馬斯科 (MAS) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Masco Corporation 2003 first quarter earnings conference call. As a reminder, today's conference is being recorded and simultaneously web cast.

Statements in the following discussion may include certain forward-looking statements, including Masco's future sales, earnings growth potential and other developments.

Actual results may vary materially because of external factors such as interest rate fluctuations, and changes in consumer spending and other factors over which management has no control. Additional information about past Masco's products, markets and conditions which could affect future performance is maintained in the company's filings with the security exchange commission.

The financial statistical data referred to on this call is included in the company's web site at www.Masco.com. Under the investor relations section. In addition, we may refer to this call to non-GAAP financial measures as defined by the SEC's regulation G which is also located on the web site. Accordingly, a reconciliation of the differences between such measures and the most directly comparable financial measures calculated in accordance with the GAAP is included in the investor relation package.

After a brief discussion by management, the call will be open for analyst for questions. We're unable to get your question during the call, please call the Masco Corporation investor relations office at 313-792-6646.

I would now like to turn the call over to Mr. Richard Manoogian, Chairman and Chief Executive Officer of Masco. Please go ahead, sir.

Richard Manoogian Thank you, operator. This morning, we release our 2003 first-quarter earnings. As a reminder if you have not received our press release and supplemental information, they are available in our web site at www.Masco.com.

We are pleased to report that our net sales aided by acquisitions increased 19% to a first-quarter record 2.5 billion dollars compared with 2.1 billion many first quarter of 2002.

Our North American sales increased 11% and international sales increased 66%. Stronger sales to non-retail customers, sales of acquired companies, particularly service partners in our installation group, and Hans Groh (ph) in our international plumbing products growth and the favorable impact of foreign currencies, more than compensated for the slower sales growth with certain of our retail customers.

Excluding acquisitions and divestitures, first quarter 2003 consolidated net sales increased 5% compared with the first quarter of 2002. North American sales increased 2% and international sales increased 20%. In local currencies, international sales were flat compared with last year.

While our first quarter 2% organic growth in North America is below our historic growth rate, given the economic challenges in the first quarter including adverse weather conditions, the Iraqi war, and higher energy costs reducing consumer disposable income, we believe that this lower rate of growth still compares favorably with most of our peer group.

We currently expect that our organic growth rate for the remainder of the year should be higher than that achieved in the first quarter.

We reported net income of 166 million or 32 cents per common share at the higher end of our previously forecast earning guidance range of 30 to 32 cents.

We estimate that adverse weather conditions, particularly impacting new construction residential sites reduced our first-quarter 2003 sales by approximately 2 to 3% from what was anticipated at the beginning of the quarter. Resulting in earnings per common share being 2 do 3 cents lower than originally expected.

Historically, a substantial portion of weather deferred sales are usually recovered later in the year. As previously announced, first quarter earnings were also adversely affected by the expense resulting from the accelerated vesting of divered (ph) compensation benefits due to the recent unexpected passing of Masco's President, which reduced earnings by approximately 3 cents per common share.

In addition, we estimate that higher energy prices negatively impacted material, freight and other operating costs reducing earnings by approximately 2 cents per share during the quarter. We also incurred higher than normal expenses in the quarter related to the installation of new color solution centers at Home Depot stores and the planned rollout of a new paint product line at Wal-Mart and certain plant start-up costs.

These reductions were partially you have set by one cent per common share of realized gains from the sales of marketable securities and 2 cents per common share of insurance recovery income-related to the Behr (ph) litigation. Now, the company expects further insurance recoveries related to the Behr litigation later in the year. Gross margins were 30.2% in the first quarter, compared with 30.8% last year.

The decrease reflects lower than expected sales due to adverse weather and increased material, energy, insurance and pension costs as well as relatively higher sales in product segments with somewhat lower margins. Operating margins decreased to 12.6% compared with 13.8% in the first quarter of last year. Lower operating margins reflect 21 million dollars of accelerated benefit expense as well as the items I just discussed which lowered gross margins partially you have set by 14 million dollars of Behr litigation insurance recovery.

Total SG&A expense in the quarter as a percent of sales was 18.1% compared with 16.9% a year ago. Excluding the accelerated benefit expense that I mentioned earlier, SG&A expense in the first quarter was 17.3% of sales. Our general corporate expense was 1.1% of sales in the first quarter of this year, the same as last year. Our segment sales for the quarter included cabinet and related product sales were up 7%, plumbing product sales were up 32%, installation and other services sales were up 39%, decorative architectural product sales were relatively flat and other specialty product sales increased 23%.

