Timothy Wadhams - Chief Executive Officer, President and Director John Sznewajs - Chief Financial Officer, Vice President and Treasurer Donald Demarie - Chief Operating Officer and Executive Vice President

Nishu Sood - Deutsche Bank AG Susan Maklari - UBS Michael Rehaut - JP Morgan Chase & Co Megan McGrath - Lehman Brothers Joshua Chan Ivan Marcuse - Northcoast Research Eric Bosshard - Cleveland Research Joshua Pollard - Goldman Sachs Group Inc. Budd Bugatch - Raymond James & Associates Ivy Lynne Zelman

Thank you, Cindy. And thank all of you for joining us today for Masco's Second Quarter 2010 Earnings Call.

I'm joined today by Donnie Demarie, our Executive Vice President and Chief Operating Officer; and John Sznewajs, our CFO. And if you would please flip to Slide #3.

Net sales in the second quarter of 2010 increased 2% compared to last year's second quarter. Income from continuing operations was $0.01 per share compared to $0.19 per share on an as-reported basis.

I should point out that foreign currency did cost us about 1% in terms of the sales change. And I want to talk about earnings per share and margins on a reconciled basis and will do that in just 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.

And we ended the quarter in a very strong cash position, with $1.4 billion of cash at June 30, 2010. If you'd please flip to Slide #4.

I want to take a look at margins without some of the restructuring charges that occurred in this year's second quarter as well as last year's. And looking at gross profit, on an 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've got a much more significant rationalization charge this year given some of the things we're doing with our Cabinet business, gross margins would have been on an 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.

And also add back one-time charges from the second quarter of 2009. Our operating margins on a comparative basis would've been 8.3% versus 7.3%.

Again, with both on an adjusted basis, both gross margin and operating margin up 100 basis points. If you flip to Slide #5, 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. And if we add those back and normalize our tax rate at 36%, our comparative earnings would've been $0.16 in the second quarter of 2010 compared to $0.17 last year.

In addition, and I think this is an important point for investors, this year's earnings are 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. So our $0.16 includes an additional $0.05 of interest expense and change in currency loss.

If you please flip to Slide #6. Taking a look at some of the trends that we've been tracking over the course of the last couple of quarters, and again, these are on an as-adjusted basis.

We've included the as-reported numbers in the appendix. We've 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.

And 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 had incremental sales of $35 million with incremental profit of $24 million with an incremental margin of 69%.

If you please would flip to Slide #7. 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. And you can see here, these next set of slides are presented on a segment basis.

They exclude general corp-related expenses 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 reductions, which offset a less favorable relationship between price and commodity.

If you flip to Slide #8. North American sales were also up 2%, again, driven by Plumbing and paints and stains, and 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 #9 please. Our 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 the second straight quarter that those businesses have been up 8%.

And we did have unfavorable currency from our International operations of $24 million. And you can see here that we had, again, some very nice profit improvement for our International businesses.

And this, I think, is the third straight quarter that we've shown some very nice margins in those operations. If you move to Slide #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 that we're exiting, sales in this segment would have been flat.

And on that 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 standpoint, notwithstanding the fact that our sales were down.

We did have a profit improvement, again, on a reconciled basis without restructuring charges, and continued to do a very good job in this segment in terms of cost reduction. Now if you flip to Slide #11.

Our Plumbing-related Products had another very strong quarter. Sales were up 8%, and 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 a very, very good performance by our Plumbing business. If you flip to Slide #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 top line on a first half basis to see if those comparisons made a little more sense to us. In the first half, on a lag basis, 90 days, housing starts were down 3.7% and our segment sales were up 7.5%.

When we factor in the significant price reductions that have impacted our business from a competitive standpoint, that more than explains the difference between starts being down 3.7% and our sales being down 7.5% and suggests to us that we continue to take share. A 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 WellHome-related operation.

So we're really pleased with the cost reductions and the work that's been done in this segment. If you flip to Slide #13.

Decorative Architectural Products 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've done in the past, if we look at our first six months in this particular segment, margins are pretty comparable to last year, down I think just a little bit from 21.9% to 21.4%.

We've had some challenges in this segment relative to commodities, both in terms of resins and TiO2. 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 some time.

