馬斯科 (MAS) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco corporation 2004 first quarter conference call. As a reminder, today's conference is being recorded and simultaneously webcast.

If you have not received the press release and supplemental information, they are available on Masco's website at www.masco.com. Statements in the following discussion may include certain forward-looking statements regarding Masco's future sales, earnings growth potential and other developments.

Actual results may vary materially because of external factors such as interest rate fluctuations, changes in consumer spending, and other factors over which management has no control.

Additional information about Masco's products, markets and conditions which could affect future performance is contained in the Company's filings with the Securities and Exchange Commission and is available on Masco's webite at www..masco.com.

Masco undertakes no obligations to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

The financial and statistical data referred to on this call is included in the investor packet distributed prior to the conference call, and is posted on the Company's website under the Investor Relations section.

In addition, we may refer to this call in non-GAAP financial measures as defined by the SEC's Regulation G. Accordingly, a reconciliation of the differences between such measures as the most directly comparable financial measures calculated in accordance with GAAP is included in the investor package.

After a brief discussion by management, the call will be open for analysts' questions. If we are unable to get to your question during this 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. Mr. Manoogian, please go ahead, sir.

Thank you, Chris. And I should mention that joining me today are Alan Barry, our President and Chief Operating Officer and Tim Wadhams, our Senior Vice President of Finance and Chief Financial Officer, who will be joining me during the question-and-answer period at the conclusion of my remarks.

We are pleased to report that net sales from continuing operations for the 2004 first quarter increased 19%, to a first quarter record of 2.8 billion, compared with 2.4 billion for the first quarter of 2003.

We are particularly pleased that our 19% sales growth increase resulted from organic growth driven by market share gains, new products, and favorable market conditions. All of the Company's business segments, including our European operations, experienced strong sales growth.

Particularly strong were sales of assembled cabinets, paints and stains, and installation services, windows, and faucets. North American sales increased 18%. Since we have had no significant acquisitions during the past year, virtually all of that 18% is organic growth.

I should point out, however, that the first quarter of last year was adversely affected by bad weather conditions in a number of our markets. International sales increased 26%. In local currencies, international sales increased 9%, compared with the first quarter of last year.

This is the first time in a number of quarters that we have achieved significant organic growth in Europe, and reflects the recent reorganization of our European operations into several platforms with greater emphasis on expanding our sales to retail customers.

Excluding the impact of foreign currencies, total organic sales for the entire Company were up 16% in the first quarter. Income from continuing operations for the quarter was $241 million, compared with $158 million last year.

Earnings from continuing operations increased to a first quarter record of 52 cents per common share, exceeding the Company's increased guidance provided in early March of 42-44 cents per common share, compared with 30 cents per common share for last year's first quarter.

Results for the first quarter of 2004 include income related to adjustments to the Behr litigation accruals of 3 cents per common share. Excluding the Behr litigation income, first quarter earnings per common share were 49 cents. Results for the first quarter of 2004 also include incremental income from financial investments of 5 cents a share, a 3 cent increase over last year.

And an additional 2-3 cents of gains from currency and other asset transactions. We previously announced the planned disposition of several European businesses that are not core to our long-term growth strategy. These businesses had combined 2003 net sales in excess of $350 million, and we expect net proceeds from the dispositions to exceed $300 million. The dispositions are expected to be completed within the next 12 months.

First quarter 2004 results include an after-tax charge, aggregating $76 million or 16 cents per common share, to reflect those businesses that are expected to be divested at a loss, and after tax income from their operations of approximately $4 million, both of which are included in discontinued operations.

Any gains resulting from the disposition of individual businesses, which we expect later this year, will be recognized as such transactions are completed, and are expected to substantially offset this year's first quarter charge.

Including these discontinued operations, and the recorded anticipated loss on the disposition of certain of these businesses, net income for the quarter increased to $168 million, compared with 166 million for last year's first quarter. And earnings increased to 36 cents per common share compared with 32 cents last year. Gross margins were 30.3% in the 2004 first quarter compared with 30.1% last year.

Operating profit margins as reported were 13.8% for the quarter compared with 12.8% last year. Results in the 2004 first quarter include the effect of previously communicated increases in certain operating expenses, including certain material, energy, freight, insurance, promotional and other costs, which partially offset the positive impact of higher sales volume.

Although we have seen some moderation in certain material cost increases in recent weeks, we have begun raising prices in a number of our product categories, and are discussing further price increases with some of our customers. As previously indicated, the Company expects that profit margins in 2004 will approximate those of 2003, as higher margins from increased sales will be partially offset by cost increases, not offset by price increases.

Total SG&A expenses for the quarter as a percent of sales, including general corporate expense, were 17.3%, approximately the same as last year. Our general corporate expense was 1.3% of sales for the first quarter compared with 1.2% last year.

The increase is primarily attributable to costs and expenses associated with complying with the new requirements of the Sarbanes-Oxley legislation. Our segment sales were strong in all categories. Since we have had no significant acquisitions in the last 12 months, our sales increases are mostly organic and a result of market share gains and the large investments we have made in recent years to strengthen our product offerings and market positions.