Particularly strong product sales during the quarter included assembled cabinets at retail, and vinyl windows. Our key retailer sales growth continued at a relatively slower rate this quarter. Our sales growth with key retailers increased 4% in the first quarter, slightly above the growth rate of 3% in the fourth quarter of last year, but considerably lower than the strong sales growth in the first quarter of last year.

Combined sales to Home Depot, Lowe's and Wal-Mart are three --our three largest retail customers increased approximately 3% in the first quarter of 2003, compared with a strong 18% in last year's first quarter. This lower rate of growth in the last two quarters is the result of general economic conditions and customer-specific issues unrelated to Masco and does not reflect any significant loss of SKU's or shelf space.

If anything, our market share has continued to grow in many of our product lines with these key customers, and we expect a higher rate of growth for this year as a whole. Even though sales growth with our key retailers has slowed in recent months, one of the benefits of our corporate strategy of covering all of the major price points for our products and multiple distribution channels is that when one channel of distribution slows down, that slowdown is often you have set by an improvement in other channels of distribution.

And that was the case in the fourth quarter of 2002 as well as this year's first quarter. I might add that today our master chem (ph) division announced a new product launch Kill's Casual Color (ph), latex one-coat paint, available in a variety of finishes and colors for interior and exterior use.

This line will be offered in select Wal-Mart stores throughout the United States. The line will be sold in a new nontraditional container designed specifically for the ease of carrying, lifting and pouring. We expect that this new line will add to our future sales growth.

During the quarter, we also completed the installation of 30-foot computerized paint color center displays in 1,500 Home Depot stores. While we incurred extra costs related to this program during first quarter, and the entire program is costing us tens of millions of dollars, most of which will be amortized over a three-year period, we are already seeing positive effects on our sales as a result of this initiative.

While paint sales were relatively flat in the first quarter, partially due to negative economic and weather conditions that I mentioned earlier, we expect substantial increased sales in paint products this year and April has already returned to double-digit growth. Our tax rate was 34.8% in the first quarter compared with 34% for the comparable period of the prior year. The rate increase is primarily the result of recent acquisitions, in using the proportion of domestic income which is generally taxed at higher rates than foreign income.

We expect that our tax rate for 2003 will continue to approximate 35%. During the quarter, we repurchased a total of 14 million common shares. Approximately 2 million of these shares were used for the employee long-term stock incentive plan. We repurchased an additional 2 million shares in April. The company currently has 35 million shares remaining at the end of April under our share repurchase authorization.

Accounts receivable at the end of the first quarter were 56 days compared with 58 days a year ago, despite extended payment terms with certain customers. Inventory days were 60 days at the end of the March 2003 compared with 35 days a year ago largely the result of new products, currencies and weather delayed sales. Accounts payable days at the end of the first quarter improved to 35 days from 24 days a year ago as we continued to negotiate more favorable supplier terms.

Working capital at March 31, 2003, defined as accounts receivables and inventories, less accounts payable, improved to 21.9% of the last 12 month sales from 22.1% a year earlier. Internal growth and working capital management all contributed to improvement in the last 12 months of operating profit return on fete operating assets, including goodwill to 17.9% for the 2003 first quarter compared to 16.9% for the comparable period in 2002. Our cash flow and balance sheet continue to be strong with approximately 1.1 billion dollars of cash and marketable securities and 2 billion dollars in unused bank lines at the end of the quarter.

Debt as a percent of total capital was 47% at both March 31 2003 and the end of last year. Since the end of the quarter, we also completed the sale of our 42% equity interest income limited for cash proceeds of approximately 75 million dollars. The sale resulted in a pretax gain of approximately 5 million dollars. As you know, in February of this year, our President passed away unexpectedly.

While we are saddened by the loss of Ray Kennedy, who was a close friend and business associate to all of us and many of you, with Ray's help we have a strong management team in place.

In early April, we announced the appointment of Alan Berry (ph) as President and Chief Operating Officer. Alan joined brass craft manufacturing in 1972 and has broad business experience, including finance, manufacturing, customer development, acquisitions, and general operating management. Throughout his career, Alan has developed important relationships with customers in the wholesale, home builder and retail channels.

