馬斯科 (MAS) 2002 Q1 法說會逐字稿

Please stand by. We are about to begin. Good morning. Ladies and gentlemen, welcome to the Masco corporation first quarter 2002 earnings conference call. The press release and additional information issued this morning is available on Masco corporation's website at www.Masco.com. As a reminder today's conference is being recorded and simultaneously webcast after a brief discussion by management the call will be open for analyst questions. If we are unable to get to your question during this call please call the Masco investor relations office at Again, that number is (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 balls of various fact force including external factors 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. At this time I would like to turn the call over to the chairman and chief, Mr. Manoogian. Please go ahead, sir.

Thank you, operator. We are pleased to report that the positive trends that we experienced in the first quarter of 2001 have continued into the first quarter of 2002. First quarter 2002 sales aided by acquisitions increased 11 percent to a first quarter record of $2.1 billion compared with 1.9 billion in the first quarter of 2001. Net sales from our North American operations were up 13 percent and international sales increased 1 percent. Excluding acquisitions and divestitures, worldwide net sales from internal growth increased 8 percent for the quarter, with North American sales increasing a strong 11 percent. And international sales declining 6 percent. In local currencies, international sales were down 2 percent. Our internal sales growth has trended upward in recent quarters, with improvement in both sales and incoming orders. A year ago in the first quarter of 2001, our internal sales growth hit a low point with a minus 4 percent, followed by two relatively flat quarters, improving to an increase of 6 percent in last year's fourth quarter and the 8 percent increase we have just announced for this year's first quarter. As many of you know, Masco is historically achieved approximately 8 percent average annual internal sales growth, or over twice the rate of our industry. North American internal sales growth has improved from a decline of 2 percent in the first quarter of 2001 to an increase of 11 percent this quarter. International sales continue to be impacted by weaker foreign currencies and continuing weak foreign economies, particularly Germany. We do expect a modest improvement in our international businesses in the second half of this year. Masco's net income for the first quarter was $150 million earnings per share increased to 31 cents per common share compared with 25 comments per common share that we reported in the 2001 first quarter. The 31-cent modestly exceeded the guidance we had given previously of 30 cents per common share. Before good will amortization earnings per common share were 31 cents for the first quarter of 2002, compared with 29 cents for the same period of 2001. We are particularly pleased with our performance in the first quarter of 2002, based on the fact that the quarter had two less shipping days than last year's quarter. We estimate that this resulted in our 2002 first quarter earnings per common share being approximately 2 cents less than would have been achieved with a comparable number of shipping days. The last nine months of 2002 will benefit from two additional shipping days over the prior year period. Unusual items further reduced earnings per common share by approximately 2 cents in the first quarter. Unusual items included the disposal and write off of certain assets, partially offset by the benefit of a lower 2002 tax rate. Gross margins were 30.8 percent in the 2002 first quarter compared with 29.2 percent in last year's period. Operating margins before good will amortization and general corporate expense increased to 15 percent, compared with 13.7 percent in last year's first quarter. Margins were aided by profit improvement programs and the higher rate of internal sales growth. Based on present trends, we expect operating margins for the full year to increase by at least 75 to 100 basis points over last year. SG&A expense as a percent of sales was 16.9 percent, approximating the 16.8 percent we had in last year's first quarter. Our general corporate expense decreased to 1.1 percent of sales from 1.3 percent in the comparable period of last year. Our segment sales for the quarter were cabinet and related product sales were up 9 percent year over year to 656 million, excluding acquisitions and divestitures sales were up 7 percent. Plumbing product sales were 464 million, a 12 percent increase from last year's quarter, excluding acquisitions sales were up 11 percent. Installation and other services sales, including the effect of a divestiture, were 390 million, down 8 percent Excluding the divestiture, sales were up 6 percent. Decorative architectural product sales increased 11 percent to 359 million. And other specialty product sales increased 76 percent to 231 million, and excluding accuse situations and divestitures, sales were down 5 percent in this segment. Our key retailer sales continued strong with above average increases in sales of assembled cabinets, faucets and architectural coatings. Combined sales to Home Depot, Lowes and Walmart increased approximately 18 percent for the quarter. During the first quarter we repurchased approximately 1 million shares of our common stock for our employee long-term stock incentive plans. We continue to increase our focus on asset management. Inventory days approximated 74 days at the end of the first quarter, compared with 85 days a year ago. Accounts receivable at the end of the first quarter, however, were 61 days compared with 57 days a year ago. A major customer has extended its accounts payable terms, increasing our accounts receivable by approximately six days. Excluding this one customer, our overall daily rate of receivables actually improved over a year ago. The company's effective tax rate was 34 percent compared with a reported 35 percent a year ago. We expect the lower 34 percent rate to continue for the balance of the year. I should mention that last year's tax rate of 35 percent was after the deduction of good will amortization. If you excluded good will amortization, last year's tax rate would have been 33 percent rather than the reported 35 percent. Debt as a percent of total capitalization at the end of the first quarter declined to less than 47 percent, an improvement from the 38 percent at the year end. During the quarter we paid down debt by approximately $50 million. We are pleased with our performance in the first quarter and the positive improving trend in sales and incoming orders has continued in April. April sales were up nearly 20 percent over the year ago month, although the month did benefit from two additional shipping days. Excluding the impact of the additional shipping days, internal growth in April continued the first quarter trend of high single digit increases. As I mentioned earlier, private improvement programs we have implemented are contributing to margin enhancement and we expect margins to improve by at least 175 basis points. We also implemented a number of programs to aid our return on assets and our cash flow, and we expect significant improvement this year in both of those areas. Because the first quarter is seasonally a low quarter for Masco, sales and earnings per common share in the last three quarters of 2002 should average higher than the first quarter results, contributing to significantly improved sales and earnings for the full year 2002. If present positive sales and economic trends continue, we believe that second quarter earnings should approximate 37 to 39 cents per common share and full year 2002 earnings should approximate $1.45 to $1.50 per common share, compared with the company's previous out look guidance for 2002 of $1.40 to $1.45 per common share. Now, operator I will be happy to take any questions that anybody might have.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on the touch tone phone. We will proceed in the order you signal. Once again, if you have a question, press star one. And we will take our first question from Joseph Sharoka from Merrill Lynch.