Our sales growth was stronger than industry growth and the internal growth of most of our peer competitors. Our segment sales for the quarter were: Cabinets and related products, sales increased 18%; plumbing product sales increased 19%; installation and other services sales increased 16%; decorative architectural product sales increased 28%; and other specialty product sales increased 20%.

Combined sales to Home Depot, Lowe's and Walmart, our three largest domestic retail customers, increased approximately 21% for the quarter, compared with a 4% increase in the 2003 first quarter. Total key retailer sales from continuing operations, including strong growth in Europe, increased 20% compared with a 5% increase in the comparable period last year.

The Company's tax rate was 36.3% for the first quarter, compared with 34.4% last year. The increase in tax rate was due principally to a change in the mix of foreign earnings to countries with higher tax rates and an increase in domestic earnings relative to total earnings, which are generally taxed at a higher rate than earnings from the Company's foreign operations.

The Company anticipates that its tax rate for 2004 will approximate 36%. We continue to make improvements in working capital management. Accounts receivable days at the end of the first quarter improved to 53 days, compared with 55 days a year ago.

Inventory days improved to 49 days, compared with 58 days a year ago. And accounts payable days improved to 36 days from 34 days a year ago, as we continue to negotiate more favorable supplier terms.

Working capital, defined as accounts receivable and inventories less accounts payable, improved to 18.5% of the last 12 months of sales, from 21.9% a year earlier. For the 12 months ended March 31, 2004, return on invested capital as reconciled improved to 11.6%. The Company continues to believe that we will achieve our 15% return on invested capital goal by 2008 or sooner.

Our liquidity and balance sheet continue to be strong, with cash and marketable securities in excess of 1.2 billion at the end of the first quarter, and $2 billion in unused bank lines. Debt as a percent of total capital at the end of the first quarter was 2004 -- at the end of the first quarter of 2004 -- was 47%, the same as the first quarter of last year.

The Company has continued its active share repurchase program, and repurchased approximately 15 million common shares during the quarter. In April, we repurchased an additional 5 million common shares. At the end of April, we have approximately 29 million shares remaining under our share repurchase authorization.

And during 2003, we returned to shareholders approximately $1 billion through dividends in our share repurchase program. We expect we will return at least an additional $1 billion to shareholders in 2004.

In terms of current outlook, the strong sales trends of the first quarter have continued thus far in the second quarter. While we do not yet have final April results, April organic growth will be in double digits; and based on present trends, we expect double digit internal growth for the entire second quarter.

The Company continues to experience better-than-expected sales performance thus far in 2004. And based on current business trends, we believe that we will achieve record sales in earnings for the year, with full-year earnings from continuing operations in a range of $2 to $2.10 per common share. This year's new earnings guidance represents an increase from the previous guidance of $1.80 to $1.90 per common share.

The new 2004 guidance includes the benefit of recent common share repurchases and assumes that housing starts will remain flat to a decline of 5% compared with 2003. The Company's previous guidance assumed that housing starts would decline 5-10% compared with 2003. We estimate that a 1% change in housing starts equates to approximately 2 cents in earnings per common share impact.

Earnings guidance for 2004 includes a reduction of approximately 5 cents per common share, resulting from the absence of earnings related to the European businesses to be divested.

This year's earnings guidance includes the Company's expectation that certain operating expenses will continue to increase in 2004, including such items as energy, insurance, and certain material and freight costs, and excludes first quarter income related to the Behr litigation, and the charge for businesses to be divested.

The earnings guidance also excludes any potential additional income related to the Behr litigation for the remainder of 2004, as such amounts cannot be predicted. Also, the guidance does not include any additional share repurchases, nor does it include any additional gains from financial assets, which we believe may average at least one to two cents per quarter for the remainder of the year.

Based on current business trends, the Company anticipates that second quarter 2004 earnings from continuing operations will be in a range of 50 to 53 cents per common share, compared with second quarter 2003 earnings of 44 cents per common share.

Now operator, I'd be happy to throw the meeting over to any questions that anyone might have.

Thank you, sir. At this time, ladies and gentlemen, if you would like to ask a question, please press the star key, followed I by the digit one on your touch-tone telephone. If you are using a speaker phone for today's conference, please make sure your mute function is turned off in order for your signal to reach our equipment.

Once again, if you would like to ask a question at this time, please press star one. We'll take today's first question from Margaret Whelan with UBS.

Good morning, Richard.

Good morning, Margaret.

Terrific quarter. Well done.

Thank you.

A couple of things. You're saying the margins will be about flat with last year, despite the growth in sales.

And can you tell us in the first quarter, did you have any price increases or was it all unit growth?

The reason that -- you may remember in our February conference call, we forecasted our margins for the year would be relatively flat, even though we were looking for sales increases, and the reason for that was we were anticipating that we would not be able to offset on a timely basis all of our cost increases with price increases.

