馬斯科 (MAS) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2006 first quarter conference call. As a reminder, today's call 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 rate fluctuation and 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 website at www.masco.com. Masco undertakes no obligation 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 posted on the Company's website at www.masco.com under the Investor Relations section.

In addition, we may refer in this call to non-GAAP financial measures as defined by the SEC's Regulation G. Accordingly, a reconciliation of the differences between such measures and 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 313-792-5500. 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.

Thank you, Jessica. We are pleased to report that net sales from continuing operations for the first quarter of 2006 increased 9% to a first quarter record of $3.2 billion compared with $2.9 billion for the first quarter of 2005. North American sales increased 13%. Since we have had no significant acquisitions during the quarter, virtually all of that was organic growth.

International sales decreased 5%. In local currencies, international sales increased 3%. International sales were negatively affected by a stronger U.S. dollar, principally against the Euro, which reduced international sales by 8%.

Income from continuing operations increased to $219 million, or $0.53 per common share, compared with analysts' consensus estimates of $0.46 per common share and $0.47 per common share for last year's first quarter. The $0.53 per common share is before the cumulative effect of an accounting change net and excludes $17 million pretax, or $0.03 per common share of costs and charges related to plant closures and other profit improvement programs in our Plumbing Products segment for the first quarter. Income from continuing operations, including the charge, was $208 million, or $0.51 per common share.

Our first quarter results exceeded our expectations. Market share gains and our strong organic growth in the new construction market and certain home improvement products all contributed to our first quarter performance. Our 2006 first quarter results, seasonally the lowest quarter of the year, were better than expected, while better than expected, nevertheless continued to be adversely affected by recent increases in commodity, energy and freight costs, offset in part by selling price increases for certain products. The Company has already implemented, and continues to implement additional selling price increases for a number of its products and believes that by the end of the first half of 2006, many of these cost increases will be largely offset by such price increases.

Operating profit margins as reported were 11.2% for the quarter, compared with 11.5% last year. Operating profit margins in the first quarter of 2006 include the negative effect of the charges related to the Company's profit improvement programs in the Plumbing Products segment. Excluding these charges of $17 million pretax in 2006, and income regarding a litigation settlement of $2 million pretax in 2005, operating profit margins improved to 11.7% in the 2006 first quarter compared with 11.4% last year.

Total SG&A expenses for the quarter as a percent of sales, including general corporate expense, were 16.4% compared with 17% in last year's first quarter. Our general corporate expense was 1.5% of sales in the first quarter, compared with 1.6% last year.

In terms of segment sales, since we had no significant acquisitions during the quarter, our sales increases were mostly organic. Sales in each of our product segments increased in the first quarter versus last year. Cabinets and Related Products sales increased 9%. Plumbing Products sales increased 5%. Installation and Other Services sales increased 16%. Decorative Architectural Products sales increased 10% and Other Specialty Products sales increased 5%. Assembled cabinets, paints and stains, and installation services were particularly strong in the quarter, each with double digit sales increases compared with a year ago.

Total key retailer sales from continuing operations increased 7% in the quarter compared with a decline of 1% in the 2005 first quarter and a 5% increase in the 2005 fourth quarter over the corresponding quarter of the previous year.

The Company's tax rate was 34.6% for the first quarter, and the Company estimates that its effective tax rate for the full year of 2006 should approximate 34 to 35%. The Company's tax rate in the first quarter of 2005 was 32.3%.

We continue to make progress on our working capital reduction program. Working capital, defined as accounts receivable and inventories less accounts payable, improved to 17.6% of the last 12 months of sales from 18% a year earlier. For the 12 months ended March 31, 2006, return on invested capital, as reconciled, was 13.3% compared with 12.7% a year ago. The Company continues to believe, excluding the Plumbing Products segment costs and charges, which are expected to aggregate approximately $70 million pretax in 2006, that we will approximate our 15% return on invested capital goal by the end of 2006 and our 18% goal by 2010.

Our liquidity and balance sheet continues strong at the end of the first quarter with approximately $800 million of cash and marketable securities and $2 billion in unused bank lines. During the quarter, we retired $800 million of 6 and 3/4 notes due in March, 2006. Debt as a percent of total capital was 46% at both March 31, 2006 and 2005.