Good morning, Richard, congratulations.

Thank you, Joe.

The divestiture in the install segment, was that just Inracon? You are comping through that now?

Yes, that's correct we divested our Inracon services around the middle of last year and that reflects the decrease in sales for that segment.

Okay. Can you update us on the rest of the divestiture program? I think you commented it was going to be somewhere total between three and $400 million over the course of the next year or so.

Yes, we had one additional small divestiture we completed in March. We now divested three companies and of the total program that we had projected last year, we completed about 70 percent of the total divestiture. We still have some additional relatively small companies that we are hoping to divest between now and year end.

On the comment of the 75 to 100 basis points profit improvement? Is that apples to apples after we exclude the good will that you think the organic ...

That is apples to apples, excluding good will in both years.

Excellent. Thank you, sir.

We will take our next question from Armando Lopez from Morgan Stanley.

Good morning.

Good morning.

Just a quick question. The sales to the key retailers was really strong during the quarter. Would you apply a little bit more color in terms of how much of that -- are you seeing an end demand versus inventory restocking?

We think all of the increase that we had on the retailers' side is as a result of end demand. We have not seen any inventory rebuilding at the retail level. We think there may have been some modest inventory rebuilding in the first quarter results from the wholesale channel of distribution which probably represents about 25 percent of our sales. But our other channels of distribution, we haven't seen any inventory rebuilding yet.

Great. One other one. The last quarter you talked about pricing on the faucets. You were doing some price adjustments. Could you expand on that a little bit in terms of, are those completed now? Or what is happening with pricing?