If anything, price increases, or material cost increases, have accelerated other than the last few weeks. And some of that we have begun passing on to customers. We have implemented a number of price increases, and we are talking to additional customers about other price increases.

But we're assuming that there will be a lag factor between when those increases go into place and the costs that we're already absorbing; so on a conservative basis, we are assuming that margins will continue to be flat for the year, even though sales are coming in a little stronger than expected.

Okay. And can you talk a little bit maybe even in the individual segments, if possible, just about the leverage and the cost cutting, the consolidation you've been doing, how that's helping lift margins?

We are seeing nice benefits from cost reductions. You might notice our cabinet margins were strong in the first quarter.

We've discussed previously how we consolidated a number of operations there, and undertaken an number of cost initiatives -- reduction initiatives -- so we are pleased with that progress. So that is something that we're going to be continuing to do throughout the organization.

And I would expect as the year progresses and into next year, we will see further cost reduction opportunities.

And then in installation, I wouldn't have expected commodities to be an issue, yet the margin was down there.

Margins were down in our installation business. And that was really due to two factors. One is, we've shared with the financial community, we are seeing increasing strong sales growth of noninstallation products, which typically have lower profit margins than our insulation projects.

And secondly, that's one area where we have seen very substantial price increases for raw materials going back even to late last year, and there is a lag factor of implementing those cost increases into price increases, and that is reflected in the first quarter.

We would expect our margins for the year as a whole should do better than our first quarter for that group.

Okay. And then just the last question for me. In terms of both the gains in the quarter and the financial assets, why wouldn't that be stronger than a couple of pennies a quarter for the rest of the year?

Well, I made a comment that it should be at least one to two cents for this quarter.

We did have some unusual gains in the first quarter, and it's very hard to project gains on financial assets, so we think it is more appropriate to take a conservative approach on the balance of the year.

Unusual being one time?

Unusual being one time. Although, a fair number of our gains are coming from our Masco Capital entity.

And some of you may remember that years ago, we used to average about $10 million a quarter of income from Masco Capital pretax. The last two or three years, that dropped off under market conditions, and we now think that Masco Capital is back to more like its historical run rate.

So I think for as far out as we can see, at least the next several quarters, I'll be surprised if Masco Capital doesn't average at least 10 million or more pretax a quarter separate from the gains that we had on our marketable securities.

[SPEAKERS OVERLAPPING]. So it seems your guidance is a little conservative.

Well, historically, you know we've said that our guidance has been a little conservative; and I think for a number of quarters now, we said that if there are any surprises on our guidance, we think; based on present trends; that they may be on the positive side.

Good. All right. Well done.

I should add that we do have significant marketable securities still in our portfolio, some five or 600 million, and we have said it is our intent to liquidate and run down that portfolio significantly during the course of this year.

And if the gains that we have in some of those securities hold; then the gains we realized during the year the might be greater than what I've indicated.

Sure. Okay. Thank you very much.

We'll take our next question from Ivy Zelman with Credit Suisse First Boston.

Good morning, Richard. Great quarter. Just a simplistic question in terms of Masco Capital.

Can you give us the -- I don't even remember it being called Masco Capital. What's included in there?

Masco Capital is the entity that holds our long-term financial assets. You may remember that we have invested in some 30 or 40 funds -- equity funds. In order to take advantage of tax strategies, we still have some significant capital loss carry forwards that we can only offset with capital gains.

So we've invested in a number of funds, trying to spread our risk so that whatever income we do generate, basically is going to be tax-free. And we have about $400 million of investments in Masco capital.

That's over and above the 5 or 600 million of marketable securities that we have in addition.

And in term was like investments, like in lifestyles, can you break down what you still have in equity investments, please?

Over and above Masco Capital, which is invested in equity funds, we continue to have 75 million dollars in Metaldyne, which is our former automotive parts affiliate. And 25 million in TriMas,which by the way has or will be shortly filing an offering to go public. So that investment will become more liquid.

Then on top of that, we continue to have about 4 million shares of furniture brand stock, which we treat as part of our marketable securities portfolio.

Okay. In terms of your cash, you said you have in excess of a billion two. How much of that cash is in Europe and tied up and not accessible?

We have -- at the end of the quarter, we have about 600 million in cash and about 600 million of marketable securities, most of which are highly liquid.

Of our cash portion, we have about 200 to 300 million that is tied up either in foreign countries, or is in Hansgrohe, which is a partially owned company and a separate entity. Most of that cash we can bring back if we pay a modest tax penalty. And so it is available to us.

But all things being equal, we would rather not call on it, and keep that available to be invested in the countries that it's located.

Okay. And then lastly, moving to another subject, installation services, you know, it seems to me that some of the other businesses that you're going into beyond installation of insulation, you mentioned a lower margin. Can you kind of explain how the profitability works?

Because understanding that the trades that, you know, install a cabinet for, example, are going to be more qualified, and you would think would make a higher margin for you, but -- is it because you have to pay them so much and their labor is that much more expensive?

