and TI02. Costs continue to be a challenge in that segment.

Okay. I understand . Okay, thanks for your

Thank you, Josh.

We will take our next question from Mike Rehaut at JPMorgan.

Thanks. Good morning everyone. First question I just wanted to clarify when you were walking through some of the math with the installation services and the housing market backdrop are you looking at completions or starts and is also part of the issue because I'm doing the math at home or in the office, rather, and is it seasonally or unseasonably adjusted?

Yes, we use, primarily use housing starts and we use the unadjusted quarterly we use the actual quarterly numbers then we lag at one quarter.

Right. Okay. That's --

Talking about both starts and completions in the previous conversation.

But you are purely looking at this in starts.

We looked at it a bunch of different ways. As we look at starts you have really small numbers and a lot of change occurring in the start numbers especially when you consider the swings between multifamily and single family, we are trying to come up with a way to make more sense of the small sampling.

I wanted to clarify that, the second question just on the cabinets you mentioned you added 50 dealers and I guess when initially thinking about the combination of the builder group and retail group, it seemed to be more of a back end opportunity and I was wondering what the changing fundamentally or how you are going to market that you're adding dealers and what you think the revenue opportunity meant specifically I thought you still had a couple of brands going this way and couple of brands going this way is there new cross over opportunities that you are cross selling one brand that you had gone into big box, into the builder channel or vice versa and what do you think the opportunity is longer term?

The combination has been focused on top line. We saw a tremendous opportunity to drive top line growth where we had mutually exclusively dealers, between KraftMaid and Merillat for the most part we felt that we could meet more of the price point needs of our customers and when we looked at our lineup with quality really in the value price segment and Merillat really in that middle with storage and functionality and really setting that brand to really drive all around ergonomics and KraftMaid being the brand to really inspire too that we felt we could meet the majority of the consumer segmentation and needed to really sell those brands as a package. As we looked we felt we had a compelling offering to keep more of that business in house and get a bigger share of the wallet as well as provide better customer service through being able to rep the product in a similar way, look at the supply chain looking at availability and cost out just thought more compelling for a dealer to keep that business with Masco especially some of the things they are doing with coordinating hardware and counter tops as well we saw this as a big top line opportunity. I will make one clarification to your question when we talked about 50 dealers adding a brand those weren't meant to be new dealers. I don't have the breakdown between how many were new versus existing dealers who carried one of our brands who added another brand but we see this as a big top line opportunity that was really the driving force behind the merger.

I think if you think about it obviously cabinets have declined pretty significantly. I think if I'm remembering right information I saw suggested that in 2006 that was about a $15 billion market. Currently running $9 billion or $10 billion. As things improve I don't know that we get back too $15 billion, obviously some of that was driven by equity extraction back in the day. But we will get back to something north of where we are today. We think the strategy puts us in a really good position to take share on the way back up. In addition, counter tops are about a $15 billion market. We did have a counter top business we talked about De Nova and as your know one of the strategy for this business is to package cabinets and counter tops we think there is upside opportunity there. It would be kind of tough to quantify what we think is possible there. But we certainly feel very good about our opportunities given these really strong brands and the counter top acquisition which will make the purchase experience that much better.

Thank you.

Thank you, Mike.

We will take our next question from Nishu Sood with Deutsche Bank.

Thanks and good morning. Not to beat a dead horse here but I just wanted to revisit the subject of the starts relationship with installation service. One of the confusions for investors is the multifamily versus single family differentiation that Ivy and Mike were alluding too. My question is this, historically as you look at the revenue split of the installation services business would it roughly match the split of starts the way that the census looks at single and multifamily? So historically how has that looked and how has that looked recently? There have been fluctuations in small numbers.

The numbers are moving around a lot. I'm not sure I completely understand the question. What is important to understand is that installation other services has always had a strong position both with home building and multifamily. We always done we always serviced both segments equally well. I don't believe the share is hard on the multifamily because it moves around. I will say that the multifamily unit composition versus single family unit obviously is smaller. But again a number of changes as multifamily went from small apartments to more of a mid to high-rise dwellings, those units increased in value because the applications were different. So instead of residential products there were commercial products in place so that relationship has been a tough one for us to model. If I was going to give you in rough estimates a multifamily unit is worth a half to two-thirds of what a single family unit is worth to us on a take per unit basis in installation services.

Got it that is what I was looking for, second, I wanted to get some color on some of the changes in your specific line item guidance, like rationalization charges, up by $50 million, D&A up by $60 million, CapEx declined, I was wondering and corporate expense was as down as well I was wondering if you could walk us through the drivers of the differences versus last time.