Yes, I might mention -- by the way, the follow-up to your first question, too, I mentioned we haven't seen any rebuilding at the retail level. We do think some retail inventories are relatively low. I would be surprised if we don't see some rebuilding in that segment sometime during the course of the year at a later point. As far as faucet praises we announced in the spring last year we were doing a major faucet repricing, lowering of prices on certain key models where we felt the price got out of line with the market place. Our expectations were increased sales as a result of that repricing would give us absolute profits equal to or guarantee we would have achieved otherwise. Thus far we have been very pleased with the experience we have seen as a result of that faucet repricing. Our faucet sales increases are coming in at double digit rates for the last few quarters. We have gained market share in each of the last three quarters that we have data for. We are very pleased with the results we have had.

Okay, thank you.

We will go next to Ivy Gellman from Credit Suisse First Boston. Please go ahead.

Congratulations, you guys. Good to see you doing so well, especially on the working capital front.

I think the share recount compared to the year ago largely reflects some shares that we had in acquisitions during the course of '01.

What was the actual number we should use going forward?

484 million I think is the going forward rate of shares, which is the average shares we had outstanding I believe for the first quarter.

Okay. If you look at the installation services business, you've seen? Sequential declines on a year over year basis in terms of the growth. Can you give us an elaboration as to what is going on there? And talk about some of the businesses you have been successful in adding to the actual services you provide and the status of the overall business?

Yes, our service business were up, excluding divestitures were up around 6 percent in the first quarter compared to a year ago. I think that under states our growth a little bit because we have seen some reduction in material pricing in the last few months which we passed on to customers. That probably resulted in three to 4 percent decline in average prices, not affecting our margins because it didn't affect the overall profit margins. Our actual unit sales were probably higher than we reported. We are continuing to have good experience with rolling out additional product lines. As you know a couple of years ago less than 10 percent of our service businesses were non-installation service, and now we are running at a 20 percent growth rate in percentage of our total services being non-installation. We are seeing a variety of different products which are now installing for home builders. We now install products in 60 percent of all the single family homes constructed in this country. It gives us a tremendous base upon which to build.

Can you elaborate nor specifically on which products you added and what is the opportunity for more specifics going forward?

Our highest growth increase in other products in that category has come from the installation of cabinets and gutters, I would say, are the two major product areas, with fireplaces and a variety of other products coming not guilty the at somewhat slower amounts of sales.

What about the wiring? Are you doing that as well?

Yes, we introduced a number of new products, structured wiring an also environments for living. We had a very good home builders show on environments for living. We signed up another ten or 15,000 homes on that program, which averages something like two to $3,000 per home. So a lot of those sales will show up later in the year. We didn't have as much of that in the first quarter. A lot of those products were just being rolled out.

Lastly, what about faucets, is that on the table?

For installation?

Yes.

We are not doing installation work in faucets we don't want to compete with plumbers in the field who do that work but are our customers presently.

Congratulations on a great fourth quarter.

Thank you.

We will take our next question from Rick Henderson with Raymond James and Associates. Go ahead.

Good morning. Very nice quarter. Want to ask you a little bit more about the plumbing products segment. Appears that you reversed kind of an unattractive trend that had extended up until the fourth quarter of last year. This double digit growth. I wonder how sustainable that is and what is driving it.

We think it's sustainable and a major driving force in that is the repositions of the repricing of the faucets. Which as I mentioned earlier has gained us market share in the last three quarters. Frankly if you take North America, if you take North America sales it's better than the numbers you are seeing. Included in that total category are the European plumbing sales where we don't see much growth there because of the economic environment. I should also mention we have had a number of new products that we have introduced during the course of the past year, particularly again on the faucets side. That resulted in nice growth and market share gain in that category.

Which channels are you seeing that growth in? Are you regaining any share in the home builders channel? Is that all in the home center channel?

No, we think we are getting in on all the channels of distribution.