Yeah, I will ask Alan Barry, our President, to answer that question.

Hi, Ivy.

Hi, Alan.

You know, as you move into -- as we start putting some of these services into new branches, we have startup costs and we have the learning curve that we get over relatively quickly.

So we have seen a lot of that as we've really put an effort into expanding our programs across many more branches.

The other thing to keep in mind is that in some cases, we're buying and reselling fairly expensive products like fireplaces and cabinets, so any profit we make is incremental profit. And we have relatively low cost of capital.

So as we sell additional products other than insulation, our average return on capital is about 100% pretax. And what we've said on a number of occasions is that as Masco, we are now focusing on increasing absolute profits and return on invested capital, with less focus on profit margins.

So I would expect that you might see our margins stay flat or even come down a bit over time. But the tradeoff for that is higher rate of organic growth, and a higher absolute rate of profits and earnings per share growth. And we think that's a good trade-off.

Two follow-ups quick on that. One, with respect to the spectrum of products that you're offering, can you -- paint was one you were testing out in California.

Is that going to go forward as one of the offerings?

We're still in a test mode on that. And we're not sure where that's going to lead to.

All right, and then secondly, with respect to some of the customers that you provide bundled services where you give them more than one installation service, what happens if one particular -- like a fireplace -- is installed, let's say not properly.

Will they possibly not pay you for all the services, or are they individual contracts? How do those terms pan out?

Fortunately, we haven't had much of a problem along those lines. On a rare situation -- we have had no difficulty with our customers on that.

They basically know because of who we are and what we do that we are going to be there to take care of any problems that might arise, so that really hasn't been an issue with either us or any of our customers.

Okay. Thanks, guys.

We'll take our next question from Michael Rehaut with J.P. Morgan

Hi, good morning. A couple of questions. First on the share buyback, you know, you'd had said in your prepared remarks, Richard, that you had -- you're thinking of doing about a billion dollars returning to shareholders. And if you take out dividends -- and these are rough numbers -- but you know, dividends of a little under 300 million, that would leave about 700 million for share repurchase.

You've already done about 15 million shares, which comes in to over, you know, 420 million, using a $28 share price. And so what I'm getting at is that, you know, it implies only about 10 million shares, give or take, additional potential to repurchase over the next three quarters.

Is that what you're indeed implying? Or, you know, can you give us an idea if you've continued the share repurchase into April, and what you're looking at going forward?

I think what I said was that we expected to return at least one billion to shareholders in 2004. So I wouldn't necessarily pick that as the number. It may well be a larger number. Having said that, I would add that I mentioned that we bought another 5 million shares in April, so that brings 20 million share repurchased in the first four months.

I would also not expect that we maintain 5 million shares a month for the rest of the year, which would be 60 million shares, because that is a fairly substantial number.

And one reason why we have accelerated our purchases early in the year is partly that's in anticipation of the fact we're going to have those European divestitures later in the year, which will be throwing off over 300 million in cash.

So we have accelerated our share repurchase program early in the year to offset the lost earnings per share that we will have from the divestiture of those companies.

Okay. And the '04 guidance still does not include any share repurchase -- or any -- in terms of share repurchase, the '04 number does -- it incorporates the first quarter, but it doesn't assume any additional for the rest of the year?

That's right. The guidance only includes the shares we repurchased through the end of the first quarter, so you know we've already bought an additional 5 million shares and we expect to continue relatively active going forward.

So you would have to add some additional factor into anticipated share repurchases to that guidance.

Okay. And just one thing on the -- the price increases that you talked about, can you give us a little more color in terms of which segments those price increases are concentrated in? And --

That's a very sensitive area, both for competitive reasons, as well as for -- from customers' reasons standpoint, and we are in some delicate negotiations with a number of people, so normally I'd try to be more helpful to you, but I think right now we'd rather not make any comment on where we are working on increases.

Okay, but I'm sure -- on the cost side, in an area like plumbing products, has been one of the harder-hit areas and that is probably -- would it be fair to say that -- I mean that's --

Well, I would say that if you take from what we've said in the past, you've seen significant increases in copper and brass, which affects plumbing, you've seen significant increases in wood and particle board, which affects cabinets, so you've seen those increases in a number of our segments.

All right. And one last question, Richard, if I may.

You know, you had a nice improvement year over year in cabinets, and I was wondering if you could break out -- yourself or Alan, you know, if it is possible to see how much of that improvement has come from some of your, you know, reorganization of the business units, and some of the efficiencies that you've been trying to push through.

Okay. You're talking about on the profit side as opposed to sales?

The margin improvement. You know, how much of the 150 basis points of margin improvement would you say would be related roughly to the -- you know, reorganization, the efficiencies --

I think a number of the changes we made operationally really were during the first quarter, and we haven't seen the full impact of those yet on margin.

So I would say that most of the margin improvement was due to volume; and some of it, and an increasing amount as the year progresses, will be coming from cost reductions.

Great. Thanks very much.

We'll take our next question from Keith Hughes with Robinson Humphrey.