Sure, Nishu this is Tim. In terms of CapEx, you are going from the $190 million to $170 million, it's a couple of projects we thought we would -- pushed out in to next year terms of the rationalization charge that you mentioned, more of a refinement, I don't think we changed that number significantly from the end of the Q1 number we gave you when we talked about the closure of the RTA business down in Waverly. In terms of general corporate expense, again, just some cost containment here, stock comp expense gets to us a little bit with the stock trading down from where it was at the end of Q2 that makes that a little bit more favorable. Variety of things going there. There is favorability there.

D&A, up largely due to fact we have accelerated depreciation as a result of some of the closures or anticipated closure of the value product group activated going down in Ohio. I think those and then interest expense obviously is up. Tim mentioned in prepared remarks, because of the $500 million issue we did in March.

On the rationalization charges, we did announce when we talked about the exit of the RTA related businesses, $115 million, of charges previous to that related to the integration of the two cabinet businesses we announced $40 million restructuring charge. I don't know if that's helpful in terms of parsing that a little bit. The other thing we would point out too is in terms of rationalization our head count is down just as a data point second quarter last year to this year by about 8%.

One thing that could change with rationalization charges if we are fortunate enough to sell DPG unit to a buyer there would be a change as we have to accelerate some of the charges at the time of the sale. We are not in a position to comment, premature to comment on whether we could sell the business at this point in time.

Thanks a lot.

Thank you.

We will take our next question from Ivan Marcuse at Northcoast Research.

What is the total of the 17 branches what is the total cost (Inaudible) P&L?

So far this year we incurred about $9 million of cost about $4 million in the first quarter and about $5 million in the second quarter.

Okay. With reduced outlook does this program sort of do you slow it down a little bit or are you going to continue to keep what your planned pace is at the beginning of the year?

At this point we announced 17 --

17 locations open. Original plan was to go to 22. Depending on what happens with the Home Star, now is plan is to operate the 22. Optimize them, we are learning new things and primarily early in the launch in cold weather climate as we gotten to some of the sound markets and really looked at the hot humid and dry heat markets, we are finding different attributes in the selling process and take per units. Right now we will stick with the 17. We haven't made a decision to roll out five more. We will wait and see how the 17 do and make assessment in the quarter.

And I think, and Don, correct me if I'm wrong but I think that we anticipate a couple of the branches should be in a break even or better mode profitability mode by the fourth quarter of this year.

The early prototypes are tracking right on plan which were to be profitable by year end.

Great. One quick question with profitability was great in the second quarter can you maintain that going forward or what makes it go higher or lower going forward that you see out there?

I appreciate the comment, we think we done a pretty good job in the first half in terse of incremental margin, cost containment et cetera. Little tough to predict margins in this environment. We do expect going forward that we will have head winds from a priced commodity stand point of about $40 million, having said that, we anticipate additional cost savings, realized $45 million net of cost savings in the first half of the year and anticipate a number that would probably proximate that or maybe be a little bit stronger in the second half. Big, big issue for us is obviously volume. Just in terms of thinking about future profitability. We got high contribution margins tend to average about 30% across the Company. Obviously we are doing a little better than that given the cost reduction activity that we have undertaken. I feel comfortable and confident if we get a lift in volume that we ought to convert that at a very attractive rate going forward. We need that lift.

Thanks a lot, guys.

We will take our next question from Megan McGrath at Barclays Capital.

Just a follow up on that last comment given on how well you have done on improving margins so far, do you think that you need to get above million starts for the US to reach that 10% operating margin goal that you gave us last year at your analyst say.

We used 1.1 million at this point Megan if I recall and also that assumed a lift of about 15%, in repair remodel related activity. As I remember. And again we have not gone back and looked at that. I would say we taken additional fixed costs out and continue obviously to work very hard on supply chain on lean on innovation, et cetera. My guess is that, that number would probably come down a little bit, I think we equated the 15% increase in , and the 1.1 million starts to about a $10.5 billion sales numbers. But my guess is at this point in time that would have come down a little bit but haven't put a pencil to paper on

Then a quick follow up on your comments about the paint business and margin pressure you are expecting to see in the second half. Is that entirely commodity related or down mix shift or pricing pressure in that segment?