We introduced more new product at the recent kitchen bath show that took place in Chicago than I think we've introduced in the last several years. We have a lot of new products in the pipeline.

Okay, very good. On the other expense line, can you give us a little bit of detail about what assets were written down an what we can expect going forward from that line?

The other items I mentioned that costs us about 2 cents in the quarter involved about $10 million from the loss on sale of marketable securities and we wrote off about $8 million of product displays, largely related to our Thomasville product line which we will be discontinuing. That 8 million flowed through profit margins in the cabinet segment. You should add that back if you want apples to apples in that product category an also flowed through SG&A in our cabinet businesses. Our total SG&A as a percent of sales would have improved in the quarter had it not been for that charge. In terms of the other income net line which showed a pre tax loss of about 11 million largely as a result of that portfolio write down, we would expect that that category should be flat or modestly profitable in the next three quarters. So there ought to be some nice swing in that going forward.

Thank you very much.

We will go next to Shane McGrath with A.G. Edwards. Go ahead.

Congratulations. I'm on the road; bear with me here. If I look at the first quarter last year operating profit, those have good will amortization expense, right?

Yes. Put out the numbers both with and without good will amortization. The numbers I mention in the call adjusted and took out amortization. It would be an apples to apples comparison.

On the margin improvement, how much would you say is operational leverage versus mix versus materials pricing? Maybe if you could expand there.

I also have to say that in fairness, the last year was a particularly bad quarter for us. We incurred a lot of costs related to some of our profit improvement programs. We had negative sales growth internally a year ago which impacted margins. While we are up 130 basis points this year in the first quarter in margins, I mention we are only projecting 75 to 100 basis points for the year as a whole. That's an improvement. That's a combination of the internal sales growth plus the things we have done to reduce costs over the past 18 months. The higher volume and higher production absorbs more fixed overhead costs resulting in higher margins. It's a combination of all of the things we have been working very hard on for the last couple of years to improve performance. We think that trend is going to continue. At the present time we think we will improve margins not only this year but based on present trends we have an opportunity to improve margins next year as well.

Great. Thanks a lot.

If you would like to ask a question at this time, please press star one. We will go next to Robert Marshall with Wachovia. Go ahead.

Quick question. Looking at your improvement in the gross margin on a year-to-year basis which product were the improvements most apparent?

I believe that our operating, if you look at the breakdown we provide, our operating margins improved in virtually every product segment we are in. I believe gross margins would have done as well with the possible exception of cabinets largely because of the one charge I mentioned earlier. We are seeing improvement across the board. Again I would emphasize that we have very high contribution margins. We have shared with the financial community that our contribution margins are in the high 30 percent. As we generate our historical internal growth rates of 8 percent, that drops a significant profit improvement down to the bottom line. I think what you are seeing is a combination of the benefits of that incremental growth and high contribution margin combined with the cost reduction program we've undertaken to give us a nice boost in profits.

Okay.

I should also mention, faucets we always historically have had higher margins than the company average. Even though we lowered prices in the faucets, the pricing is attractive. With that group growing at double digits, that contributes to the margins going up.

Do you have an estimate for free cash flow for '02 at this point?

I don't have one for year as a whole, with you I think it will be in the range of a hundred million before dividends.

We will take our next question from Carol Beers with South Capital Partners. Please go ahead.

Good morning, Richard. Could you please give us a little more color on sales to key retailers? Because I note that expansion at Home Depot and Lowes alone could boost sales 15 to 20 percent.

You mean if they grow 15 to 20 percent?

They are growing.

They are growing, that's right. I mentioned earlier our sales with what we call our big three, Home Depot, Lowes and Walmart, we are up 18 percent in the quarter without any meaningful inventory rebuilding in the process. So you can assume that was all sell-through. We are all encouraged by that. I think you can assume our you customers must be doing well if we are doing well. We think we have yet to get some of the benefit of an economic pick up that might also happen later this year or next year. So thus far at least we are very encouraged with the trends we are seeing at retail.