The Company has continued its active share repurchase program and repurchased approximately 10 million common shares during the first quarter. In April, we repurchased an additional 3 million common shares. At the end of April, we had approximately 16 million shares remaining under our share repurchase authorization.

During the quarter, our board of directors increased the quarterly dividend by 10% from $0.20 to $0.22 per common share, making 2006 the 48th consecutive year in which dividends have been increased. The Company expects to continue to return a minimum of $1 billion annually to shareholders on average over the next several years through share repurchases and dividends as part of our on going commitment to value creation. In the first quarter of 2006, the Company returned $408 million to shareholders through share repurchases and dividends and since the beginning of 2003, has returned in aggregate over $4 billion to shareholders.

The Company continues to believe that it will achieve mid to high single digit organic sales growth, our goal in 2006, and based on current business trends, believes that it will now achieve full year earnings from continuing operations in a range of $2.40 to $2.50 per common share.

This $0.05 per share increase in full year's earnings guidance would have been even higher except for the recent surge in commodity and energy costs in recent weeks. We have experienced unprecedented increases in a number of materials that we use extensively in manufacturing our products. Just since the first of January of this year, copper prices have increased 50% and zinc prices have increased 70%. Just since the first of April, copper has increased 30% and zinc 20%. These recent cost increases are reflected in our updated full year's earnings guidance.

Our full year guidance is based on housing starts declining 5% from 2005 levels, share repurchases of a minimum of 20 million common shares, modest margin improvement for the year, reflecting selling price increases, offsetting in part higher commodity and energy costs, and modest anticipated income from financial investments. This guidance also assumes no further significant commodity cost increases and excludes costs associated with our profit improvement programs and any other items.

In January, 2006, the Company announced a plant closure in the Plumbing Products segment, a major faucet manufacturing facility in Chickasha, Oklahoma. The Company incurred $17 million pretax, $0.03 per common share, of costs and charges associated with this plant closure, and other profit improvement programs in the Plumbing Products segment in the first quarter of 2006, and as previously announced, expects to incur additional costs throughout 2006. These costs and other costs and charges related to the Company's profit improvement programs are anticipated to aggregate approximately $70 million pretax this year. Including the $70 million of anticipated costs, approximately $0.11 per common share has been included -- if it had been included in our guidance, earnings from continuing operations in 2006 are expected to be in the range of $2.29 to $2.39 per common share.

In terms of current business conditions, while we don't have final April results, sales in the month were relatively flat with a year ago but I believe that that's misleading. This April had approximately 10% less shipping days than last year and Easter was in April compared to March of last year. In Europe, many businesses close for an even longer holiday than in this country for Easter. The majority of our businesses have not seen any slowdown in business since the first quarter and we expect mid to high single digit organic sales growth for the second quarter.

This -- the Company remains committed to its strategy of value creation and is focused on the simplification of its business model, cash flow generation, improvement in return on invested capital, and return of cash to shareholders through share repurchases and dividends. Consistent with this strategy, we are continuing to pursue a variety of initiatives to offset cost increases and increase operating profit, including sourcing programs, the restructuring of certain of our business, including consolidations, manufacturing rationalization, head count reductions and other profit improvement programs. In 2004, we initiated a profit improvement program with a goal to reduce costs on an annual basis by $200 million by the end of 2007. We recently increased this goal to $240 million as we continue to find additional ways to reduce our Company's cost structure. As we previously indicated, we estimate the incremental benefits to be realized this year from this program will approximate $60 million.

Our Asian sourcing has grown from $200 million in 2003 to over $550 million in 2005 and we believe will exceed $650 million in 2006. We generally save 25 to 30% on products and components that we outsource to Asia.

Business consolidations, together with divestitures, have simplified our corporate structure and reduced our operating business units from 67 in early 2003 to 34 at the end of this year's first quarter. In April, the Company completed the sale of two additional relatively small businesses for proceeds of approximately $49 million, further reducing the number of our business units to 32.

The increases in commodity costs and the lag in implementing selling price increases in the last two years have masked much of the benefits of our profit improvement programs. Since additional program costs are presently expected to be minimal for 2007, earnings benefits should be more evident next year as many of our commodity cost increases are expected to be offset by by then by selling price increases.

