馬斯科 (MAS) 2001 Q1 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Masco Corporation 2001 first quarter conference call. The press release and additional informations issued this morning is available on Masco Corporation's web site at www.masco.com. As a reminder, today's conference is being recorded and simultaneously web cast. After a brief discussion by management, the call will be open for analyst's questions. If we are unable to get to your question during this call, please call up the Masco Corporation investor relation's office at 313 792 6646. The following discussion may include certain forward-looking statements related to Masco's future sales and earnings growth potential. Actual results may vary because of various factors including extra home factor over which Masco has no control. Additional information about Masco's products, markets, and expectations, which could affect future performance, is contained in the company's annual report and Form 10-K report filed with the SEC. I would now like to turn the call over to Mr. Richard A. Manoogian Chairman and Chief Executive Officer of Masco. Mr. Manoogian, please go ahead.

Thank you operator: Masco today announced our results for this years first quarter. First quarter 2001 sales aided by acquisitions increased 9% to $1.9 billion compared with $1.7 billion reported in the first quarter of 2000. Excluding acquisitions and divestitures, worldwide net sales from internal growth for the quarter declined 4%. The first quarterly decline in internal growth that I can remember since I believe the early 1990s. Net sales from our North American operations aided by acquisitions were up 14% for the quarter to $1.6 billion. North American sales from internal growth were down 2% for the quarter. International sales were down 9%. Excluding acquisitions, international sales declined 12% compared with the first quarter of 2000, and were down 5% in local currencies. Masco's net income for the quarter declined 34% to $115 million. Earnings per share declined 36% to 25 cents per share compared with 39 cents per share that we earned in the 2000 first quarter. The 25 cents equalled the guidance we had given previously. Before goodwill amortization, earnings per share were 29 cents compared with 42 cents in the same period of 2000. Sales and earnings in the quarter were negatively impacted by continued softness in home improvement product markets in North America and Europe, customer inventory reduction programs throughout the distribution system, less favorable product mix as customers tended to buy more of lower priced products, competitive pricing, and lower other income. Gross margins were 30.0% in the first quarter compared with 32.9% in 2000. Operating margins before goodwill amortization and general corporate expense were 13.8% compared with 17.6% in the first quarter of last year. The largest single factor affecting profit margins was sales being below plan. Margins were also negatively impacted by competitive pricing and unfavorable product mix, both reflecting the weakness in our markets and stronger sales with some of our lower margin products. Lower margins on recent acquisitions less overhead absorption from lower sales, higher energy costs, and the final stages of the Thomas Will 00:04:06 cabinet rollout also reduced margins. Total SG&A expense increased to 17.5% of sales from 16.7% for the first quarter of last year, primarily due to sales being below planned levels. Our general corporate expense increased to 1.3% of sales from 1.4% last years' period. Our segment sales for the quarter were cabinets and related product sales declined 4% year-over-year to $605 million, our service businesses were our strongest performers. Insulation, installation, and other services sales increased to $426 million, an increase of 133% over the comparable 2000 quarter and up 21% excluding acquisitions. Plumbing product sales were $419 million, down 11%, decorative architectural product sales increased 7% to $330 million, and other specialty product sales declined 14% to $131 million. Plumbing and other specialty product sales were negatively impacted by lower foreign currencies. The company's affected tax rate for the 2001 first quarter was 35% and we would expect this rate to continue for the balance of the year. Returns of key retailer sales, our combined sales to Home Depot, Lowe's, and Wal-Mart increased approximately 7% for the quarter, one of the lowest increases we have had in many years. Our key retailer sales in total were up 3% for the quarter. We do not believe we lost any significant market share with key retailers during the quarter. Returns of acquisitions in January, we completed the previously announced acquisition of BSI holdings, a leading provider of installation services for new residential construction markets within the United States and Canada. This acquisition substantially increased sales in our installation and other services segment. Our acquisition pipeline continues to be relatively full and in April we completed the acquisition of two European companies with combined annual sales of approximately $70 million. The companies are the Aaron Group, an Italian manufacturer of kitchen cabinets and office storage units, and Griffin Windows, a manufacturer of door and window systems located in the United Kingdom. During the first quarter, we repurchased approximately 2 million shares of our common stock, of which approximately 1 million will be used for our employee incentive programs. Also during the first quarter, the company issued $800 million of 6 and three quarters five-year notes. And early in the current second quarter, the company also issued 500 million of 6% three-year notes. Proceeds of these offerings were used to reduce floating rate and bank debt. Our inventories are in relatively good shape, given current business conditions, and approximated 85 days at the end of the first quarter compared with 84 days of a year ago. Accounts receivable did increase modestly to 57 days from 54 days a year ago reflecting current economic conditions. In terms of current outlook, while we have had a smattering of reports of improvement in April, we have had as many or more disappointing reports. And our markets in general have shown no improvement. Aided by acquisitions, our January sales in North America were up 20%. There were two extra shipping days in this year's January, while in February and March, North American sales were each up 10%. There was one less shipping day in both February and March. Most of our customers have said that their March results were below their expectations at the beginning of the month, and that trend of disappointing business has continued in the second quarter. Our April sales in North America were up 16%, but there was one additional shipping day in April. European sales were down 11% and down 5% in local currencies. Our total corporate sales for April were up 11%. While business conditions in our markets have softened even further in recent months, we continue to believe, unless there is a significant additional decline in our markets that our second quarter earnings results should exceed those of the first quarter, and second half operating results should exceed those of the first half. Based on present business trends, we estimate that our earnings for the second quarter should approximate 30 cents per share, a slight modification from our previous guidance of at least 30 cents per share, and assuming no significant economic improvement in our markets. Earnings for the full year may be closer to a $1.20 per share, compared with current analysts consensus forecast $1.31 per share, which may be based on more favorable economic assumptions. Well, much of our current earnings decline has been caused by general economic conditions impacting ours and other markets. We are displeased with our current results and are accelerating our profit improvement programs and continuing to review all areas of the company to identify other initiatives to improve our future performance. Longer term, we believe that a lot of the initiatives we are undertaking will make us a stronger company and assuming, the economy shows moderate improvement next year, we continue to believe that we will get back to our historical growth rate beginning in 2002. Now, operator, I will be happy to open the meeting up for any questions that anyone might have.