Do you think you are seeing same store sales growth in your products through their stores?

We believe if you take our products in total, we are doing as well or better than they are. We have some key product areas where we are actually gaining share within the stores. So I would say we are more than holding our own in terms of being in proportion to their growth.

Thank you. I we will take our next question from Stephen Kim with Salomon Smith Barney. Please go ahead.

Good morning, gentlemen. I had a few questions if I could start off with faucets. A lot of attention being paid here to what was a good performance. I was wondering, could you comment a little bit on a line review that we understand sort of took place several months ago in the big box. I was wondering if you could comment on any resolution or pick up in share that you think you may have benefited from in the quarter?

Well, we can't comment on particular core reviews. Our customers have asked us not to do that. I can tell you that we feel that we are maintaining if not increasing our share with our key customers, particularly in the faucet category. If you take faucets with the major home centers, I would say that Moen, Delta, Glacier Bay are all increasing the market share at the expense probably of a number of other brands. Those are going well. We think that's going to continue as far out as we can see. We think that while some of our customers are coming the number of SKUs they will be carrying in the overall department, they are putting more emphasis on the high selling rapid selling SKUs. As a result of that, even though there may be less shelf space given to faucets, we will gain faucets sales as a result of repositioning.

Any indication that there has been an acceleration of that migration toward better performing SKUs as of late or if there's anything planned in sort of a market acceleration in that transition?

I can only tell you our faucet sales are well in excess of what that segment is doing in terms of increases. So we are experiencing very nice growth there. I should say that's not only retail but across all channels of distribution. We are seeing a very nice pickup in our faucet business.

If I could shift gears to installation services business. I had a question about the margins there. You mentioned that the, you had a price decline on the material. I assume you meant primarily installation. But the unit performance was up 10 percent. I guess my question is, when you have that kind of a dynamic, what kind of an impact does it have on your overall margin? I would think because the materials is pretty much a pass through you might actually get a better margin because it's more labor relative to pass through and materials. Is that true or not?

That may be modestly true. One of the things that has happened in our service businesses, we consolidated our service operations in the first half of last year, combining a number of the companies that we had acquired. Some of the benefits of that are really flowing through the latter part of last year and into this year in terms of man inch improvement because of the efficiencies we are achieving through that program. So we are very pleased with the margins that we have had in the service businesses. We are in the mid-teens, which is an unusual performance when it comes to service businesses. I think one of the interesting things you'll see when we put out our 10-Q, when you take our return on assets in that business, excluding good will just for a moment, we are running something like a 70 percent return on invested capital, excluding good will. We think that's been a real winner for us in terms of a business and still a lot of up side for growth and profitability going forward.

Great. Definitely sounds good. We look forward to seeing that this week. Last question regarding the paint business. We saw some, we felt it was a strong quarter in that category as well. I wonder if you can comment, was there anything special in the quarter that helped drive that performance? Was it pretty much the ongoing initiatives?

Bear had a good quarter. We continue to do better than the Department does. We continue to gain market share in the Home Depot in the paint department. I think one of the reasons for that is that a lot of our customers, particularly the Home Depot and Lowes are putting more and more emphasis on turnover and GMROI, which return on invested capital. Our particular products, such as Bear, give them a high return and will result in their putting more emphasis on these products going forward. Bear continues to gain its share of the market in the paint department. It has a very high GMROI and very high return for our customers and we think will gain market share going forward.

Nice job this quarter.

We will go next to Greg Nigma at Deutsche Banc.

Hi, Greg, how are you?

Great. Couple of questions. You mentioned in the press release that the receivables were up but that was attributable to a change with one customer, intimating that absent that change your receivables performance would have improved year on year. I guess that's somewhat unusual in a challenging economic climate to achieve that. Were there specific initiatives or action steps taken to achieve that objective?