He has been instrumental in creating and managing Masco contractor services, the industry's largest organization for the installation of insulation and other products for new home construction. And he has recently been responsible for overseeing our service businesses in a number of our manufacturing companies with annual sales of nearly 3 billion dollar.

We're fortunate to have someone of Alan Berry's talent to ensure a smooth transition and allow us to continue to build on our tradition of excellence. Our entire management team and I look forward to working with Alan to achieve even greater success for our company in the future.

In developing our second quarter and full year 2003 earnings guidance, the company continues to believe that in the present uncertain economic environment it is prude end to be conservative in forecasting for business opportunities and to anticipate a possible slow down in housing starts and continued moderation of consumer spending. This year's guidance also includes our expectations that operating expenses for the year will increase, particularly for such items as energy, insurance and pension costs.

While higher energy costs reduce earnings for the first quarter by approximately 2 cents per common share, based on present crude oil prices, we believe that most of this increased energy cost will gradually dissipate as the year progresses. As we had previously reported, we estimate that for 2003 our insurance costs will increase by approximately 40 million dollars and pension costs will rise by approximately 10 million dollars.

Our favorable sales performance has continued early in the second quarter with April sales up nearly 20%, and with organic growth running higher than what we achieved in the first quarter. And thus, based on current business trends, the company continues to be guardedly optimistic and anticipates that its earns per common share for the second quarter of 2003 should approximate 43 to 45 cents per share, and expects to achieve record sales and earnings for the year -- for the full year with full-year earnings as previously forecast in a range of $1.65 to $1.70 per common share.

Now, operator, I'd be happy to throw the meeting open to any questions.

Thank you, sir. Today's question and answer session will be conducted electronically. If you wish to ask a question, you may press the star key followed by the digit one. If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal. We'll take as many questions as time permits. Once again, star one to ask a question.

We will pause a moment to assemble our roster.

We'll take our first question from Michael Real (ph) out, J.P. Morgan.

Good morning, Richard.

Good morning.

I had a couple of quick questions. First, if you could just kind of review what your initiatives are and what you feel the progress is -- obviously you talked in the call about the kill's paint line at Wal-Mart, but can you describe sort of the traction you may or may not be seeing at Wal-Mart across the different product lines and also at Lowe's and where you might expect sales to grow year over year? You know, as '03 progresses. Then I have one quick follow-up.

In terms of the new kill's (ph) line we're shipping to Wal-Mart, we have just begun shipping that product line. So that's had very little effect on our sales thus far, but we think we'll have a significant impact as the year progresses. In terms of other customers, I don't want to get into specific customer sales because they asked us not to discuss that individually.

But I can tell you that we're seeing nice penetration, increased market share, increased shelf space, SKU's in our a number of our product lines and we're optimistic looking forward on the sales of paints and assembled cabinets, faucets and most of our product lines, particularly at Home Depot and Lowe's, we sell less of those product lines to Wal-Mart, everything considered. They would be one of our smaller customers of the three companies. But having aid that, we look for increased sales at all three of them in a significant amount this year.

Okay. And just a question on the impact of whether you mentioned that you estimated it affected your sales by about 2 to 3%, and your -- your EPS by 2 to 3 cents. We heard in the past that your work through of 1% of sales growth could translate to 4 cents in earnings, and this ratio is a little bit different, I was wondering if you could perhaps, you know, explain the difference there.

Sure. The 1% of sales is on an annual basis. In other words, 1% of sales for the entire year would reduce our earnings or increase our earnings by 4 cents a share. So if you translate that into one quarter, it would be one cent each quarter so what we're saying is the 2 to 3% decline we saw first quarter would be an annualized basis 8 to 12 cents but it only impacted the first quarter.

We don't expect any of that impact in the following three quarters. If anything, we would expect to recover some of that loss in the future quarters. I might add that most of that loss is really related to new construction. We had a lot of home builders, particularly in the eastern part of the United States that were not able to get to their own builder sites to dig the holes for beginning a housing start.

We lost a substantial percentage of days where our teams of installation people could not get to worker sites. So when you add all this together, it adds up to 2 or 3% of sales. We also feel that we probably lost some consumer business. At one point we had 500 home center stores close due to the weather, but we think net-net that was less of an impact on the overall results than the new construction side.

Thank you. Just a point of reference, you said 35 million shares left on your authorization?

That's correct.

Okay. Thanks a lot.

We'll go next to Ivy Zelman, CSFB.