Costs in this segment are up. And because of our excellent relationship with suppliers, we've been able to get the supply that we need and anticipate being able to do that going forward.

Obviously, it helps when you're growing. We're 100% committed to satisfying our customers and the end consumer.

As you know, or I think you know, we've enjoyed 99.9% fill rates. That's very important to us, maintaining lead times, fill rates and stock positions.

And both The Home Depot, our major customer for paint, and Behr continued to take share, and 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'll continue to work with our suppliers and continue to work on productivity within our facilities and operations and with our customer.

We're very committed to productivity and lean, as I think all of you are aware. And we'll also continue to work to expand our business.

We continue to innovate, have 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 Pro paint initiative. If you flip to Slide #14.

Other Specialty Products showed increase of 4%, driven by increased sales volume of windows. And we also had a nice performance in this segment from a profit standpoint with margins up from 5.5% to 7.2%.

If you flip to Slide #15, working capital. We had another very, very good performance.

Donnie, 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're talking about receivables plus inventories less payables, in terms of dollars, declined from 17.8% last year to 16.1% this year.

We saw some 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 falling off a little bit late in the quarter and the buy-ahead in certain areas for certain products. But I'm very confident that those inventory days will be worked down by the end of the year.

If you flip to Slide #16. I want to take a quick look at our thoughts about the macro economic 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 digit. And the trends in June that we experienced have continued into 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 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, 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's on a macro basis. And having said all that, we think the second half from a top line standpoint looks to be a bit challenging.

And again, that's not Masco-specific, but that's a macro comment. Our attitude is we'll continue to focus on the things that we can control.

And with that, I'd like to turn the presentation over to Donnie, who's going to talk a little bit about some of the things that we're doing in the Installation segment as well as the Cabinet segment.

Okay, thank you, Tim. If we can, let's turn to Slide #18.

The Masco Business System, or MBS, is our common operating platform to drive results to our individual operating companies. We turn to Slide 19.

Through MBS, our focus is then on improving gross profit and lowering our fixed costs to create maximum operating leverage. We have aligned part of our incentive compensation targets around improving our working capital while using lean principles to reduce costs and create the currency to reinvest in our business.

Earlier, Tim had commented on some of the favorable trends. On Slide #20.

I'd like to spend some time updating you on the progress in Installation and Other Services as well as Cabinets. First, we'll take a look at Installation and Other Services on Slide 21.

We have continued to optimize our infrastructure and since 2006, we're down approximately 30% in branch locations, 50% in vehicles and 60% in headcount. Included in these numbers are significant reductions we have continued to make in 2010.

Slide #22. We will win in Installation Services by continuing to reduce our fixed costs, improve our productivity and focusing on the profitable sales of insulation and select diversified products.

We are continuing to open new distribution locations for service partners and now have 17 WellHome locations servicing new markets and expanding channels. On Slide #23.

As things improve, we are the largest provider of installed insulation in the United States, and we have already reduced our fixed costs by approximately $180 million since 2006. Our ERP system will be creating scale and customer service advantage, and our WellHome locations will position us as the leader in retrofit 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.

If we move on to Cabinets, really on Slide 25, we have mothballed or closed eight facilities again since 2006 and have lowered our headcount in this segment by 45% Slide #26. We will win at Masco Cabinetry by exiting non-strategic 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 have had over 50 dealers add an additional Masco brand to their current Cabinet offerings. Slide #27.

Going forward, we have already reduced our fixed costs 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 countertop 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.

And with that, Tim?

Thank you, Donnie. And with that, Cindy will open the lines for questions.

Just one thing that struck me is that you said windows actually drove some improvement, yet we still see some deterioration or it looks like deterioration in Installation Services and your new housing activity forecast still much more conservative. Can you kind of give us a flavor of what happened there?

And what caused that?

Well, windows, Budd, we have seen a pretty significant shift in terms of moving from new construction to repair/remodel activity. And as you know, there's been some tax incentives in place which have encouraged window replacement.

We've also seen some pretty good activity in the United Kingdom relative to windows. And again, most of that is on a replacement side as well.

So that would be a little bit of the difference there.

And in the United Kingdom, is that also Milgard?