I think a combination of things. We are putting more and more focus on asset management. So receivables is one of the areas that we are putting that focus on. I also have to say in fairness if you go to the year ago period that was probably the low point in the economy related to our businesses and some of our customers were struggling a little bit more a year ago. Some of that may be related to product mix. A year ago we had some customers like K-Mart that were not doing as well. So I think it's a combination of economic factors and our own internal management.

Your building program, I know you mentioned specifically the performance of the key retailer program in the quarter. I don't think you emphasized the builder program continues to improve as well. Given the trend to larger builders consolidating their share. Could you give some quantify indication of the performance of the builder program?

It is doing very well, not so much because of the consolidation although we have very good relationships with the major home boulders, but because of our capability to continual reply get more products into the channel of distribution and because of the growth of our service businesses which is all home builder businesses. The fact that we have been able to roll out additional products through the service businesses has been improving our sales to home builders on average. I think we are now running something like well over $2,000 per home in this country of products from Masco being in the average home being built in this country. We see that continuing to expand.

Richard, what might that opportunity be? If you were to look at the number of products that you could conceivably install without posing conflict of interest issues with your customers, what could that $2,000 per home grow to become?

Well, potentially as you know, there's an awful lot of installed products in a home that we are not involved with. If you take kitchen cabinets alone, they run into the thousands of dollars per home all by themselves. But you have hit a high point that we have to be very careful that we do that in a way that minimizing any channel conflicts. We are hesitant to compete with our customers. When we go into the installation in a particular market we tend to do that by acquiring a local distributor or going into an area where we don't have strong distributors. Bottom line the builders want us to install everything that can be installed. What we try to do is pick the areas we can make a particularly good profit in or ideally we manufacture products related to that area. We are still exploring and have a lot of test programs and a lot of different markets in the country. We see a lot of up side in terms of the dollar value per home that we think we can be averaging three to five years from now compared to this year's number.

Conceivable the opportunity to be double or triple the current run rate? Is that a reasonable expectation?

I wouldn't put a number on it. Over time clearly there's that type of opportunity.

One final question. With respect the other expense, you mentioned the sale on the loss on other securities an the Thomasville write off. Where is the marketable securities portfolio today? Number two, have you now completed the write off the product display or investments related to Thomasville?

Yes. On the latter question we wrote off all of our displays, even though that transition is going to be taking place during the course of the year with $8 million worth of displays. In terms of marketable securities, we are planning at our investor meeting coming up June of this year -- I don't remember the date of that, but I should put a reminder out for everybody that we will be having an all day investor meeting, I think it's June 19. We will give a lot more detail on balance sheet and other items. In there we will summarize for you where we stand on marginal securities and other non-operating assets. But currently we have $130 million worth of marketable securities over and above the $200 million of cash we have on the balance sheet. And we have about over 300 million of other financial investments which we do primarily to take advantage of the capital loss carry forward that we have in the company. As you know, we have had for a number of years large capital loss carry forwards as a result of the divestiture program. So any income we can generate that is capital gains effectively is a tax free income for us.

Thank you, Richard.

We will take our next question from Barbara Allen with Arnold and Fleischweller Please go ahead.

How much of this improvement in gross margin was due to improvement in raw materials and energy cost trends?

I would say, Barbara, relatively little of it would be a result of reduction in materials. I think we have seen a little improvement in energy, but if you take energy on average for last year, I would say it's pretty close to the current run rate of energy costs. We are hoping that will come down. As you know, energy price if anything has backed up recently. I would say material costs generally are pretty come probable to last year. Most of that increase is driven by efficiencies in volume rather than material costs.

How much was depreciation and other non-cash charges in the quarter?

I don't have the quarter number offhand, but for the year we are projecting capital expenditures of 280, 290 million. Depreciation and amortization for the year is going to be about 220 million. I would say you can take about a quarter of that 220 and get a pretty good number. 55 to 60 million, I would guess, for the quarter.