Hi, good morning. I was going to ask a question, I wasn't sure if Michael asked because I ran to the bathroom, but can you tell us if you would purchase any shares in April?

Yes. I mentioned we repurchased 2 million shares in April.

Sorry for the repeat question. Can you give up an update on the contingent liability, what the share count is? Did you cash out on some of them?

We committed to cashing out one of the contingent liabilities that's running due in the second quarter of this year. And that eliminated some of the contingent shares. So at the end of the first quarter, we had 31 million shares that were subject to price guarantees down from 35 million shares at the end of the year. The general shares that were in the outstanding shares was approximately 20 million shares, the same number of shares as we had at year end.

The reason that same number applies is even though we paid off certain amount of shares in cash, our share price went down by 2.50 dollars which increased the obligation and those two were an you have set to one another. So our outstanding average shares we used a 528 million at the end of the quarter, included 28 -- 20 million shares of contingent shares based on a stock price of 1860.

And what should it look like pro forma, assuming a flat stock price currently for the end of the second quarter in terms of the number of shares that will be contingent?

Well, if you take -- if you take the current stock price, that alone -- let's say that's an increase of $3 a share, you multiply the $3 times 31 contingent shares, that's 93 million dollars. You divide that by the share price. Let's say 22, and you would come up with about 4 million shares. So in other words, currently our contingent share price is 60 million shares.

But the 31 million won't go down because you're going to pay off the liabilities can

The 31 million only goes down when the liabilities are fulfilled or go away. The next significant liability doesn't come up until the summer or fall. If our share price stays where it is, I would expect we would retire that obligation with cash rather than stock and our contingent shares would go down some more. If our stock price goes up, those obligations totally go away. That next obligation is around $27 a share so the stock doesn't have to go up all this much for the obligation to go away.

Okay. And lastly, Richard, and then I'll let other people ask question, with respect to the guidance you went through with respect to operating expenses, and I wasn't sure if the $1.65 to $1.70 incorporated further recover Friday Behr paint and other items that might be perceived to be nonrecurring?

No $1.60, $1.70 is purely operational. We expect substantial additional recoveries related to the Behr litigation. That's not included in that forecast.

Terrific. Thanks a lot.

We'll take the next question from Bud Bugatch of Raymond James and Associates.

Good morning. It's Sam Darkatsh pinch-hitting for Bud. You talked of the organic growth was company-wide. Could you help us with what the organic growth was specifically in the three categories affected which would be plumbing, installation and other specialty?

We mentioned in the fourth quarter report that we put out that we were going to discontinue giving specific internal growth by segment. That was really because our competitors don't put that information out and some of our customers would rather we didn't put the information out.

On top of that, the new regulation G, you have to give reconciliation tables for every category. But it gets complicated. But I can tell you generally that we did achieve relatively flat growth in paint sales, although we think that was strictly a one-quarter weather-related event, and it's a relatively low quarter in terms of sales for that category. Had relatively flat faucet sales in terms of internal growth and had significant internal growth in assembled cabinets and in windows and a number of our other product categories.

Two more quick questions about the balance sheet. Inventories were up slightly. Slightly more than the sales growth was. How much of that was the build-up of -- from the new product, how much of that might have been currency, how much of that might have been maybe sales picking up end of quarter kind of thing?

I think all three of those were impacting the inventories. I can can't give you a current break down, but I would guess a third of each. And I would expect that virtually all of that will be gone in subsequent quarters and we'll get back down to the lower average days for the rest of the year.

And in payables you stretched it I guess 10 or 11 days which is terrible. Is the improvement coming mostly in efforts from one or two particular segments or is this pretty much broad based across the portfolio?

No. We're doing that a broad-based virtually all of our supplier base. We think there's considerable upside opportunity for us working with our suppliers in that area.

Okay. Thank you.

We'll take our next question from Greg Nejmeh of Deutsche Bank.

Good morning, Richard. A quick question related to your initiatives with respect to return on capital. I know in my conference you spoke briefly of increased emphasis in that area. Could you just review with us some of the initiatives and perhaps some of the goals that you may have established with regard to returns on capital?

You know, Greg, as we have said in recent quarters, we have invested about 10 billion dollars in the last six years in acquisitions, capital expenditures and new product development to build what we would call the critical mass of making Masco the biggest and we hope the most important company in our industry supplying the home improvement and home building industry.