Thank you. Our question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the * key followed by the digit 1 on your touchtone telephone. Once again for questions please press *1. Our first question comes from I. B. Ziemann with Credit Suisse First Boston.

Thank you. Good morning Richard. I have two questions. First question, you indicated that you did not lose any significant share at the Home Centers. What does that mean? Do you loose any share?

No, we do not feel that we lost any share at the Home Centers, either in market share or in SKU of any consequence.

Okay, and then secondly with respect to your increase in debt during the quarter, your debt capital ratio now is over 50%. Should we anticipate that, that would come back down at some point, given that not in the optimal level you discussed previously?

Because of the acquisition of BSI in January, and the other small acquisition we did in March, our debt to equity ration has increased to about 50.5% of total capital. That's clearly a number higher than we are comfortable with. Our long-term goal continues to be keep our debt-equity ratio in the 30-40% range, but we do believe that our positive cash flow will fairly quickly bring back the debt-equity ratio down from current levels and I should mention that our debt tends to rise in the spring anyway due to seasonal factors, and come down at the year end. So, we would certainly hope by year-end, it will be less than that number and as we sell off some of the other non-operating assets that we discussed in the past, we would expect that ratio to drop significantly in the next few years.

Okay, and then lastly, you mentioned your, there are two parts in the question and that will be my last question. You said that your income, you had lower than it anticipated other income and I would like you to elaborate, please on what those pieces are?

The two biggest swing factors that we had in other income was an increase of about $20 million in interest expense that largely reflected the acquisitions that we made during the course of the past year. In addition to that, we had about $20-25 million of less other income that we would normally have in a quarter, and that reflected a lower level of income and gains from our liquid assets that we have in the company in terms of Masco Capital, and some of our marketable securities portfolio. So, we are assuming for the rest of the year that we will have less other income this year, than we did have last year.

Okay, and then the second part of the question. You did have a tick note from LifeStyle, which is generating close to nearly $70 million in the crude interest or other income for interest income. Can you talk about this concern that industry sources are indicating that LifeStyle is struggling right now given the weakness in that market, and is it possible that there might have to be a haircut on exposure to LifeStyle in the future?

You are correct that the entire furniture industry like many of our markets is also going through a difficult time this year, and LifeStyle earnings are down compared to previous years having said that they continue to have substantial cash flow in terms of EBITDA and at the present time we do not anticipate any problem in terms of earning the interest on our pick notes. But that is something that obviously we have to review on the continuing basis and a lot would depend on the industry conditions in the furniture industry over the next few quarters.

Okay, thank you.

Our next question comes from Barb Gates with Raymond James.

Good morning Richard.

Hi Barb.

One thing, couple of days ago, when the share count looked like it went up significantly from the fourth quarter, is something driving that?

You may or you may not remember that the BSI transaction that we did in January included both cash and stock, I believe that was about 15 million shares of stock issued in that acquisition, so that would have been the biggest swing factor in the quarter.

Okay, that accounts for it. How was your cash flow in the quarter? Can you tell us what that looked like?

I do not have that number in front me. But normally, because of the ramp up for spring business, our inventories and receivables would move up in the first quarter, I can tell you that we are looking for pretty positive cash flow for the year as a whole. Last year, our capital expenditures were over $380 million. This year we are expecting that they are going to be about a $100 million less than that number. So, that combined with other items should result in a fairly positive cash flow for the year.

And some of your initiatives today, will they go to the working capital accounts or...

One of the initiatives that we previously discussed is the divestiture of a number of companies that we said we expect to get $400 million of profits from those divestitures. We have not included that in any of the numbers that we have discussed up to this point.