Okay. Lastly, I was wondering, since this major customer requested a change in the accounts receivable, or its payment terms, which is fairly significant in terms of its impact on you as well as your return on investment and assets and deal with that customer, were you able to -- what did they give you in return for such a request?

We were able to negotiate a number of things in our favor that certainly partially offset if not totally offset the cost of that additional accounts receivable. So it wasn't a one-way street. We were able to do something we were both satisfied with.

Excellent. Glad to hear it.

I should mention, we talked about inventories and receivables. I didn't mention payables. We were able to increase the payables in the quarter by about six days. That's an area we think there's still significant up side opportunity for us. I think you'll see a major improvement in that going forward in terms of cash management.

Thanks, Barbara.

Would you talk about the international? Those sales were flat and operating income was up. Can you give us an idea of where the improvement was coming from and what the trend will be for the year, please?

In Europe we have seen better business in the U.K. and in Spain and in Italy. The biggest weakness has been in Germany. Housing starts in Germany now have been down for seven consecutive years. So even though there was some industrial pick up a year or two ago in Germany, that didn't translate snoot the residential housing market in that country. Having said that, we do think that the weaker markets over there, particularly Germany, are bottoming out currently. And I would be surprised if we don't see positive comparisons in the second half of this year. I think Germany continues to have problems integrating with east Germany, the tax structure, the costs they have in that country have been negative in terms of growing some of the residential market opportunities there. I think the worst comparisons are behind us now.

Okay. Then in terms of the operating profit improvement sequentially it's up $7 million?

In Europe?

International, uh-huh.

I can't give you a breakdown on that off hands. That would include acquisitions that we had in Europe. But I believe our margins in Europe were also up, if I remember right our margins were up to 12 percent from 11 percent a year ago.

Yes.

Part of the cost reduction also applies in Europe as well as here. We just haven't gotten the benefit of added volume yet, which hopefully will enhance margins even further once we get a volume pick up.

Is there anything on the cost side that has been leading to that?

I don't think there is any major one or two things.

Okay, thank you.

We will take our next question from David Weeger] with [Legg Mason. Go ahead.

Good morning. Could you give us an update on some of your larger acquisitions, maybe Mill Guard and how is that progressing?

That is the window company we acquired in the second half of last year, Mill Guard, is doing very well, showing incremental increases in sales and earnings over capital periods of last year even prior to when we acquired them. We are more than pleased with Mill Guard and see geographic expansion. They are only in half of the United States, primarily the western United States. It will be gradually expanding its national presence. All the home builders we have talked to think exceptionally well of Mill Guard as a company and as a product. I might just add, we are seeing a pickup in acquisition activity in terms of receptivity of doing transactions. We have had very few acquisitions in the last six months. But I will be surprised if we don't see a pickup in the second half of this year. And if we don't achieve our historic average of doing about five to 10 percent added sales through acquisition. And the forecast that we made for this year in terms of the dollar 45 to dollar 50 does not include benefit from prospective acquisitions that might take place.

Could you let us know with respect to bear paints, are you anticipating another Memorial Day event similar to last year?

We can't comment on what promotions our customers might be working on.

Thank you very much.

We will take our next question from Timothy Herks with John Bristol and Company. Please go ahead.

Good morning, Richard. You mentioned your free cash flow of approximately $600 million you before dividends. What are the priorities for that cash flow?

One of the things we clearly want to do is reduce the debt equity ratio. It is currently around 46 or 47 percent. We would like that down below 40 percent. I have to tell you the cash flow will be opportunity stick. The first priority is to bring debt down. If good acquisitions come along, we don't want to exclude those. Then it's a question of whether the sellers are more interested in stock or cash in acquisitions. It will be going to a variety of purposes.

Okay. And is the reduction of debt and the thought that you can add five to 10 percent to your sales each year through acquisitions? Are those two thoughts in conflict?