We think now we have accomplished a lot of that goal in terms of creating that size as a partial you have set to the consolidation going on in the customer base. Going forward, we are going to put increasing focus on translating that investment to higher returns for the company and hopefully for our shareholders. So whereas we have been more active in the past in acquisitions, we think going forward there's going to be more balance between internal growth, share buy back and acquisitions.

And the result of that should be that our rate of return will start improving because we'll be adding less acquisitions and less goodwill. What we have said is that we expect some significant returns, improving returns on rates of invested capital. I mentioned in my presentation that our return on assets --operating assets went up by about 100 basis points year over year.

And our return on invested capital would have gone up by almost the same -- the same amount, even including goodwill in those calculations. We think we can continue to improve our rates of return going forward, and we'll give more of that information at our investor conference in June to bring people up to date on what some of our plans might be and goals might be.

Might it include possibly the divestiture of certain assets as sure that perhaps aren't meeting your return criteria?

That certainly would be included but that would be incremental additional. We expect to improve our rates of return regardless of any divestitures. But having said that, we are taking a hard look at all aspects of our business, and as part of that review we're talking a look at some product lines and businesses to see that if they don't meet our strategic or long-term financial goals, you know, if it makes any sense to do something with those businesses. So that clearly would be part or an incremental part of the equation I have discussed.

Great. Thank you.

We'll take our next question from Ted Franchetti with UBS Warburg.

Good morning. A couple of questions. First, it should be quick. What share counts should we assume for second quarter for the rest of the year?

The share count we ended up the quarter at 520 million shares, and going forward that rate at the end of the quarter would have been 514 million shares. So excluding -- excluding any additional buy backs after the end of March and I already mentioned we bought back 2 million additional shares and excluding any share price improvements, and I mentioned that our stock prices already up three point, excluding those benefits we would have had a 514 share count. Including those benefits the share count would even be lower.

Okay. Can you talk a little bit about international sales and what helped that big improvement? Is Hans Groh incorporated international is that -

Yes. The 60% in international sale, 40% of that would have come because of the acquisition of majority ownership of Hans Groh, which is reflected in the first quarter and we didn't have that ownership in the first quarter of last year. And 20% would be reflected in a fairly dramatic swing in exchange rates where the Euro strengthened dramatically over the year-ago rates. Most of our businesses are tied to the Euro or the British pound. So we got the benefit of that change in currencies.

Okay. Do you have an estimated run rate for any of the international -- should it continue at that rate for the rest of the year?

Richard Manoogian What happens is that your currency comparisons will moderate as the year progresses. Because the first and second quarters of last year were relatively low points in the Euro, and so that will diminish somewhat as the year progresses. But I would expect that you'll see close to that same kind of rate in the second quarter and then somewhat slow down in terms of currency impact going forward.

Last question on income. Is that -- is the benefit from 245 -- from the sale included in the second quarter earnings guidance?

Well, the after-tax impact of the $5 million pretax would be less than half a cent per share. So you can either include it or not include it.

Thank you.

We'll take the next question from Joseph Sroka, Merrill Lynch.

Hi, good morning, Richard. How are you?

I'm doing well. Yourself?

Good. With Behr, you recognized income in the quarter as the insurance recovery, is that actually a cash recovery?

Yes. That was actually a cash recovery. We received to off set some legal expenses related to one of the lawsuits.

Okay. But then as far as cashout to cash-in, do you know about how you're running yet or is that going to have to settle itself in the fourth quarter?

I think you're talking about claims?

Right. When you settle claims versus insurance recoverables?

We are beginning to get the claims and I would say that most the payments to be made against the claims would be in the third and fourth quarter possibly first quarter of next year. And as those claims come in, that's when we would receive insurance recoveries. We have effectively already written off through a reserve what we expect to be the claims that will come against us, so that expense is already behind us in our 2002 results.

As the insurance proceeds recovery has come in, that will be incremental income, although unusual item that will come in and be positive. So we'll only have a positive impact going forward.

Correct. I guess I was trying to get to a ballpark or feel for at the end of the day what you thought this was going to be on a cash expense for the whole litigation?

It's probably too early to give you that number. We do expect a substantial insurance recovery. We currently feel our best knowledge is that the reserves we have set up are adequate to cover the claims we are going to get. I would say there's some chance of some positive upside improvement, but it's just too early to tell that because we haven't had enough claims yet.

Okay. That's fair. We'll stay tuned on that. Do you know roughly what the EPS impact was of your stock option expense in the quarter?