Are any of those done yet?

None of those are done yet. We would expect all or most of them to be completed this year. We have hired investment bankers both in this country and in Europe to make the sales offering. The offering booklets are in the process of being completed. A lot of the do-diligence work has been completed and we mentioned previously that one of the companies, the largest of the group, we are in advanced discussions with a strategic buyer. If those negotiations proceed favorably, that transaction could be completed in the next two or three months. We would expect the bulk of the other transactions accreted in the second half.

Okay. And when I look at the segment operating margins, the one that really is eye popping is the change in the plumbing products category. Can you, may be, put a little more color on that one?

Yeah, I would say the decline we show in plumbing products in the first quarter is a little misleading. First of all that does reflect that some of the lower currency values in Europe in terms of the number of plumbing product operations we have in Europe, but also historically we have put in place the price increases in our positive business during the first quarter, and that typically has resulted in advanced orders in the first quarter coming in from later in the year. This year we did not have a price increase. If anything we actually had selective price reductions on certain models, and so I think the comparisons are a little misleading in the first quarter year-over-year.

When you look at that on a price and quantity and on absorption basis, may be even in the US verus overseas, what does it look like comparatively? Can we get any hard data that you could help us through?

Hard data on what?

On the operating margins, may be US this year verus US last year in plumbing products. I am just trying to see how we make a comparison and what happens going forward.

I would say I think the margins have come down in both US and in Europe somewhat in plumbing products. Perhaps a little bit more in this country, because of the price reductions that we have implemented, I think we have mentioned before that the one area that we have seen some small margin or market share loss has been in faucet where we walked away from some low margin business in the new construction site, and we have seen some competitive pricing, and we have lowered prices on certain models which we think is going to increase our sales, and may position us in a strong basis, and actually pick up some business because of those lower prices, but we have yet to see that. I will mention that we just did finish the kitchen and bathtub show in Atlanta or in Orlando rather, and we are very exited with the response ... we have gone through a number of new products that we have introduced in the faucet operations. So, we are fairly optimistic going forward, but I think this year is going to be a difficult year in terms of faucet comparisons.

So, going forward in terms of margin, do you expect a similar kind of erosion year-over-year in terms of basis points of margin for the second quarter, third, and fourth quarters or to receive those?

I would think the second margin decline was ... you may see that for most of the year, although again I would caution you that the first quarter is a little distorted because of the lower sales level that due to the timing of the price increases.

Based on that even if we do not have price increases in the second quarter or least if we have an accelerated revenues we should see some pickup for basically better absorption.

Right. Now also again, I would emphasize that our hope is that in repositioning ourselves on pricing on some of those core products, we may well see a pickup in business and if we did, then that would have of course enhance our margins.

Yeah. Thank you Richard.

We will go next to Chris Wenham with Goldman Sachs.

Thanks. Good morning Richard.

Hi Chris.

Can you comment on your sell in to the stores and your customers' look like verus what their sell through was? Have you seen any improvement in the inventory issue?

I think there clearly was significant inventory reduction going on by our customers in the first quarter, and I would also emphasize that frankly it was probably even heavier around the whole sale side of the market as that was on the retail side, but continuing in both, we would expect that, that would continue in the second quarter, although I think our feeling is that it will be on a lesser rate in the second quarter than the first quarter, and one other things that we said and one reason why we expect some improvement in our second quarter result over first quarter besides the seasonal factors is that even though we think there probably will still be some additional slowing in consumer demand for products ... that, that slowing should be offset by a moderation of inventory cutting by our customers in the second quarter compared to the first quarter.

Okay, and with regards to Thomas Will and Weiser, can you kind of give us update on those what the impact was in the first quarter and whether those costs are now complete?

The Thomas Will rollout has been going fairly well, we are now in over a 1000 home people stores, our current run rate is probably around $40 million on an annualized basis. We are projecting that that should be approaching 100 million by yearend. The reason for the pickup in the second half is both seasonal as well as the fact that in the fall home people does plan a major marketing promotion program on that product line, and I would say that virtually all the costs related to Thomas Will are behind this now as of the first quarter in terms of extra cost.

And how about Weiser?

Weiser has completed most of the move to their facilities, the losses were substantially less in the first quarter than the average last year, and we would expect those loss will also be gone after the first quarter or largely gone.

And lastly, in the fourth quarter, you commented about $70 million worth of non-recurring expenses that you had to run-through. And that depressed margins and then in the first quarter it seems like the margins are still similar to the fourth quarter level. So, my question is, were those, what we felt was non-recurring, did it actually continue in the first quarter or did business continue to deteriorate so, that the profitability actually worsened in Q1 versus Q4?