No, not in the U.K. That our U.K.

Window Group.

I see. Okay.

And can you talk a little bit about where you are now in the Cabinet integration? How close are you to being done?

And when will you finally, or are you totally exited now out of RTA?

No, but the RTA exit is really -- the timing is due to some customer-related issues as we work through kind of exit plans and the possible sale of that business. So we anticipate that will occur sometime around the end of this year or the first quarter of next that we'll be completely out of the RTA.

On the integration side, things have gone well. May 1 was really our first day operating as Masco Cabinetry.

We'll be moving into our new combined headquarters in Ann Arbor somewhere around October 1. And the integration appears to be going very well.

Okay. And the exit of RTA, is that domestic and International?

No, it's just domestic, Budd.

You've shown some pretty good improvement on the profitability side. And obviously, you guys are working hard and doing tough things, headcounts, 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 14½% increase; I'd like to understand the reconciliation that you gave us because I didn't follow you on why we wouldn't have seen growth in the best quarter probably for 2010 in Installation Services, and that business from a top line perspective. Unless you can break out volume for us versus price, I think a lot of us are probably going to be pretty confused on that and recognizing that the back half of the year is going to be much more challenging.

So that's the first question, just understanding that reconciliation. And then if you can break out Cabinets as well, you mentioned that if it wasn't for your exit of RTA product within the home centers, you would have been up, which was helpful.

But understanding the difference between repair and remodel, because in your outlook comments, you mentioned that big ticket items you expect to slow. So I don't think that a lot of people were expecting big ticket items to actually increase.

Can you kind of break apart what you're actually seeing at point of sale given that you commented July is trending down, June was trending down. June was still a good completion month for new construction, so I think we need some more help here.

I'll take the Cab side of that question, Ivy. What we have seen is on the builder side, and the dealer side for Cabinets was relatively strong, if you will, in the second quarter, basically offsetting some declines at retail.

We continued at retail to see some certainly slowness with big ticket-related items. Obviously, retail is the area where we have exited certain product groups.

But we had, basically, just in terms of comparing the two sides of that, if we look at the builder side and a little bit stronger dealer opportunity in the second quarter, that would've offset the retail side. And I'll let Donnie answer the question on the housing.

Yes, Ivy, when we looked at the housing starts in the quarter, really a lot of small numbers moving around very quickly and some swings between multifamily and single-family, and took a look at really the full year of 2010 versus the full year same period of 2009 and then lag 90 days on starts. And what we saw was a decrease of 3.7% versus segment decline of 7.5%.

And we haven't given out the specific selling price deterioration in the segment. But more than offsetting or explaining the difference was what we had been selling price and feel confident that on the first half of the year, on a lag start basis, that we are actually gaining share.

And when we look at completions, I guess our information might be a little bit different than maybe what you're looking at because we actually had second quarter of 2010 completions down about 4% to 5% from second quarter of '09. And if we look at the first half of 2010 completions versus the first half of 2009 completions, we actually show completions down 12.5%.

So unless we're looking at maybe some different information, we actually saw completions down during the same period.

Ivy, you mentioned 14.5%. That would've been the increase in starts in the second quarter from the information that we have.

Right. I guess that makes sense.

If you think about it year-over-year, what you're saying is that completions were down year-over-year. And sequentially, we saw an increase in completions.

And so wondering the benefit of the strength of the tax credit when builders saw an improvement in starts and we started seeing growth in starts, are you suggesting that there might be some benefit in the third or fourth quarter from the completions that you didn't get in the 2Q because of the lag effect?

Yes, Ivy, we're looking at, I mean obviously, we now lagged -- we actually have the second quarter housing starts that will lag, which really will impact our third quarter. And they came in, I believe, around 170,000, which are up about 20% to 30% over the lag first quarter.

So we're going to be tracking that very closely. Tim mentioned the trend that we're seeing in July.

And so far, early in the month, we're not seeing that. So that's something that we're going to have to track very, very 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 were up 13%. So we feel really good that we're performing in line and in sequence with the market.

Probably our biggest concern will be there should be a significant increase going into the second half of the year, and early in the quarter, we're not seeing that.