My question was answered, thank you.

We will go next to Michael Morrisrow with Bear Stearns.

Thank you, good morning. You referred to share gains, new products, as aiding results in the quarter.

Can you elaborate on or give us a flavor of, you know, what new products really gained traction out there?

Well, we really have a variety of products in virtually all of our segments.

And if you look at the sales increases we were achieving -- 16, 18, 19% in our different groups -- as you know, the sales of those products in industry-wise and competitively-wise were not up that much, which I think reflects the fact we've had share gains.

I will ask Alan maybe just to comment on some of the particular new products that we've had.

Well, at the builder's show in January, we introduced a new line of doors from Millguard that's been very, very well received in the marketplace.

We continue to work on, and add to our Color Center program that we have. We have introduced the new Michael Graves line of faucets that really didn't start shipping until toward the end of the first quarter.

And then we've just had -- we started a major push on new products over the last couple of years. And a lot of what we're coming to market with now are things that we have been working on for, you know, just many, many months in the past, and we expect that continuing flow of new products to continue for the forseeable future.

And as a follow-up, some of your competitors on the paint side have introduced the -- a ceiling paint line that goes on on one color and then changes back to white.

Is that something Behr is already involved with or we can expect?

It's not new. They have had it out there. It's been out there with a different color that they initially put on that changed to white. They have just come out with something new that is pink that turns to white, I believe, is the color.

We've looked at various options to that, and in terms of the quantities, we really -- it's actually helping the sale of other paint products as well; so even though we don't have that particular product, it's actually caused incremental sales to the whole department.

Okay. And then just two questions on the guidance going forward.

In the second half of the year, are you basically just extrapolating the organic sales growth? Are you looking for a slow down from the double-digit in the second quarter?

Well, we haven't given a sales guidance for the year; and as you know, last year, the first half of the year, sales were negatively impacted by weather, the Iraq situation, and we did see a pickup as the year progressed.

So all things being equal, there may be some moderation in the rate of growth that we have later in the year, but for the year as a whole we are looking for significant organic growth.

Okay. And then just interest expense is a little lower than we were looking for.

Anything there, and can you give us the full year that you're baking into your guidance?

Yeah, we did retire some debt last year, you might remember, in the latter part of the year, 430 million. So there is a reduction. And that rate was around 6% on average, as I recall. So there is some benefit there.

We also entered into a swap agreement to fix some of the -- or to float some of the fixed rate debt, which is saving us about 3% at this point in time. And on a full-year basis, I would guess we'll be around 240 million relative to interest.

And we have some additional debt coming due in May, which has higher interest rates than the debt we're paying on the debt we issued to replace it.

So I would expect that our interest rate might decline a little bit more this year from last year.

Thanks.

We will go next to Frank Dunau with Adage Capital.

I got a few accounting questions. Just on -- on -- you know, the press release says, you know, you took this charge or the disposition of European businesses.

Does that sort of imply that you were going to get substantially all of it back during the rest of the year?

Yeah, Frank, we have to -- when you have a disposition of a number of businesses, we have to under accounting rules recognize those businesses where we expect to have a loss transaction at the time we make the announcement.

So in the first quarter, we have to account for those businesses where we think we have a loss; subsequently, where we think we have gains, we can only recognize those when they actually are consummated, the transactions. We can't anticipate the gains.

And what we said in our fourth quarter conference call back in February, consistent with what we have in the press release here, is that we did anticipate a first quarter charge, but we think that that will be substantially offset as we sell businesses later in the year, where we expect to have a gain.

All right. And then also this three cents from the Behr litigation, I was just trying to make sure I understood, it is in the 52 cent number --

Yes, it is.

But it is not in the 2 dollars and $2.10 guidance?

In the two dollar -- we anticipated no additional income from Behr relative to the 2.10.

Okay. So the -- but the 3 cents is in that number?

Yeah, I believe 3 cents is in there, yes.

Okay, that's it. Thanks.

You're welcome.

We will take our next question from Bryant Chen with Basso Capital.

Hello? Hi. We just wondered, I mean, if you would comment on your dividend policy. I mean, we did kind of talk about maybe [INAUDIBLE].

Yes, as you may know, we have increased our dividends for some 45 years in a row.

And last year, due to -- particularly due to our performance, as well as the tax law changes, we increased our dividend by two cents a quarter, whereas we had been increasing it by a half or one cent a quarter in previous years. So I think -- I think the Board will obviously take into consideration our performance and our liquidity and balance sheet and other factors and the changes in the tax laws.

I can't speak for the Board, but I think certainly the intent is to continue increasing that dividend and maintaining that historic record that we've had.

Okay. Thank you.

We will take our next question from Barbara Allen with [INAUDIBLE].

Thank you. I wondered if you did any analysis that could enlighten us on the sales growth this quarter in the areas that a year ago were unaffected by the terrible winter weather, which I would assume would be the Southwest and California.

Frankly, I don't think we've take a hard look at the regional variation in the quarters, so I can't give you a good answer on that one, Barbara.