I would say it was a combination of factors, I think margins clearly have been hurt by volume being less, pricing pressures due to weak sales in a variety of product areas, product mix I mentioned earlier where consumers are buying lower margins, lower priced products than historic, energy cost, we have a number of divisions that have reported energy cost up as much as 50% or more from a year ago, particularly due to natural gas cost and freight increases, and as well as the extra costs we are absorbing because of that heavy capital expenditure program, and we have not have the sales come along that we expected this year versus what we expected a year ago. We are also incurring some costs due to the cost reduction programs that we have in place. We probably had about 18 manufacturing operations in the first quarter that reduced head count. These were operations that had down sales as opposed to operations that had up sales and they probably reduced head count by nearly 2000 people during the first quarter. So, that would represent about 10% or more of the people within those operations. So, clearly severants 00:23:50 and other costs were also impacting us during the quarter as we incurred some of those costs. So, I think it really was a combination of those items as well as the fact that the acquisition of BSI and some other acquisitions at least in the first quarter had lower averages than we would expect for the year as a whole or going forward.

Okay, thank you.

Our next question comes form Steven Gem with Solomon Smith Barney.

Thanks very much. Rich, could you comment on ____00:24:19 in comments about their interest in taking the schlage product line, a higher end, which I think that you may have called broad way that would compete directly against Baldwin, have you heard anything about this, and keep this comment on anything you are hearing in the competitive front in what sense. Thanks.

Well, ___00:24:40 I think has done a good job, particularly at the lower price points on lots of hardware, their schlage lot probably has gained market share in the industry over the last few years. That would affect this in our wiser operation, which as you know has been one of our underperforming operations partly because of that move to Mexico, which we think we think will also make us more competitive. They have announced an entry into the higher end product line to complete with Baldwin, but we have had other companies both import in domestic, Black and Decor and others enter that market over the years and Baldwin has done an excellent job of maintaining their market share and based on everything, we have seen we do not see any change in that and the relationship Baldwin has with their key retailers has been very strong and continues to be very strong.

Do you get the idea that there is going to be any allocation of shelf space in your major venues for this new Broadway line yet?

I think that the best answer I can give you to that is that, we do not expect any loss of market share at Baldwin of any consequence.

Great, and then also I also hear that April sales in lock sets were up pretty considerably, did you see that in your business as well?

No, I would say that if anything we would have shown a decline in sales of products year-over-year, but again I think the major part of that was inventory reduction programs going on with our customers.

Okay great. And then last question following up on that inventory correction issue; you made a comment of that that the wholesale inventory correction apparently was even more intense than retail in the first quarter. Can you comment on whether or not this is an accelerating trend versus retail, give us an idea whether retail or inventory corrections you feel are almost done or dying out, but that perhaps the whole sale, is sort of beginning to take up a slack here, or it is different due sort of combination of events going on.

We had some major whole sale customers in the first quarter that cut their orders by 25-30% or more, which obviously are bigger cuts than what's happening in the marketplace. And I think some of that is really a lag factor. Traditionally, that is not unusual because wholesalers being an in-between person, don't know to react as fast to retail demand because they are reacting a little slower to their customer reactions, and once they see a slow down there, they tend to be carrying even higher inventories, and some times that cary their retail and will cut back even faster to try to bring those inventories in line. I would expect that the worst of that probably took place in the first quarter, but within our projections we are still assuming fairly significant inventory cutting at all levels of the distribution channel in the second quarter as well.

How about the back half?

I would certainly hope that by the second quarter, virtually all of our customers will have their inventories in line with end demand, unless there was a significant change in end demand from current levels.

Okay, great. Thank you very much.

Our next question comes from Joseph Sirocco with Merrill Lynch.

Good morning Richard.

Good morning.

With two more acquisitions in Europe, can you still give us a strategic backdrop for doing acquisitions in Europe and if there is a game plan there?

I would just say that fact that the two acquisitions we just announced were in Europe is more coincidental then planned. We continue to have active programs both in the US and in Europe, and as we said before, in terms of size and scope we would expect that our US acquisitions probably would be greater in terms of size than our European acquisitions. The other thing I would just like to mention is that even though the pipeline continues full, and we do expect to do some additional significant acquisitions ... we still would expect that the rate of acquisitions for the next year 2002, might be somewhat less than the very active face that we had over the last two or three years. So, we continue to expect significant acquisitions, but I would think that will be little less than we have been averaging for the last few years. In Europe, our goal there is really to continue building on our core strength, the two acquisitions that we made, one expands our cabinet capability into Italy, which is important not only for the Italian market, but that company also exports to a number of other countries throughout Europe and other areas, and secondly, the acquisition of Griffin windows really tied in very nicely with our AVOCET operation in the UK, which is an important manufacturer of window hardware, and now gives us a greater systems capability that we can offer to our customers.

Okay, second question. You mentioned head count had come down by about 2000 in some of the operating groups?

I want to be clear on that. That would be down 2000 in those operations that had lower sales and we are reducing head count. We would have had other operations such as our Thomas Will Operation, which would have increased head count, and clearly our service businesses were our sales are up significantly would have also increased head count.

Okay, but I was asking because I don't think we have talked about head count before ... we know that you do have some cost reduction operations or activities in place. I was wondering if you expected further down side at the head count.