Your completion number that you're referring to, we were thinking single-family completions were up 15% year-over-year in second quarter. So you're taking total completions down 5% [ph](38:03).

We're talking total. Yes, we've always looked at total.

So at this point, you're not sure why July would be tracking down because it should be up based on completions that you have yet to benefit from. So is that potentially a share issue?

Well, we don't think so. As we said, we've really dived into both the second quarter as well as the half year.

And in both periods, we believe we've gained share. So nothing indicates to us -- now 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 also have a holiday at the beginning of the month which impacts services more than it does the other businesses.

So yes, it's hard to say at this point, Ivy. We're just trying to give you the trend that we're seeing early.

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?

Yes, we had about $20 million, Josh, of unfavorable price-commodity relationship in the quarter. And that would've been impacting the Installation segment, as well as the Decorative Architectural segment, and to a lesser degree, our Plumbing segment.

And I would point out that we had cost savings of approximately $20 million on a net basis which offset that negative price-commodity relationship.

Okay. And then I was just wondering, is higher commodity cost 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 very large suppliers, a lot of very large customers and don't get into specific discussions about price and/or cost related to vendors.

Okay, I understand that. The on your outlook for Decorative Architectural, you said the worst is behind you in terms of cost pressure.

In terms of ability. We were talking, Josh, just in terms of availability of resins and TiO2.

Costs continue to be a challenge in that segment.

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 it also part of the issue, because I'm doing the math here at home or in the office rather, and is it seasonally or unseasonally adjusted?

Yes, we primarily use, Michael, housing starts. And we use the unadjusted quarterly -- we use the actual quarterly numbers, and then we lag it one quarter.

Heard [ph](41:15) Mike, talking about both starts and completions in the previous conversation.

Right, but you're purely looking at this against starts.

We've looked at it a bunch of different ways because, obviously, as we look at starts, you have really small numbers and you have a lot of change occurring in the start number, especially when you consider the swings between multifamily and single-family. So we're trying to come up with a way that make more sense of the small sampling.

Right. Second question, just on the Cabinets.

You'd mentioned that you added 50 dealers. And I guess when initially we were thinking about the combination of the Builder Group and the Retail Group, it seemed to be more of a back-end opportunity.

And I was wondering if -- what is changing fundamentally? Or how you're going to market that?

You're adding dealers and what you think the revenue opportunity, I mean, this [ph](42:19) facility I just thought that you still had kind of a couple of brands going this way and a couple brands going this way. But is there new crossover opportunities that you're 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?

Actually, the combination has really always been focused on top line; that we saw tremendous opportunity to drive top line growth where we had mutually exclusive 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 then KraftMaid being the brand to really aspire to that we felt we could meet the majority of the consumer segmentation and that needed to really sell those brands as a package. So as we looked at this, we thought 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 products in the similar way, look at the supply chain as far as taking variability and costs out, and just felt it was more compelling for a dealer to keep that business with Masco, especially considering some of the things we're doing with coordinating hardware and countertops as well.

So we always saw this as a big top line opportunity. I will make one clarification to your question.

Whem we talked about 50 dealers adding a brand, those weren't meant to be all new dealers. I don't have the breakdown between how many of those 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, and that was really the driving force behind the merger.

Yes, Mike, and I think if you think about it, obviously Cabinets have declined pretty significantly. I think, if I'm remembering right, some information I saw suggested that in 2006, that was about a $15 billion market, and I think currently, it's running $9 billion or $10 billion.

So as things improve, I don't know that we get back to $15 billion because, obviously, some of that was being driven by equity extraction back in the day. But we will get back to something north of where we are today, and we think that the strategy puts us in a really good position to take some share on the way back up.

In addition, countertops are about a $15 billion market, and we did add a countertop business that we've talked about, DeNova. And as you know, one of the strategies for this business is to package Cabinets and countertops.

So we think there's some upside opportunity there. Be kind of tough right now to quantify what we think is possible there.

But we certainly feel very good about our opportunities given these really strong brands and the countertop acquisition, which we certainly think will make the purchase experience that much better.

Not to beat a dead horse here, but I just wanted to revisit the subject of the starts relationship with Installation Service. I think one of the confusions for investors is the multifamily versus single-family differentiation that Ivy and Mike were both alluding to.