We didn't have any stock option expense because we're expensing options prospectively and we did not issue any stock options in the first quarter. Most of our share-related compensation activities relate to stock awards. And stock awards we have always expensed. We expensed them as they vest, and that has been flowing through our income statement on a continual basis.

Okay. Good. I bet on that. When you answered Ivy's question and you talked of the 165 to 170 you phrased this as being purely operational. So that -

That's right. That does not include any insurance recoveries or any non-operational items.

Correct. So that being the case, what would you consider to be the purely operational EPS on the first quarter?

Well, the -- if you take the 32 cents we reported, you could argue that the accelerated vestings due to the passing of our President was an unusual item.

Okay.

That's a positive 3 cents. The litigation proceeds were a minus 2 cents. And marketable security was a positive 1 cent. So those you have set each other so I would argue that the 32 cents was a pretty straightforward number, even after we incurred all the energy and other cost and expenses in the quarter which I don't expect to continue.

As far as thinking of that 32 cents relative to the 165, 170, in your mind you're counting it as 32 cents?

Yes.

Okay. Fair enough. Thank you, sir.

We'll take our next question from Armando Lopez, Morgan Stanley.

Hi, thanks. Good morning. Just a couple of quick questions. First on the -- kind of a follow-up question on return on invest in capital. Can you talk a little bit maybe on the segments and where you think you have the most opportunity by segments?

For improvement?

Correct, yeah.

We have shared wing the investment community what our incremental returns are on invested capital and operating assets by segment. And virtually all of our segments are in the 30 to 40% pretax return on incremental business, incremental volume and the one that's unusually high is our services businesses. Which are more like 70 to 100% of return on invested capital.

The reason being we don't have plant equipment to the same extent we have in our operating businesses. So the incremental return we get through internal sales growth, all things being equal, is fairly significant in all of our operations. That's one reason why we if we're not as active in acquisitions which add new goodwill, I think you'll see a nice improvement in our returns going forward. If we're able to generate the significant internal growth.

Okay.

And hold costs in line which is another part of the equation.

Okay. And then second question, in terms of the other income line, other net was I think positive 7 million of income compared to like an 11 million loss our expense last year. Now, some of that is the gain on sale of securities, but it's even after you back that out, it would have been flat or zero compared to losses running next year. Can you talk a little bit about what is driving that difference?

Yes. We did have 5 or 6 million of marketable security -- 7 million of marketable securities gains in the first quarter. So if you take that out, you end up with about a zero fete of all the other items that flow through that line item. I would expect that all things being equal, that would be the run rate for the rest of the year.

Okay. All right. Great. Thank you.

We'll take the next question from Keith Hugh, SunTrust Robinson Humphrey.

I wanted to follow up on the new Wal-Mart program is that -- how many stores is that rolled out to initially?

We've begun shipping that product just in the last few weeks. And we expect it's going to be going into 1,500 Wal-Mart stores.

And what kind of time frame will it take before you're up and running in all 1,500?

I think we'll be in all 1,500 days to within 60 days.

Thank you.

We'll go next to Steve Fockens, Lehman Brothers.

Good morning. A quick question to follow-up I guess on Greg's. In your comments on acquisitions and being a slower growth perhaps than it's been in the past and more balanced with internal, does that mean you expect over time to average more in the 5% growth to sales line than, you know, the ten we have seen in the last couple of years?

Yeah. It's very hard to give you a specific number because that's opportunity driven. But what we have said in past presentations is that we have averaged -- we have said that our goal has been to grow at 5 to 10% on average through acquisitions in terms of average annual growth rate. And historically, we've averaged closer to the top end of that range and what we have said in the past is that we would expect going forward that we're more apt to average closer to the bottom half of that range. So that's a fairly significant swing in terms of added goodwill and other impact on our financial statements. And that's why we think you'll see a bigger improvement in the returns.

Thanks. Maybe you can help me a little with my math here. If I'm looking at the way you guys calculate return on invested capital, do you do that on a trailing 12-month average for capital?

Yes, we do it on a trailing 12 months and one reason why our numbers are a little understated is that when we do that calculation on acquisitions, we pick up all of the assets that exist at the end of a period. And typically we'll only pick up part of the sales for the period that company was with us. So that tends to understate our returns a little bit. Again F we have fewer acquisitions that distortion will be modified.