Right, AUDIO DISTURBANCE after they have been done rather than prospectively, so that we were happy to tell you that we are being very active in terms of reducing costs through head count reduction, through rate freezers, through a variety of other areas, and hopefully, those results will start showing up somewhat in the second half, but particularly in next year.

Okay Richard, thank you.

Our next question comes from Ron Fisher with ____00:30:34.

Good morning.

Good morning.

You mentioned that SG&A expenses had gone up as a percentage of sales, because sales were not growing while you thought. But SG&A has actually grown somewhat, I mean about 25 or so million dollars in the previous few quarters just on an absolute basis. I am wondering if you could give some thoughts on where that rise comes from?

Really, the main reason for the rise in SG&A was a couple of things. One, certain SG&A costs are fixed, we have certain sales forces and other things that if our sales come in below expectations. The percentage number will go up just because of the fixed nature of those costs and secondly, some of the stronger sales we had in the first quarter on a comparative basis had relatively higher SG&A cost than some of our average business, and that tend to blow our average up. I think also we have undertaken a number of key customer initiatives that we think overtime are going to enhance our sales growth, but we are incurring the cost on some of those initiatives upfront. So, a combination of those has resulted in the percentage going up a little bit from what we would have had otherwise.

Is that the insulation business that has a higher SG&A?

No, it would include some of our decorative hardware products and some of the other business that we have, where we have some large established sales forces.

Okay. Thank you.

We will take our next question is from Greg Nejma with Deutsche Bank.

Good morning Richard.

Good morning Greg.

Hi, how are you? A Couple of questions, one, with respect to the asset review, I think you mentioned in response to an earlier question that there were $400 million in business divestitures potentially, but that was a program that you had announced several months ago. Are there any new initiatives that you are considering in view of the protracted earnings in cash flow weakness, in the amount of 400 million?

The $400 million in proceeds ... that involves about 500-600 million in terms of sales of companies and clearly we are looking at all faces of our business in terms of where else we can generate more cash flow, that is not something that is new now, that is something that we have been undertaking really for some months, but at the present time we do not have anything to announce on that.

Is there somebody internally who has been specifically assigned to that initiative. Have you have established or brought in anyone new to examine your cost structure and or other opportunities to divestiture businesses?

Well, as you probably know, we have previously announced and shared with the investment community, the fact that we have established some 13 different teams and if anybody does not have a list of those teams in their charters, we would be happy to send it them. Just one of those teams is geared towards the generation of cash flow and improving our balance sheet. And that's made up of a number of members of team management and those teams then have the ability to bring in other people to work with them if they deem it appropriate. So, we really have very active programs in all areas and cash flow and improvement in the balance sheet is just on of those areas.

Yes, one thing that I am trying to reconcile, is as you have increased your presence with big box retailers and with big builders, presumably the information flow and the sophistication of those customers is such, that you would know more immediately, about variances between your expected sales and sales in reality. Why is it that with a more sophisticated customer base in information, presumably more right away available, you think that you have continued to be surprised by the weakness?

Well, the primary reason is that our customers have been surprised by the weakness. And let us exclude the large home builders from that for a moment because their business has been relatively good, but if you look back at retail generally, not just the big box, but the retail generally, I would say that many of our customers are running negative store counts as supposed to the positive 4, 5, 6% they were running 6,9, 12 months ago. So, their business has swung some 8-10% from what they expected, and initially I think that some of them felt that that might have been a temporary swing and as a result their inventories build up more than they expected, and because of that they have taken more aggressive actions because I think they now believe that, you know, that decline is at least in the near term going to stay. So, frankly the shortfall we have had has been a shortfall our customers have experienced, and in fairness probably economists and Wall Street analysts have underestimated as well. So, it has surprised all of us.

Is there anything that you can do differently as a major supplier to them in one that manages certain inventory categories and what your large customers are doing to improve their forecasting accuracy?

Well, I would hope that the last 6-9 months is more the aberration then the norm, I go back over 30-40 years in the business and I have never seen as many people surprised by what's happened in such a short period at a time this has happened in the last 6-9 months, and I just don't think that is a normal pattern to go forward. We do have data on sales at the cash register level, we have a lot of other information, but one of our jobs is to provide service to our customers and as a result of that we always have to make sure that we are capable of shipping products when they needed, and that's why we try to keep ahead of them in terms of making sure our inventories are adequate, our manufacturing capabilities are adequate to meet the projections they have, and if they fall short and of course we are going to be a little surprised, and overbuilt in the process ourselves. One other things I should say is that one of the other cost that has really come out of some of our profits in the last quarter or two as been in promotions, incentives, and other things that our customers have undertaken that we have supported to try to move some of that inventory through the channels. So, that has been another factor that has come in to play in terms of margins and hopefully that will enhance sales going forward.

Rich, when you look at your return on capital employed obviously that return measure has come down fairly dramatically as you got at assets with acquisitions, and yet the returns have been so poor. As you disaggregate and look at the components or return on capital employed, are there specific areas that you are devoting more attention to in terms of trying to attack and improve?