But so my question is this: Historically, as you look at the revenue split of the Installation Services businesses, would it roughly match the split of starts the way that the census kind of looks at single- and multifamily? So historically, how has that looked?

And how has that looked recently? Because obviously there's been a lot of fluctuations, Donnie, like you were saying in small numbers.

Yes, the numbers are moving around a lot. I'm not sure I completely understand the question, Nishu.

But I think what's important to understand is that Installation and Other Services has always had a strong position both with home building and multifamily. So we've always serviced both segments equally well.

I don't believe we have -- the share is hard on the multifamily because, again, it moves around. I will say that the multifamily unit composition versus a single-family unit obviously is smaller, but there is again been a number of changes as multifamily went from small apartments to more of mid-to-high-rise dwellings.

Those units actually increased in value because the applications were different. So instead of being residential products, there was some 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 2/3 of what a single-family units is worth to us on a take-per-unit basis in Installation Services.

Got it. That's perfect; that's exactly what I was looking for.

Second, I just 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 went up by $60 million, CapEx declined and corporate expense was down as well. I was just was wondering if you could walk us through some of the drivers of those differences versus last time?

Sure, Nishu. It's John.

In terms of CapEx, you're going down from the $190 million to the $170 million. It's just a couple projects that we thought would take place this year getting likely to push out into next year.

In terms of the rationalization charge that you mentioned, I think that's just more of a refinement. I don't think we really changed it very significantly from the end of the first quarter number that we give 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. So a variety of things go in there.

But there is some favorability there. D&A up largely due to the fact that we had some accelerated depreciation as a result of some of the closures or the anticipated closure that the value product group activity that we've got going down in Ohio.

So I think those -- and the interest expense, obviously, is up as Tim, I think, mentioned in his prepared remarks because of the $500 million issue that we did in March.

Yes, and the issue 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 a $40 million restructuring charge.

I don't know if that's helpful just in terms of parsing that a little bit. The other thing we'd point out too is that in terms of rationalization, our headcount is down, just as a data point, second quarter of last year to this year by about 8%.

Yes. And, Nishu, one thing that could change with the rationalization charges, if we are fortunate enough to sell the VPG bit unit to a buyer, there could be a change in that as we have to accelerate some of the charges at the time of the sale.

So we're not in a position to comment whether -- it's probably too premature to comment as to whether we can sell the business at this point in time.

What is the total of the 17 branches that you've put out in WellHome, what's the total cost savings there [ph](50:20) from the P&L?

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

Okay. And then with the 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've announced I think, what, 17...

We have 17 locations opened. The original plan was to go to 22 depending upon, we thought we would accelerate that or pull off that depending upon what happens with Home Star.

Right now, our plan is to operate the 17, optimize them, we're learning new things. We are primarily early in the launch in cold weather climates.

As we have gotten into some of the southern markets and really looked at some of the hot humid and then dry heat markets, we're finding different attributes in the selling process as well as different take-per-units. So right now, we will stick with the 17.

We haven't made a decision whether to roll out five more. That was the original plan.

We're going to wait and see how the 17 do and make an assessment probably later in the quarter.

I think, Donnie, correct me if I'm wrong, but I think we anticipate that at least a couple of those branches should be in a breakeven or better mode, profitability mode by the fourth quarter of this year.

Yes, the early prototypes are tracking right on plan, which work to be profitable by year end.

Your 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?

Well, I appreciate the comment. W think we've done a pretty good job in the first half in terms of incremental margins, cost containment, et cetera.

Little tough to predict margins in this environment. We do expect, going forward, that we'll have some headwinds from a price-commodity standpoint of about $40 million.

Having said that, we anticipate additional cost savings. We've realized about $45 million net of cost savings in the first half of the year and would anticipate a number that would probably approximate that or maybe be even a little bit stronger in the second half.

The big, big issue for us is obviously volume just in terms of thinking about future profitability. We've got very high contribution margins, tend to average about 30% across the company.

Obviously, we're doing a little better than that given some of the cost reduction activity that we've undertaken, so I think it's -- I feel very comfortable and very confident that if we get a meaningful lift in volume, that we ought to convert that at a very attractive rate going forward. But again, we need that lift.