To summarize, in the first quarter of 2006, sales increased 9% to $3.2 billion, growth that was essentially all organic. We had over 800 million of cash and marketable securities. We returned 408 million to shareholders through the repurchase of 10 million shares and dividends and dividends were increased for the 48th consecutive year. We continued to simplify our organization structure. The platform strategies we've developed are driving synergy and leveraging opportunity and return on invested capital as reconciled improved to 13.3% as we are well on our way to our goal to approximate 15% return by the end of this year.

While our team is proud of all of our accomplishments, we have more to do. We are focused and committed to continuing to execute our strategy of further simplifying the Company, investing to grow our business organically, aggressively managing our business unit portfolio, improving our balance sheet, generating superior cash flow, and returning cash to shareholders through share repurchases and dividends. As we continue to develop and execute our strategic plan, we appreciate the efforts and dedication of our over 60,000 worldwide employees. We firmly believe that our strategy, together with our leadership products and brands, multiple distribution channels and price points, position Masco to deliver long-term value for our shareholders.

Now, I'm being joined by Alan Barry, our President and Chief Operating Officer, and Tim Wadhams, our Chief Financial Officer, to answer any questions that you might have. Operator?

Thank you. [OPERATOR INSTRUCTIONS] We will take our first question from Margaret Whelan with UBS.

Good morning, guys.

Hi, Margaret.

Nice quarter.

Thank you.

Two questions, Richard. The first one is other than the commodity inflation, what's the one thing that you guys can do to lift your margins through the year?

I would say there are two key things, Margaret, in terms of improving margins during the year. One is continuing to be aggressive on implementing price increases. At our recent investor meeting, we mentioned that we expect this year we will be implementing in excess of $300 million and we currently believe it will probably be in excess of $350 million of price increases sometime during 2006, primarily in the first half of the year. The second thing we can do to continue improving profits would be to continue focusing on our profit improving program to reduce costs throughout the organization and we're working hard at accomplishing that goal as well.

And when you said about simplifying the business, what are you referring to relative to what you've done already?

Well, we've already reduced our operating units by almost in half. In addition to that, as you know, we've reorganized into five global platforms which enables us to manage our businesses that have similarities together to maximize both cost reduction, organic growth and synergies so I think all of that has resulted in the organization being leaner and meaner as well as being able to tap more of the growth potential that we think exists in our businesses.

Okay, thanks, and just the last question. What was your share count actually at the end of the quarter or what it is right now?

Tim?

I think it was 411, Brian? 411, Margaret.

Is that the weighted average or is that the end of the quarter?

Right, and as I mentioned, we've reduced that by 3 million additional shares in April.

Excuse me, Margaret, that was the average for the quarter. The ending number was 406.

So we should use 403 for the quarter?

Except remember you have a weighted time period as so when the shares are retired so you don't get an exact number benefit.

Okay. Thank you.

Our next question comes from Budd Bugatch with Raymond James.

Good morning, Richard and Alan.

Hi, Budd.

Congratulations.

Hi, Budd,.

The pricing Richard, 350, you gave us for the year as the expected, can you tell us what it might have been in the first quarter of what you estimate it was?

I can't give you inexact number. It's difficult for us to get a hard number on not only costs but on pricing as well for the reason that we have over 30 business units, we have thousands of customers within those units and we have literally millions of SKUs, but I would estimate that our first quarter we probably were in the low single digits in terms of sales contribution so if we grew 9% organically, a few percent of that would be a result of price increases.

So maybe 2%, are you thinking?

I would define low single digits probably in the 2 to 3% range.

Okay, all right, so maybe about 60 million then. That much, 60 million of pricing in the quarter?

That would be year-over-year. But again, remember that some of those price increases went into effect late in the quarter and some of that benefit will only be showing up in future quarters.

I'm just trying to get a number of what that might be in this quarter. And raw materials, do you have a way to put a number what you think the incremental impact of raw materials for the year will be?

It's hard to come up with an exact number but I'll repeat what we talked about at the investor meeting. We lost 110 basis points of margin last year and our estimate is that that was a result of about 200 basis points of raw material cost increases not offset by price increases, and then we also mentioned that of that, we had about 200 million of unrecovered costs carrying forward into 2006. So if we're successful on implementing our price increases, our goal is not only to recover that 200 million, but to recover some of the additional costs in 2005 that we did not previously recover and gradually try to recover some of that lost margin and our goal is over time to recover the 110 basis points of margin that we lost last year going forward. It's going to take us a good part of the year to recover that and I think the real benefit of that will show up mostly in 2007, all things being equal.