There are a variety of areas that we are looking at, again if you look at the list of the teams that we have formed, we are looking at areas how we can reduce costs within operating units, and I should mention that everyone one of our operating units has their own initiatives underway in terms of what they can do to reduce cost and become more efficient both in terms of capital as well as in terms of margins. We are looking at areas where it make sense to combine operations, consolidate operations, as I say the initiatives they we are undertaking or at least looking at our broad base. We do not what to talk about specifics until we make decisions or implement them, but hopefully the company is going to be a stronger company going forward as a result of those initiatives.

Right, thank you.

We will go next to Wendy Kathleen with ABN AMRO.

Good morning Richard.

Good morning.

To go to the mix question again, is there any reason as we look at BSI or some of the other recent acquisitions, why they could not reach the historical levels of Masco overall in terms of ...?

No, I think the product mix is two fold, one is that cabinet sales and installation services generally have somewhat lower profit margins than our historic corporate average. But that does not mean that they do not have very high returns to our service business ... they have a very high return on invested capital. So, that as we make some of these acquisitions at least initially, the overall margins might be somewhat lower than our corporate average historically, and bring the averages down until we integrate them to get some synergies in cost benefits, and bring them back up to higher levels. But, I will not interpret that as a permanent change in margins, which is a question of which groups are increasing the fastest.

Okay, and again ...

I should also mention that particularly in the case of BSI, where we are integrating that with our other existing service businesses, there we did encourage some extra sevrants in relocation cost, because we had a major program there combining branches and moving operations at a relatively fast rate, and the profitability of that business has been going up each month, as we have completed those programs.

And finally, we have been very concerned about, many investors have been concerned about Europe, and it looks like it is deteriorating further, if you look at the recent numbers, out of Germany in terms of manufacturing orders, they are significantly lower. Can you share with us your view on that in terms of what you are looking at for the balance of the year in Europe?

Yes, it is from the comments I made. We are running negative sales in Europe even in local currencies. I would say that the Germany and the UK are particularly weak. The last residential housing numbers I saw in Germany are down 25% from a year ago, and we thought a year ago was depressed, and in our markets Europe has generally been depressed for two or three years unlike some of the industrial markets there, which had been doing better. So, the fact that our markets were already down, I think the down side is probably a little less than it might be in some other industries, but not to say that we don't see it going down even further, and that is included in some of the numbers that we have talked about.

Thanks very much.

We will take our next question from Brian Mc Claussen with JP Morgan.

Good morning. You have spoken about the pricing pressure particularly in the plumbing segment ... but could you talk about pricing in other segments and what is driving it, and ultimately, who benefits from it. I know you mentioned that lower prices might dispert higher sales.

That was true in the case of faucets where we have lowered our pricing on certain core models where we felt our price had just gotten too far out of line with others in the industry. In terms of other products, anytime you go through economic downturn where most of the manufacturers are surprised by the extent of the downturn. It is not unusual where you will see some pricing pressure that you wont see in normal times, and there is a number of cases where that has happened that we are meeting those pricing pressures, and being competitive in the marketplace or giving additional promotions or allowances to some customers to help them move inventory, and I think that was reflected in our first quarter results.

Okay, a second question with acquisitions. You also pointed out that some of your recent acquisitions have an entirely lower margin that is bringing down the average, again, as you were just saying from your historical average. Which segments would those be and do you see future acquisitions extending that trend?

I think in terms of historically, we have had operating margins around 17-18% for the company and what we have said is that cabinets typically run more in the mid teens, and the service businesses typically run into the low and mid teens. Although, much higher on a return on asset basis. So, if we were running our normal margins ... those margins as they grow, would bring our average down a little bit, and I guess the same thing would be true in Europe. We have been running a little lower in Europe largely due to economic reasons in our corporate average, so, European acquisitions will bring the margins down a little bit. Right now, that is probably less of effect because our margins are down pretty much across the board for the economic reasons I have mentioned, but that is a reference to normal times when we expect our margins to get back up into the mid and high teens.

Thank you.

We will take our next question from Barbara Allen with Arnold and _____00:43:29.

Thank you. I didn't get the number of share that you had repurchased in the quarter.

We repurchased 2 million shares in the quarter and probably are using about 1 million of those for employee incentive programs. So, assume we retired about 1 million net shares in the quarter. And remember that we issued 15 million shares in an acquisition for the quarter.

Right. I was also interested in the Thomas Will cabinet's line. I thought that the target draining is $200 dollars in annual sales and you are looking now at $100 million by yearend?

No, we have never used the 200 million number ... the most that we have ever discussed with anybody was the goal of 100 million. You might be thinking of the home people sales, because we are only one of two suppliers to home people, and on a combined basis, they may be looking at a $200 million target, but I don't want to speak for our customer.

Okay, that clears that up. So, you are on track now to get that target?