We talk about pricing commodity in combination. So we do see pressure from a price commodity standpoint, mix probably doesn't help us that much in the second half. We launched premium plus alter interior the paint and primer in one, in the early Q2 of last year in 2009. So that's kind of anniversaried for the most part. We had a little bit of favorable mix in the second quarter. But I would guess that mix may help us a little bit in that segment going forward but I at this point I don't know they would say that, that would be as dramatic as its been obviously since we launched the product over a year ago.

Megan I would add as Tim pointed out with commodity in the second remaining tight, supply versus demand that we anticipate we are going to continue to see higher costs.

Okay. Thank you.

We will take our next question from David Goldberg at UBS.

It's actual Susan for David. Can you talk a little bit about given the fact that you did lower the starts pace for this year, how do you think that we sort of see ramp up going in future years does it change your expectation as lot?

Well, I would guess if anything, given that we are going slower this year and given the homes that are destroyed each year in terms of tear downs, you think about household formations population growth, going forward that I guess ironically or I guess how you look at it is the lower we are, the quicker we ought to come back, we continue to think that household formations in the decade 2010 to 2020 should approximate between 12.5 million and 15 million. Obviously that is driven by demographics, immigration, those folks have to have a place to live. There is some discussion that there could be shift from homeownership to rental there is a lot of dynamics that play there. If anything the slower things are, the faster the pace of the recovery when it does start to get traction.

Really doesn't change your sort of medium to longer term thoughts on where things ultimately trend.

No. I don't think so. We will get back to the 1.4 million 1.5 million start environment. At some point in time down the road. Obviously we got macro challenges at this point in time. Consumer confidence is not where you like to see, unemployment levels are very high. But we are going to continue to focus on the things we can control from a Masco perspective, implement the Masco business system, continue to innovate, continue to drive lean, continue to become more knowledgeable about customer buying habits and preferences and those types of things, we will push the same types of things we have been pushing and that will pay off in the long run.

In terms of cash flow. I don't think you gave us a cash flow from ops but can you talk about how it came in relative to your expectations or stronger or weaker and how that maybe impacts your thoughts around future cash uses for the rest of the year, any sort of changes there.

When you look at the working capital comparison that we gave, receivables inventories less payables represented 16.1% of sales, down from 17.8% last year, I think that certainly indicative of very strong management on the working capital side. In addition we did reduce the estimate for capital expenditures as I think Nishu Sood pointed out earlier from $190 million to approximately $170 million. So I think if anything we ought to have a pretty solid year from a cash flow standpoint. Did mention that inventory was up a little bit, we will get that back in the second half. So given the operating environment, I'm sure we will do a good job from a cash flow generation standpoint as we have historically. As things pick up as folks remember in that period from 2003, through '07 that five year period, we generated $5 billion of free cash flow. Averaged a $ 1 billion a year during that five year time frame, that's $1.5 billion of capital expenditures and $300 million of investment in displays. So we will get back to on a relative basis that kind of performance. I'm comfortable with that.

In terms of allocation from a capital standpoint. Continue to focus on investing in the business. Supporting our businesses, we obviously launched a couple of businesses. We are driving innovation. We will continue to invest in the business. We will certainly would like to see over time see our balance sheet improve a little bit in terms of debt to total cap we talked about the fact with the $300 million that was due in March of this year and $850 million due in 2012 what we told investors we would expect a net debt reduction of between $200 million, and $300 million. And I think our feeling right now is that on a near term basis given some of the global concerns that have surfaced with Greece et cetera, having a nice strong cash balance is more of a plus in terms of a negative. So from a near term stand point you will see us continue to carry a pretty substantial cash balance.

Thank you.

Thank you.

We will take our next question from Joshua Pollard with Goldman Sachs.

Thanks for taking my call.

Hi Josh.

I have a quick question in paint. You guys have sequentially quarter over quarter seen margin improvement in that paint business for each the last or four years, that's been on sequentially slower sales pace with the cost that sort of price commodity head winds that you guy are expecting is -- can we put that in to the question or should we not expect that type of improvement quarter on quarter for you all.

Well, first of all, I don't think that we seen margin expansion quarter over quarter for the last four years, we were I think in that segment down in 2008. I think around 18%. For the full year which was historical margins that we tended to enjoy around 21% if you go back and look at the last four or five years or so. So having said that, that's where the segment has come in.

And just in terms of looking forward I think Donny talk about it, I talked about it a little bit el earlier, we are seeing pressure from commodity the availability is tight in terms of resin and TI02 and the costs have gone up over the course both on a year-over-year and on a year to date basis. That's going to put a little bit of pressure on margins going forward we don't typically like to predict margins by segment. We certainly anticipate we will have a strong year in that particular segment. Later in the year we got on the builders hardware side we got some program related costs through new opportunities that will impact the segment as well. But that addresses your question.