Okay.

Installation would have been one segment that was hurt probably more than any other segment last year relative to weather, and that was -- I think predominantly in the Northeast as I recall.

Yeah, we had really, really bad weather all up and down the East Coast and the Midwest, but I was just trying to get a sense of what, you know, kind of un-weather affected sales growth was.

Yeah, it would be hard to come up with that number. I wish could give you better guidance on that.

Okay. Thanks a lot.

We will take our next question from Steve Fockens with Lehman Brothers.

Hi, good morning, guys. Just one quick follow-up on the interest expense. Tim, did you say that you expected around 240 -- 240 million in interest rate expense for the year?

Yes, that is approximately right, Steve. Yeah, we -- right around that number.

So obviously, that assumes that the average over the next three quarters is going to be a fair amount higher than the first? Is that -- what would -- given that you did, what, 53 in the first, so what would be driving the sequential increase?

Is that -- Brian; is that what we have in our filing -- the 240? Well, we've got seasonal uses of cash, Steve, that would get through a little bit.

Okay.

Over -- you know, I mean, as we ramp up the businesses in the second and third quarter.

Okay, but it's not --

We may spend even a little than that. That might be -- that 240 might be a little bit on the conservative side.

We could come in a little less. But that's what's in our guidance at this point in time.

Okay. All right. That was it. Thanks very much.

We'll take our next question from Holly Ivets with Merrill Lynch.

Hi, guys. A couple of questions. You mentioned within the cabinet-related products margins were up nice year over year on beneficial volume only.

Where do we --

And some cost reductions.

I'm just trying to -- benefit of cost reduction, where do you think we see them over time or by the end of the year?

And then secondly, why were margins weak in both plumbing and decorative?

I'm sorry, what was the last part of your question?

Why were margins weak in plumbing and decorative?

I will answer the plumbing first. The primary reason for plumbing is we have a larger proportion of European sales in our plumbing category than we do in some of our other segments, and European sales were up strongly -- largely because of currencies in some lower margin product lines, so when you roll that into the number, you reduce the overall profit margin.

Okay. Okay.

In terms of cabinets, --

On the cabinet side, we announced the consolidation of Mills Pride and Craft-Maid. And in the first quarter, we had some one-time costs, some severance cost, and some of the consolidation work that we were doing.

We did probably realize enough benefits to offset most of the costs in the first quarter. But we should start seeing the benefits of those consolidations going forward in the rest of the year.

I should also mention that historically, seasonally, the first quarter is our lowest quarter of the year, so the volume and margin in different segments in some of our businesses are even more seasonal than other, such as paint typically is stronger in the second and third quarters than the first and fourth quarters, so you can't always take first quarter margins and try to annualize them strictly based on bad performance.

But is a 15% kind of number for the year doable?

In cabinets?

Yes.

Well, I would expect we would do better than that.

Okay. Great. And how about on decorative?

Decorative architectural was up a little bit. Well, it is down from last year's first quarter, Holly.

Right.

Slightly -- I think a couple of hundred basis points, but it's higher than where we ended the year, and as you might recall, we had some of the accounting-related issues last year in Europe that affected that segment.

And as a result, the first quarter profitability was slightly overstated relative from a margin perspective, but we have seen some improvement, obviously, first quarter versus where we ended up late last year.

And I would expect that we can either maintain that level, or improve slightly on that going forward.

All right. Thank you.

We will take our next question from Stephen Kim with Smith Barney.

Yeah, thanks very much. Good quarter. A couple of quick questions.

First of all, in the installation services business, some of the margin degradation there you attributed to, you know, getting into additional products and others -- and the other part of the margin degradation was also higher installation costs.

I was wondering if you could give us some kind of feel for what the impact of the higher insulation costs were?

Well, in -- again, in total, we had three fairly substantial cost increases on insulation. One in September of the last year, one in January and another one in April.

And we typically have a lag period before we're able to put the increases into place. Off the top, I'm not sure exactly what that equated to in earnings, but it was -- it was a fairly substantial number.

When you mean April, do you mean '04 April?

Yes.

So in other words, we'll still continue to see, you know, that effect increase as we go forward, right?

You will; but by the same token, we would expect that the January cost increases that we had will start seeing the price increases that we realize to offset that.

One other general comment that I'll make, we've, I think, done an excellent job in bringing our inventories down throughout the Company.

One tradeoff for that, is if you have lower inventories and prices and costs go up, you get less benefit from cost increases of existing inventory. So we don't have as much inventory as some other companies might have, so we go through that inventory quicker and we get to the newer cost material a little faster than other companies might get to.

Okay.

Staying with the installation services business, outside of the insulation work that you do -- so dealing only with the other products in that business -- can you give us a sense for what percent -- or how many of the top 10 builders or how many of the top 20 builders, or however you sort of look at the largest builders in the country, what share of those large builders do you have contracts with to do work outside of installation?

Well, we currently have formal contracts with four of the top 10 builders. And we're working with most, if not all, of the other top 10 builders, along similar lines.