Yes, as I a matter of fact, I would say that Thomas Will is doing well. The key is going is going to be once the heavy merchandising and advertising programs come into play what is the upside. But, thus far, we are getting more than our share of the Thomas Will Business and the cannibalization, which we had originally anticipated to be about a third and in other words if we do 100 million, we might loose 30 million of other cabinet business has been running less than expected. So, on both sides we have been pleased thus far with the results, but it is a little early.

Any raw materials pressures other than energy and fuel related?

The biggest plus pressures are in energy particularly this year in natural gas and fuel in the case of some trucking. We have seen some cost increases in Europe in aluminium and other products, and resin costs have gone up, although those have tapered off. I should mention that insulation prices have gone up about 12% in the past month or two. But, we would expect to be able to pass that on to customers if that price increase holds. Those are probably the major areas of increase.

Okay, thank you. Our next question comes from William Nobler with _____00:45:44.

Thanks very much. Going back to your comment about doing further additional significant acquisitions, although you then proceeded to say the pace will slow. When I look over the last year and a half and the economic problems in part caused by acquisitions whether it be start up costs or plans or lower margins brought on or difficulties in Europe, wouldn't it make sense to completely stop making acquisitions, focus on improving the existing profitability, and return on capital rather than continue to make purchases?

Well, again I think that the fact that acquisitions on an average might have lower margins than our cooperate average is different than those companies have problems. As an example, when we did the major acquisition of BSI at the beginning of this year, their margins typically were running around 10% and we are quickly going to bring those up to the mid teens equal to our other service businesses, which again is a very high return on invested capital. So, we don't think that margin wise has been really a problem from an acquisition standpoint because those lower margins are also reflected in the purchase price that we pay for those companies. The reason I mentioned the somewhat slower pace is, we have often said that our goal going forward is to average about 5-10% of our sales average on an annual basis, and if we do hit that goal, then that would be somewhat less than the average we probably had over the last two or three years particularly if you include the barren MILLS PRIDE pooling transactions.

You know, when I looked at mentioning there and MILLS PRIDE, at that time, you acquired five companies with a billion and a half in revenues I believe and paid $3.8 billion; 11 times EBITDA and 2.5 times revenues and I just quickly looked at the first quarter of this year versus the first quarter of 1999. Your sales were up 35% and your earnings are down 25% and of course in addition, your debt at that time was 40% in capitalization, and now it is over 50% of capitalization. It seems to me looking from the outside that in general, in the last year and a half, acquisitions have not been the route to go for Masco.

I think most of your facts are correct. I am hoping your assumptions aren't correct. I would just say that the barren MILLS PRIDE as we discussed at the time were the unusual ones in terms of multiple paid. If you exclude barren MILLS PRIDE we have averaged about seven times EBITDA for virtually all the acquisitions that we have done and they are virtually all accretive on day 1. I haven't looked at the numbers lately, but I think that barren MILLS PRIDE this year are going to be accretive to earnings on a per share basis combined as well. And secondly, the barren MILLS PRIDE, which were the higher priced companies although they were companies that have been growing at a 25% compound growth rate have dramatically improved our position in the marketplace with certain customers, and I think the benefit we are getting from that has more than been offset to the higher price that we paid for those companies.

And, just one last question.

I should also mention that the MILLS PRIDE, the extra cost they incurred in Thomas Will really was more of a delay in the program. That program really ramped up about a year later than expected by anybody for decisions that were made by the customer. And therefore, those extra costs were something that would have been difficult to foresee, but they really are one-year one-time situation, and that is going to be a very profitable product line for us going forward.

One last question. I believe in ... and your text said that, next year you would hope that Masco would with return to its historical growth rates. Now, this is a year when I look back two years ago that Masco was supposed to earn two dollars a share and now the forecast is a dollar and 20. When you talk about historical growth rates, what is the base that you are thinking off?

Well that is a very good question and a very fair question. The one thing that we just haven't got a good judgment on is, how much of the business that we have had over the last two or three years was driven by the wealth effect in the economy from the strong stock market, NASDAQ, stock option, appreciation, and all the factors that drove certain elements of the market. In hindsight, I have to say that probably some of the growth that we had in our sales and earnings came from that. So, I can't tell you at this point whether going forward our growth rate and historically our growth rate has been 15-20% in terms of earnings per share growth. It is going to be from a higher number or from the current number until we get through the economy a little bit, and see what really is the wealth impact in the market, and how much of the business that we had might have been in the $82 estimate that you had isn't there any longer. So, I think we are going to have to make that judgment after we get a little farther along in this economic cycle.

Right, okay thank you.

Our next question comes from Eric Beshar with Midwest Research.

Good morning Richard. First of all your comment that you think the second half gets better than the first half, can you just give some clarification of why you have that confidence that things can get better in the second half versus the continuation of what we are seeing here in the first half?