Well, they would be if you were going to do all cash on the acquisitions. Although we are a very positive cash generator. And on top of that, we continue to have some seven to 800 million or more of non-operating assets that we would expect to have liquified over the next several years that would bring our debt down. We have other way take debt will come down besides just the cash flow that we are going to be earning over the next year or two. But I think that realistically in the last few years we probably averaged closer to half stock, half cash in the acquisitions we have done. I expect that trend would continue. So that acquisitions won't absorb as much cash as you think given the five to 10 percent number.

If you continue with that half stock, half cash, you have enough cash flow to reduce debt and fund half of your acquisitions with cash?

Yes, in that scenario we will still see debt come down. The debt as percent of total capital is 46 or 47 percent, we are in a strong balance sheet situation. Over 200 million in cash, we have $2 billion of unused bank lines that we still have outstanding. Our financial position is very strong.

Okay, thank you.

We will go next to Rick Ludwig with John A. Levin and Company. Go ahead.

Yes. Apparently Home Depot is planning on doing more global sourcing, global direct sourcing. Particularly in the areas of plumbing, hardware, tools and some other areas. I wonder if you have had any discussions with them about that, whether that will have a potential positive or negative impact on your business going forward.

Home Depot publicly stated they currently do something like six to 8 percent of their sales from imported product. Their goal is to double that number. Frankly, some of the products that we sell to Home Depot are imported product, where we design the product, have it built, packaged and sell it to Home Depot. Particularly in some of the builders hardware line, like Millard, Brass Craft. We import it. In terms of their major expansion of imported products, we believe that will be in other product categories and won't have an impact on Masco. One of the things we work hard at is to either reduce our costs, bring in components or in the case of some products imported products. And try to focus on areas that we think import competition is going to be less of a factor than it would be in other product categories. So I think our risk and exposure to import competition is probably less than other companies in our industry. The other key we think is important is the building of and enhancing brand names. We have a lot of very strong brand names that we think are important for retailers to carry because customers and professional people are going to be requesting those brands.

Thanks a lot. I appreciate it.

We will go next to Matt Shefler with Investment Strategies. Go ahead.

Good morning. Just a question about the change in revenues in the other line, one of the other line items. I'm hitting my spread sheet here, forgive me. In your installation and other services you showed, I think in the fourth quarter and much of last year a nice improvement from acquisition revenues. But the numbers now for this first quarter seem to be a turn around in that. And actually liquidating -- because of the sale of some of your businesses.

If I understand your question, mat, in the case of services, we divested Inracon which is a disaster recovery service business. They had annual sales of I believe in excess of $200 million. So when you look at our services businesses, you have to take Inracon out and you can see that effectively we are offsetting that with the growth of our remaining businesses.

Great, thank you.

Operator, maybe we have time for one more questions?

There are no other questions at this time.

That was good timing, then. I would just want toed add one other comment. We have raised up our guidance for this year from the $1.40 to 45, to $1.45 to $1.50. We have assumed in that guidance that we might see some moderation of our internal growth rate going forward. We originally planned nor negative housing starts in our budgeting process. Clearly housing is coming in stronger than expected. Our current guidance assumes a moderate, a continuation of present housing construction going forward. But we also assumed that the double digit growth we are showing in North America might possibly have included some weather benefits, some benefit from inventory rebuilding at least in the wholesale channels. That growth rate may moderate a little bit in the next several quarters. Having said that, I think for the first time in a long time, the chances are that any surprises we might see might be on the positive side rather than on the negative side. It's very possible that growth rate might continue going forward. But the guidance that we are giving already has built into it some moderation in that growth rate for the next several quarters. I can only tell you everything we see out there has been very strong and positive. We think market share gains and new products should result in strong growth for us both this year and next year if present business and economic trends continue. We are very encouraged with what we see. We appreciate your patience over the last couple of years to see better results coming from Masco. Thank you very much.

This does conclude today's Masco corporation first quarter 2002 conference call. We thank for your participation and you may disconnect at this time.