I would expect that by the end of this year, or early into next year, we will have contracts with at least 6-8 of the top ten builders in the country.

And what percent of the sales you generate in the installation services business -- again, outside of insulation -- what percent of the sales do you think come from the top 10 or top 20 builders?

What percentage of our sales in total would come from them?

Your sales in total, outside of insulation.

Well, I would say, you know, if I could answer that a little differently, we have said that some -- currently about 32% of our sales are coming from non-insulation products.

And I would think that with the big builders, if anything, the average has been lower than our national average, and as we enter into these national contracts, that is going to be picking up, so I think we will see a significant pickup in other product sales, because our penetration with the large builders was relatively smaller on some of these products than it was with small builders.

Great. Okay. Yeah, that's helpful.

And then finally, just one quick question regarding your other -- I guess other [INAUDIBLE], I guess I would call it, there was a $12 million figure that is just sort of classified as "other' within the other break-out, and that compared to a negative five last year. Can you just sort of talk about the likelihood that that figure will continue to be additive to earnings in the next several quarters?

Yeah, Steve, I wouldn't expect that to be an ongoing issue. That relates primarily to current currency -- realized gains, from currency-related transactions in the first quarter.

As well as some asset sales related to assets we got a couple of years ago from the furniture-related business when we brought those assets over to satisfy some of the debt obligation, and there happened to be -- it's just timing more than anything else.

As we indicated at the time, we expect to dispose of those assets, which included some notes and some properties and some other things, and that's pretty much just incidental.

And I wouldn't expect that to be a recurring factor necessarily going forward. There may be a little more activity, but it would be very, very difficult for us to predict that.

Okay. Great, thanks very much.

We'll take our next question from Budd Bugatch with Raymond James.

Good morning, Sam Darcatch pitch hitting for Budd. Most of my questions have been answered, but a couple of quick ones. Piggy backing along the -- some of the cabinet points, I noticed that you're doing some hiring in Ohio, and perhaps a little bit of adding of capacity up there.

And you've also combined some of the Merrilat and Craft-Maid facilities. What is your utilization rates right now in cabinets, and how does that compare with the industry? I know a lot of other players are -- have been banging their head up against the ceiling with respect to their utilization rates.

Well, the capacity that we're adding is some more specific capacity for certain parts of the operation. We're adding some finishing capabilities with our Craft-Maid facility. We have not consolidated any Craft-Maid and Merrilat.

It's more the Mills Pride and Craft-Maid that we've been looking at working on. And there was a lot of work that we previously had farmed out that we're now, you know, we have the capability within the company, but Craft-Maid wasn't necessarily buying product that Mills Pride had expertise in, so we're bringing a lot more of our existing volume inhouse to get some of the synergies that are there. So we're really focused on doing that.

So the primary addition that we're looking at doing right now is just more specific to certain parts of the operation. And that's what we recently announced.

I might -- [SPEAKERS OVERLAPPING].

You're overall capacity utilization in cabinets, Alan, to the best of your -- best of your estimation? Including Mills Pride?

Yeah, I would say that we're probably at 80% or a little less than that. But in that general range.

And we try and anticipate, you know, a couple of years down the road, where we're going to need to be to take care of our customers' needs, and then we basically put our capital expansion plans into place to take care of that. So we need to stay at least one to two years ahead of where we expect our customers to be.

And you might remember, we had some fairly significant investments a couple of years ago in the cabinet business, including the Ocala Florida plant.

And you might recall from our discussions about cap ex this year, which is up to 350 million versus 270 last year, that a significant hunk of that, as Alan mentioned, relates to manufacturing and finishing capabilities -- or capacity, if you will, for the cabinet-related businesses.

Okay. Final question.

And you may have already covered this, I apologize if you had. Richard, did you mention what the average share price you paid for the share repurchases for the first four quarters of this year -- or first four months of this year?

First three month, Sam are about 28 -- a little over $28. About $28.10, -- 28.13, I think, as I recall.

Okay, thank you, gentlemen.

Next, we'll take a follow-up question from Michael Rehaut with J.P. Morgan.

Yeah, hi, I just wanted to be clear, Richard, you mentioned before, that you know, in discussing the, you know, roughly 500 million of marketable securities, that first of all, that that is, of course, that's included in the nearly $1 billion of financial assets that you had mentioned on the last call that you intend to monetize over the next three to four years.

Actually, we intend to monetize most of our financial assets, not just our marketable securities, but some of our long term financial assets as well.

We will monetize pour of the marketable securities this year. The longer term financial assets, we don't control the monetization of those, so that is going to take more time and that's the group that will be done over the next three, four years.

Okay.

But out of the total, you know, this roughly $960 million -- of that number, there is roughly $500 million of marketable securities, that -- and that's the number that you have more active control over, and that's the number that you intend to, as you said before, monetize over the next 12 months?

Right.

Okay.

Most of it over the balance of this year.

Okay. So that would be over a 50% monetization over the next 12 months?