A couple of factors. First of all, typically, some of our businesses seasonally do better in the second half. Paint business is stronger in the second and third quarters; our cabinet business typically is stronger in the second half than it is in the first half. Secondly, if nothing else, just the absence of the inventory cutting that we are digesting in the first half of the year should result in second half of the year being better than the first half, and cash flow and other things that just happen over time should gradually add to our earnings as well. So, we are not forecasting that dramatically an improvement in the second half if you use our numbers, and assume that there is no economic pickup, but just a normal course of events should give us a better second half than the first half unless there is a major new down leg in the economy. I should also mention that we have a number of new products coming on stream. We have talked about Thomas Will, our Boston Operation has introduced a number of new products, and we have a number of other operations that are introducing new products this year that should have a much stronger impact on the second half as well as the over and above the first half.

Was that on the inventor reduction? You commented that April has not gotten that much better from a demand perspective from your customers. Do you feel or are you seeing sequential trends month to month that the inventory reductions in retail are picking and/or is it still the same pace in April that we saw in January and February?

It is hard to get an exact number on that but my reading would be that April probably was not that far off from March if you include wholesale on top of retail and other channels. But we would still expect inventory cutting in the second quarter as a whole to be less than the first quarter.

Okay, and then lastly on the ...

Part of that, partly as I tell you is that we expect the consumer sales to slow some in the second quarter over the first quarter and that is the offset to the reduction in inventory cutting.

Okay, then lastly on DELTA, you comment about that it has been accretive of the acquisition is working? Just talk about the performance of that business in the first quarter and what trends you are seeing in that business?

Well, as you probably heard from others, the industry has had a surprisingly weak first quarter. I think if anything, paint is probably one of the most recession resistant product lines that we have in the company, and yet you will see from Sherwin Williams and others that the paint sales have been slapped down in the first quarter. Now, some of that was weather driven, which comes into play in certain parts of the country. But I think in the long run, that is not going to be a factor going forward in terms of a slower growth rate.

Was that a business? You had a number of businesses that were below growth expectations? I am assuming that business trend was along with all your other businesses. Does that stand out?

Sure, that would be one that was below trend and that would also be one that was impacted by inventory cutting. But again, I think it was one of our stronger product lines that were just below of what we would have expected, and I think that we outperformed the industry and competition as a whole, and probably gained market share during the quarter.

Okay, thank you Richard.

Operator, maybe we will take one more question.

Yes, we will go next to Timothy Jones with Joseph Bowen & Company.

Good morning. A couple of question. First of all, you had talked about making your largest divestiture in the first quarter and now you are talking about two or three months of this?

No, I think when we made the announcement ... we said that it might happen in the second quarter and that hasn't changed.

oh, there hasn't been any change on that?

No.

Okay, in the plumbing products ...

We can't tell you it is going to happen for certain but if it happens, it is likely to happen in the second quarter or early in the third quarter at the latest.

In your plumping product margins, obviously you have cut the core products as probably they compete with more and with the builders. Are you doing anything to compete with price fixture at the retail area?

Well, actually the core products that we reduced the price on were really in reaction to virtually everybody in the industry, which would include _____00:55:58. We just got into a pricing that was too high in certain models against most other companies.

So, you were cutting products both through the builders and to the retailers?

Yes, we cut prices on certain models to all our customers, but again we are hoping that those cuts will result in gaining market share in the process but you know, time will tell.

You talked about last year, if I recall, you had Weiser loss of around 5 and 12 million respectively. Do you have a dollar number on what the losses were for this year?

Well we said that last year that the combined we lost about, I think it was $50 million of extra expenses in Wieser and Thomas Will. That was running at the rate of about 4-5 million a month. It was substantially less than half of that in the first quarter and would have largely be gone and probably all gone in the second quarter.

One and a half on Thomas Will?

No, one and half in the two combined.

All right, is Weiser still losing one of that or the ...?

Well, again I wouldn't want to get into a specific operation, but lets just say the losses were substantially less than half of the run rate we have had.

Okay, you talked about the wholesaler or inventory dropping in 25-30%...

Our orders from wholesaler inventory dropping ...?

Yes, was there any specific product line where that was compensated in?

I would say across the boards.

Really, and finally, your decline in the margins in the plumbing products in 1998 and 1997 were about 24% and 19 1/2 % largely down at 12 ... how much of that is not the faucets spread all those other areas that you have combined in that segment be dealt with, you know, the bathroom products and all those things?

How much was the margin down?

I mean was it more affected on the positive side or was it more affective with the revenue costs ...?

The faucets would represent a fairly large portion of that total group. So, just by its size, it would play a bigger role. But I would say that the same factors that affected one of our businesses ... that affected most of them in terms of the cost items that I mentioned earlier. So, I would say it was pretty much across the board.

Okay thank you very much.

This thus concludes today's question and answer session. Mr. Manoogian, I would like to turn over the conference back over to you for any additional or closing comments.

Well, thank you operator and we appreciate all of you taking the time to be with us and if you do have any further questions, certainly feel free to call us and we would be happy to answer them as best as we can. Thank you very much.

This does conclude today's conference. Thank you for your participation. You may now disconnect.