Okay. But if -- in which case if I look at your average capital as the way you've defined it over the last four quarters, it's about -- if my math is right, about 8.7 billion. If I look at the trailing four quarters last year, it looks like it's somewhere in the --call it the 7.2, 7.3 billion range?

That would be about right, ballpark.

So you had a 20% increase year over year on trailing 12-month average capital, but I mean, was your operating -

The reason for that is because we had large acquisition last year like service partners which are in your numbers. So that would gradually an vary and become less of factor going forward.

Right. But in terms of the return on capital this quarter versus last year, if the capital's up 20% it would have to mean your operating profit's up more than that. So what am I doing wrong? Because I don't think your operating profit was up 20% year over year, or was it?

I'd have to -- I'll tell you what. Why don't you give us a call, you know, after the meeting and we'll walk through the numbers and make sure we get the right numbers for you.

Okay. Thank you.

We'll go next to Frank Denautica (ph). Your line is open.

(audio gap)

Hopefully we answered his question.

We'll go next to Roger Mandell (ph), Northern Trust..

Good morning. A couple of questions. First on the class action settlement status T approval status. I believe the state of approved it, but what about the other case?

Richard Manoogian Yes the state of Washington has approved the settlement that we entered into with the plaintiffs. The national class action case which is in California is still waiting for a court ruling on the settlement. We haven't received that ruling yet. The only -- I shouldn't say the only, but the objections that have come in have largely related to the strike lawyers receiving too high a fee rate and secondly some of the forms and claim forms being a little complicated. So we haven't seen anything in the objections that lead us to believe that the reserves that we have established aren't adequate to cover whatever settlement the court finally approves.

Okay. Good. So should be hopefully in a month or two maybe?

There's a time period that the court has to rule on the settlement and thank runs out in the next 30 days or so.

Next 30 days, great. Also, just if you can give a little bit more color on the internal sales growth in April? I know currency is still a tail end in the international side, but maybe on the North American side is it double the rate of the first quarter average or is it in that ballpark or -

Well, we had 5% company-wide internal growth in the first quarter including currencies. And 2% if you exclude currencies. And I would say we don't have all the final numbers for April in terms of internal growth, but I would say that we probably were getting up toward the higher single digit and more like middle single digit excluding currencies. So a nice pickup in terms of internal growth rate.

I would say as a general comment if you would have asked me back in February and March what we saw for the rest of the year, based on weather impact, the consumer spending, all of the distortions that the Iraqi war that we're in our businesses, we were seeing modest reductions in our internal forecast for the year during February and March.

In April, we've seen a reversal of that and we're now beginning to see modest improvement in our internal forecast going forward.

So if you would have asked me if there was any risk in our year forecast, a month or two ago, I would have said there might have been a modest down side risk and I would say that based on current business I would reverse that and say that there's a modest upside risk to our forecast now, based on current trends.

So even though it's still early in terms of consumers adjusting to all the factors that are out there, we are encouraged by the recent changes that we have seen.

Great that's good news. One final question and I know this is a little bit of a touchy subject, but the -- just kind of an update on the cabinet rollout at Home Depot, maybe qualitatively, are you seeing that you're gaining share as this gets rolled out? Kind of how that's proceeding according to Home Depot's plans as far as time frame.

I would say that we're doing very well in terms of assembled cabinets at all of the retail customers. In the case of home doe me, I think you're referring to the fact that we picked up the New England region for Craftmade (ph) and nationally we pick up the premiere line for Mills Pride. We lost the Thomasville line nationally and what we have said is that we expect that the gains that we have had will significantly you have set more than you have set the losses of Thomasville line. And this clearly has been the case thus far. We believe we are gaining market share at all of our retail customers.

And if you take a look at the new store sets that are taking place in terms of Home Depot renovations, I think you'll see that we're probably getting more floor space, 50% or more of the pace is being given to Masco product lines. So we think we're gaining share at Home Depot.

Great. Thanks for the update.

We go next to Frank Denow, Adage Capital. Your line is open, sir.

Thank you. I'm having technical difficulty here. With the kill's rollout S that the mystery product?

That was the major product launch we referred to in the first quarter that we were incurring some expenses for and it's in production and being shipped.

You said you were in 1,500 Wal-Mart store. How many Wal-Mart stores are there altogether?

I believe there's 2,600 but the 1,500 are the largest stores. Some the other stores do not carry paint-related products or carry much smaller assortments. So these are the principal stores that we would want to be in.