Right.

The second question I had, just more of an operational question on the decorative side. We had heard a lot about the success of the Behr Color Center, and can you just talk a little bit about the effect that you have also -- what you're expecting for the Color Center for stains, and you know, if that is going to have the same type of full rollout as the Behr Color Center has, and you know, how that's coming along?

It is more of a specialty program. It won't be nearly the size of what the original Color Centers were. It is a much smaller space utilization, and focuses strictly in the stain area.

Our plans right now are to roll it out probably sometime in the third quarter. Our initial investment in that is considerably less than the investment in the Color Centers was. And it's really -- trying to do the same thing with the stain category that we successfully did with the paint Color Center.

But I would not expect that the results would be as large, nor will it incur costs going in be nearly as large.

Okay, and one last question, if I may. And this is sort of a bigger macro question.

Inasmuch as -- you know, over the last couple of yearS, obviously your exposure to Home Depot, you know, roughly 25% of sales, you know, verses -- which dwarfs, you know, in some respect your sales exposure to Lowe's, which I believe is around 5 or 6% of sales, and you can correct me if I'm wrong.

Yet, a lot of that obviously due to, you know, Behr, you know, which is a big business, but even if you strip out Behr, I was wondering where you could -- just talk us through the opportunities over the next couple of years, in terms of how you might be able to increase your penetration.

Are there certain product lines that you're working on that you see opportunities in particular?

Are you talking about with Home Depot?

No, I'm sorry, with Lowe's.

Well, we don't like to discuss particular programs with particular customers, because as you can imagine, that's a very sensitive subject from competitive and other reasons.

I would just say that we're working on a number of programs with all of our major customers, and we're going to benefit both from new programs as well as from the absolute growth of those customers. So you're right that we have a large percentage of our sales going to one customer; but on the other hand, we look at that and say we're fortunate that we have one customer that's growing as rapidly, or two or three major customers growing as rapidly as they're growing, and we can participate in that growth. So we think the advantages outweigh the negatives.

Okay. I mean, I was thinking in particular of like, you know, Michael Graves, at Lowe's, or the KILZ paint line at Walmart, things of that nature.

Well, again, we just have a rule of not talking specifically about individual customers, and that's partly because they ask us not to do that.

Right. Okay. Thanks a lot.

Operator, maybe we have time for one more question.

Okay, sir. We'll take today' final question from Margaret Whelan with UBS.

Yeah, thanks. I just have a follow-up on the return on capital. Given the improvement you're seeing in the inventory turn and the margin, you know, improving slightly, it seems like you might get to your target before '08.

Does that seem reasonable, with the 15% goal?

We think it is possible, Margaret, as we've said previously, but we feel very comfortable and very confident that we can get there by 2008, but you know, I think it is possible we could see an acceleration of that.

Where did most of the improvement in working cap this quarter come from? Was that the the fact the business was steady and so strong, or was it really managing the assets more efficiently?

Well, I think is probably a combination. You might remember, we ended up working capital as a percent of sales at 18.1 at the end of the year. We're at 18.5.

There is a little bit of a ramp-up there. But I think, you know, it is really a combination of having very strong business in the first quarter, as well as the fact that we're very focused on managing the working capital; and as we've indicated before, we have incentives in place to drive that improvement, and we've been very, very pleased with the results that we've had.

Yeah, the biggest drivers in that have been the reduction in inventory on a per-day basis, combined with the increase in payable days.

Yeah. The inventory turn at 7.5 times; is that sustainable? I think it's an all-time high.

We were there at the end of the fourth quarter. And yeah, I think -- I think we can continue to perform at that level.

We still have a few areas in the Company, where there is possible improvement opportunities in inventory, and we certainly have areas in the payables arena, across the Company where we can do a better job.

So we think we can continue, to, you know, manage that very aggressively and see some favorable performance there.

Okay. Great. Well done. Thank you.

Operator, I might just finish up with some general comments that we are pleased with the progress that we have been making in terms of generating a higher rate of organic growth, and our outlook for the rest of the year is encouraging.

And as I said earlier, we have a lot of momentum in the Company currently with the programs we've been working on for recent years, and we would hope that if anything, the guidance that we give may prove to be conservative if present business trends continue.

I would just also mention, just on a full disclosure basis, some of you may have seen that we did have some insider executive selling early in the -- or during the first quarter.

And I would just point out that as many of you know, we did have a major executive stock purchase program that we implemented some years ago, where some 300 key people within the Company purchased stock at their own risk and their own exposure, with borrowed money that they committed to personally.

Those obligations do come due during the course of the next year. So you will see some selling by executives as they retire those loans and obligations they have. So I just mention that now, so that you won't be surprised by it; and I can assure you that none of that is based on any question about our outlook, but just obligations that have to be met, and we think that's the prudent thing for those individuals to be doing.

So with that, we appreciate your taking the time, and look forward to talking to you again in the near future. Thank you.

Once again, this does conclude today's conference. We thank you for your participation. You may now disconnect.