Just a follow-up on that last comment, actually. Given how well you've done on improving margins so far, do you still think that you need to get above a million starts for the U.S.

to reach that 10% operating margin goal that you gave us last year at your Analyst Day?

Yes, I think we used 1.1 million at that point, Megan, if I recall. And also that assumed a list of about 15% in repair/remodel-related activity, as I remember.

And again, we have not gone back and look at that. I would say that we've taken some additional fixed cost out and continue, obviously, to work very hard on supply chain, on lean, on innovation, et cetera.

So my guess is that, that number would probably come down a little bit. I think we equated the 15% increase in R&R and the 1.1 million starts to about a $10.5 billion sales number.

But my guess is that at this point in time, that would have come down a little bit, but we haven't really put a pencil to paper on that.

Okay. Just a quick follow-up on your comments around the paint business and the margin pressure you're expecting to see in the second half.

Is that entirely commodities related? Or are you seeing any down mix shift or pricing pressure in that segment?

Well, we talk about pricing-commodity in combination. So we do see some pressure from a price-commodity standpoint.

Mix probably doesn't help us that much in the second half. We'd launched Premium Plus Ultra Interior, the paint and primer in one, in the early second quarter of last year in 2009.

So that's kind of anniversaried for the most part. We did have 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 at this point, I don't know that I would say that, that would be as dramatic as it's been, obviously, since we launched the product over a year ago.

Yes, and, Megan, I would add, as Tim pointed out, with commodities in that segment remaining tight, supply versus demand, that we anticipate that we're going to continue to see -- we have seen and will continue to see higher cost.

It's actually Susan for David. Can you talk a little bit about, given the fact that you did lower the start space for this year, how do you think that we sort of see a ramp up going in future years?

Does it change your expectations a lot?

Well, I would guess, if anything, given that we're going slower this year, and when you think about some of the homes that are destroyed each year in terms of teardowns, you think about household formations, population growth growing 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 somewhere between 12 ½ million and 15 million.

And obviously, that's driven by demographics, immigration, et cetera. But those folks are going to have to have a place to live.

And there's some discussion now that there could be maybe a little more shift from home ownership to rental. So there's a lot of dynamics at play there.

But I think, if anything, the slower things are, the faster the pace of the recovery when it does start to get some traction.

So it really doesn't change your sort of medium- to longer-term kind of thoughts on where things ultimately trend or...

No, I don't think so. I think that we'll get back to that 1.4 million, 1.5 million kind of start environment at some point in time here down the road.

And obviously we've got some macro challenges at this point in time and consumer confidence is not where you'd like to see it, unemployment levels are still very high, but we're going to continue to focus on the things that 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. So we're going to keep pushing the same kinds of things that we've been pushing.

And we think that'll pay off in the long run.

Okay. In terms of your cash flow, and I don't think you gave us a cash flow from ops number, but can you just talk maybe a little bit about how it came in relative to your expectations?

And whether it was 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?

Yes, I would say that when you look at the working capital comparison that we gave, where receivables inventories less payables represented 16.1% of sales down from 17.8% last year, I think that's certainly indicative of some very strong management on the working capital side. In addition, we did reduce the estimate for capital expenditures, as I think Nishu pointed out a little bit 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.

I think we'll get that back in the second half. So given the operating environment, and I'm sure we'll do a good job, from a cash flow generation standpoint, as we have historically.

And I think as things pick up, as folks, I think, probably remember in that period from 2003 through '07, that five-year period, we generated about $5 billion of free cash flow, averaged $1 billion a year during that five-year time frame. And that's after $1.5 billion of capital expenditures and another $300 million of investment in displays.

So we'll get back to, on a relative basis, that kind of performance. I'm very comfortable with that as time moves forward.

In terms of allocation, from a capital standpoint, continue to focus primarily on investing in the business, supporting our businesses. We've obviously launched a couple businesses.

We're driving innovation. We'll continue to invest in the business.

We'll certainly would like to see, over time, see our balance sheet improve a little bit in terms of debt to total cap. We've talked about the fact that with the $300 million that was due in March of this year and the $850 million that's due in 2012, what we've told investors is that we would expect a net debt reduction of probably somewhere 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 standpoint, I think you'll see us continue to carry a pretty substantial cash balance.