So is there an add-on possibility that once they're happy with the 1,500 they go into something else?

I think you have to ask Wal-Mart that, but I think we near the principal stores and these are the major stores.

Okay. And was the income sale, was that included in the marketable security or another 5 million dollars separate from the -

No, that took place after the end of the quarter. So that's incremental.

Thank you. That's it.

I might mention on the Wal-Mart, we talked about 1,500 stores. That doesn't include new stores that they open every year. I believe Wal-Mart is adding something like 200 stores a year. So we expect that 1,500 to go up from new store built as well. I believe we're in all the new stores that they open.

We'll go next to Adam Shiner (ph), Ark SF Management (ph).

Hello and good morning. I'm a little curious about your guide forecast second quarter basically being sort of flattish to up a little bit when you're saying there's a lot of first quarter in the weather and with start-up costs that won't be repeated and your sales in April look pretty good. It just seems that your guidance seems very, very conservative at just a flat to slightly up over last year for the second quarter.

Well, it's a nice increase over the first quarter, obviously that season -- season is driven. The reason for a little caution there is a couple.

First of all, I think the weather impact that's impact some home builder has pushed some business that might have been in the second quarter into the third and fourth quarters because of delays in starting new construction.

Secondly, we think consumer spending is going to ramp up but it's ramping up relatively slowly so we factored at least that assumption into our projection as well.

Third, we do see energy costs coming down. But we think we're still going to be incurring some of those energy costs in the second quarter because we're on a down slope. We're not at the bottom yet, and we think we will be virtually most of that energy cost will be gone by the third quarter, but some of it will still be in the second quarter.

So for all those reasons we're trying to be a little conservative in how we see the second quarter.

Okay. Thank you.

Once again, that is star one if you have a question. We'll go next to Jason Putnam, Credit Suisse First Boston.

Good morning.

Good morning, Jason.

Just another follow-up on ROIC. I think you discussed before that you were considering changing your compensation plan to reflect more of an emphasis on ROIC. Is that something you're still considering and just an update on that status.

Yeah. We have in the last year or two been putting more emphasis particularly at the operational level to gear system of our stock award programs to return on asset, return on invested capital. So increasing leg, we are putting that focus in that area. At the senior level, we are still driven primarily by earnings per share, but on other hand, you're not going to see a big increase unless you improve your return on invested capital, at least to a certain extent. So we have a blend of incentives driven both by shareholder concerns of earnings per share as well as return on assets.

But there's no upcoming pending change or review of that?

I would say that every year we're fine-tuning what we use within the operations, but I don't see a dramatic change in that in the near future.

Okay. Then just secondly, the launch of the new color pallet at Home Depot of course you spent quite a bit on this and I was just wondering with the preliminary results that you have seen, maybe on a comp store basis once you have installed this new color pallet, what type of improvement in sales are you seeing? Are you seeing a 10% improve?

It's a little early to give you a reliable number because weather hurt some of the business in the first quarter. But I would say thus far we are very encouraged both from the standpoint of the color center is drawing people into the paint department, in the first place. So I think the net effect is going to be that Home Depot sales of paint will increase because of the color centers being there. And secondly, our best judgment we have in the data we're following, we tried follow it pretty closely it looks like the paint center is increasing our share of that increasing size of the market. So I think it's going to be a double win for us going forward and thus far in April it's certainly been the case.

Okay. Great. Thanks.

We'll take a follow-up question from Steve Fockens, Lehman brothers.

When you calculate returns you do trailing 12 month operating income over trailing 12 month capital? Or do you take the quarter and annualize it?

No. We take the trailing 12 months.

Okay. I think that answers my earlier question. Thank you.

Okay.

We have no further questions at this time. I'll turn the conference back over to you for any additional or closing remarks.

Well, thank you, operator. I would just add that for all the factors I mentioned earlier in terms of weather T Iraqi war, concern on the consumer part, the loss of income by consumers to higher energy costs all had an impact on our results but I think given that, our results were not that bad. And as all of those negative factors dissipate, I'm very encouraged that going forward we are going to see significant improvement in terms of our sales and earnings and hopefully that will reflect itself in our earnings in subsequent quarters. So we're encouraged by what we see now and hope that it will turn into positive returns to our shareholders. So thank you very much for participating in the call.

That does conclude this Masco Corporation first quarter 2002 earnings conference call. We thank you for your participation.