Yes. My other question is on your overall price commodity or commodity head wind. What are you guys looking for the second half of the year? A good portion is coming out of paint. Could you out line the next one or two segments where you feel like the majority of that commodity head wind is coming?

When I mentioned earlier Josh was that we would expect about $40 million of head winds related to price commodity relationships in the second half of this year. We are basically pretty much neutral in the first half. Going forward, again on a Company-wide basis, going forward the impact there would probably be in three segments installation would be one of those segments where we seen a lot of price related competition and more recently seen an increase in material cost decorative architectural and plumbing, to a letter degree would be the third segment. Maybe a little bit with windows as well in terms of resins. Cindy we have time for maybe one more question.

Okay. Last question today will come from Eric Bosshard with Cleveland Research Company.

Couple of things on the install business you talked about price competition can you just give us a little bit of the perspective on the price competition in that business? What has it been in the past what you are seeing now and how you expect that to behave going forward?

Hi Eric, it's Donny. Couple of things going on in installation. You have to go back to lack at since we are talking year-over-year comparisons. We are seeing competitive pricing impact that segment. It's been a competitive priced environment for a period of time. I will tell you also that compound beside I the fact costs have really come down pretty dramatically within that segment as well. There has been some commodity such as aluminum and lumber that had minimal impact when you consider it's based installation, materials decreasing and a competitive pricing environment leads to a lower take per unit when you look at year-over-year type comparisons on a going forward basis what we seen is pricing remain competitive, there is a significant price increase that will be that was announced for July 1. That has gone in place which appears to be firm. We are pursuing the increase in the marketplace and we are hopeful that, that will bring some stability to a pretty tough pricing environment.

One thing Eric that I think is worth noting right now given the small number of starts often you are competing for maybe one or two homes and going head to head with local guys that are very small and it's really all about price. As time goes on, and as we get back to normal operating levels, our scale and size will become much more important. Donny mentioned this on the slide as we went through the presentation but when you're going after a subdivision or a much larger quantity of work, dependability, reliability, quality of work, standing behind the work becomes much more important. Keep in mind installation continues to be a relatively smart of the entire cost of the home, buyers are focused on every $0.05 and $0.10 at this point but down the road our scale should give us a lot more advantage in terms of serving the marketplace.

In terms of this July insulation increase, I'm curious, do you think you can hold on to margin knowing pricing has been competitive, why doesn't higher in --

It does if you can pass it on. We have it's a large increase, and it's a area that we are not going to be able to absorb it, and we are working with our customers and suppliers to pass additional costs on. We think it's a industry that is operating at very low pricing. Possibly historically low pricing and it's a situation that in a tough environment, we got to work with both suppliers and customers to pass that on. But we are not willing to continue to work at low prices and absorb the increase. It's just not something we can do.

The second question I had was in terms of cabinets, in looking at your results relative to the industry, I'm cure in terms of when you think or what your thoughts are in terms of stabilized and improved market share what you need to do to make progress in that area?

Well I think that Donny talked about that a little earlier Eric relative to the strategy of I want creating the cabinet businesses, offering the three brands at the different consumer points value functionality as well as style and design. Working our way up respectively quality, as we continue to integrate those businesses, Donny talked a little bit about the dealers adding certain brands so we certainly think that as things start to pick up that we ought to be able to perform very well in improving environment. Obviously the environment we are in right now we had nice wins, in a few areas on the builders side recently and again it's tough environment but as things pick up we believe that strategy will pay big dividends on the topline and on the bottom line.

Thank you.

Thank you. And that concludes the conference call I would like to thank all of you again for joining us. All of the markets we are building in home improvement products appear to be slowing we are pleased with the first half operating performance. Sales for both the first and second quarter of 2010 were up, versus the 2009 quarters. The first positive comparisons on a quarterly basis in several years. We continue to achieve improved margins. Well we expect top line revenues to be challenging, in the second half of 2010, we continue to believe that the long-term fundamentals for our markets are positive, and we are very excited about Masco's future opportunities. We will continue to focus on the aspects of our business that we can control and very much appreciate the efforts of the Masco team across the globe as we implement the Masco business system to further strengthen our leadership brands and improve our execution. Thank you.

That does conclude today's conference, thank you for your participation.