I have a quick question in paint. You guys have sequentially, quarter-over-quarter, seen a margin improvement in that paint business for each of the last three or four years.

And that's even been on a sequentially lower sales pace. With the cost, the sort of price-commodity headwinds that you guys are expecting, can we put that into 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've 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 below the historical margins that we've tended to enjoy at 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 Donnie talked about it, I talked about it a little bit earlier, but we are seeing certainly some pressure from commodities.

The availability is tight in terms of resin and TiO2, and the costs have gone up over the quarters both on a year-over-year and on a year-to-date basis. So 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'll have a strong year in that particular segment, and I would point out that later in the year, we've got, on the builders' hardware side, we've got some program-related costs, some new opportunities that will impact the segment as well.

But I think that addresses your question.

My other question is on your overall price-commodity or commodity headwinds. What are you guys looking for, for the second half of the year?

And I assume a good portion of that is coming out of paint, but could you outline the next one or two segments where you feel like the majority of that commodity headwind is coming?

Yes, what I mentioned earlier, Josh, was that we would expect about $40 million of headwinds related to price-commodity relationships in the second half of this year. We're 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 certainly be one of those segments where we've seen a lot of price-related competition and, more recently, have seen an increase in material costs.

Decorative Architectural would be a segment, and then Plumbing, to a little lesser degree, would be the third segment. And maybe a little bit, I guess, with windows as well in terms of resins.

Cindy, I think we have time for maybe one more question.

On the Install business, you talked about price competition. Can you just give us a little bit of perspective on the price competition in that business?

What it's been in the past? What you're seeing now?

And how you expect that to behave going forward?

It's Donnie. Couple of things going on in Installation.

I think you have to really go back to look at, since we're talking year-over-year comparison, we are seeing competitive pricing impact that segment. And it's been a competitive price environment for a period of time.

I will tell you also that it's compounded by the fact that material costs have really come down pretty dramatically within that segment as well. There's been some commodities such as aluminum and lumber that have had minimal impact when you consider that the majority of that segment is really based around insulation sales.

So you had your materials decreasing, you had a more competitive pricing environment, so it leads to a lower take per unit when you look at a year-over-year type comparison. On a going-forward basis, what we have seen is pricings remain competitive, but there is a significant price increase that was announced for July 1 and that has gone in place, which appears to be firm.

We are pursuing the increase in the marketplace, and we're 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're 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 more normal operating levels, our scale and size will become much more important. I think Donnie 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, much more important.

Keep in mind, insulation continues to be a relatively small part of the entire cost of a home. Obviously, builders are very focused on every nickel and dime 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 guess I'm just curious, do you think that you can hold onto margin, knowing that pricing has been competitive in front of this? Why does a higher insulation cost not create more margin pressure in this businesses in the back half?

Well, it certainly does if you can't pass it on. And we are -- it's a large increase and it's an area that we're not going to be able to absorb it, and we're working with our customers and suppliers to pass the additional costs on.

We think it's an industry that is operating at very low pricing, possibly historically low pricing. And it's a situation that in a tough environment, we've got to work with both our suppliers and customers to pass that on.

But we're not willing to continue to work at low prices and absorb the increase. It's just not something we can do.

In terms of Cabinets, in looking at your results relative to the industry, I'm curious in terms of when you think or what your thoughts are in terms of stabilizing and improving market share? What you're working on or what you need to do in order to make progress in that area?

Well, I think that Donnie talked about that a little bit earlier, Eric, relative to the strategy of integrating 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, Merillat and KraftMaid. So as we continue to integrate those businesses, Donnie 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 an improving environment. Obviously, the environment we're in right now, we've had some nice wins in a few areas on the builders side more recently.

And again, it's a tough environment. But as things pick up, we certainly believe that strategy's going to pay big dividends, both on the top line and on the bottom line.

And that concludes the conference call. I'd like to thank all of you again for joining us.

All of the markets for building and home improvement products appear to be slowing. We're very pleased with our 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. And we continue to achieve improved margins.

While 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're very excited about Masco's future opportunities. We'll continue to focus on the aspects of our business that we can control, and we 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.