Okay. I'll try to put a pencil to some of those numbers. The $60 million benefit you expect to get this year from the $70 million worth of expenses that I think you expect to take this year. Again, how much might we have seen in first quarter and if you can, tell us where it will show up in the income statement? Will it show up -- ?

I would expect that most of the 60 million of benefit will come in later quarters, because a fair amount of that is a result of our restructuring our plumbing operations, and we're just in the process of converting a lot of those operations where we're taking the work out of the plant we're closing, transferring part of that to our two other faucet plants in this country as well as a major portion of that work into Asia. If anything, in the short run, we're probably paying a penalty for that cost savings opportunity, because that transferring of work incurs a lot of extra costs and we're incurring a lot of extra costs in terms of outsourcing initially, air freight costs, other things to make sure our customers are taken care of while we go through that massive restructuring. So I would expect you will see more of the benefit of that in the latter part of the year than you will in the first part of year.

And Budd, most of the costs and the benefit will show up in the gross margin line.

But -- and most of the benefit in the third and fourth quarter? So maybe 40 million or 50 million of the 60?

I wouldn't want to put an exact number on it but that's the total we're expecting for the full year and I would expect more of that would be in the second half.

And Tim, how would you figure out the charges? Would you just linear the remaining 53 million or so?

Well, what we said, Budd, is we thought initially, more of that would probably be in the latter part of the year, but I think, I think for modeling purposes, I don't think you would be too far off if you did it on a linear basis.

We don't control that. A lot of that, under accounting rules, we have to expense as it's incurred. We can't just take an estimate and try to spread that evenly over the year, unfortunately, under accounting rules.

I understand that, but that's why I was asking, it follows in action if I'm not mistaken so therefore you know when you're going take the action so we might be able to plan it through.

That's right but the plant that we're closing, we're still in the process of closing and a lot of those severance costs will flow through later in the year.

Understood, thank you very much.

Our next question comes from Peter Lisnic with Robert W. Baird.

Good morning, gentlemen. Good quarter.

Thank you.

Richard, just wondering on the increased commodity costs, you talked about zinc and copper specifically. Is there a way that we can maybe talk about what percentage of the cost structure that might be to help us, if we get another 50 or 30% increase in copper and a similar increase for zinc, what that may mean for the second half of the year?

The major impact from copper and zinc affects us in our Plumbing Products segment, and to a lesser extent in our builder hardware segment. The reason we refer to zinc as well as copper is because we are, for instance, the largest users of brass rod in the world and brass rod is made up, I believe it's two thirds copper and about one third zinc, plus we use zinc in a lot of our coverings of various different products. So if you were to take those segments, the Plumbing segment and to a lesser extent our builders hardware segment, and look at cost of sales and and figure materials are what percentage, maybe -- Alan?

Copper and zinc together in the Plumbing category would represent something slightly excess of 10% of our cost of sales there.

Just by way of guidance, we estimate that just the commodity cost increases we've seen in the last 30 to 60 days are reducing our profits for the balance of the year by about $0.05 a share. So when we gave the revised guidance, had we not seen this last run up in prices in the last few weeks, we would have gone up even $0.05 additional in terms of our guidance for the full year.

Okay. That makes sense. If I could just move to cabinetry really quick. It looks like the incremental margin there was a little bit weaker than we had expected but margin was down year-over-year in that segment. Can you -- ?

Yes, I would say a couple of things. One again, even in cabinets, we've experienced some significant price increase in particle board, as well as over the past year in finishing and other materials. And secondly, as we've mentioned earlier, we have a capacity constraint problem. We have massive -- very large capital expenditures programs, over $100 million that we're investing on the West Coast to build a new facilities for both our builder cabinet group and our retail cabinet group, but until those facilities are on stream, we are shipping a lot of product from the east to satisfy the demand in the west and incurring a lot of extra freight costs as part of that transition. Secondly, as we've also said in the past, our RTA business, which is part of our cabinet business, continues to perform weaker, both in terms of sales and profits, and I think a major portion of the margin decline was partly attributed to RTA sales not only in this country but in Europe.

Okay. That's great, thank you.

We will now go to Michael Rehaut with J.P. Morgan.

Hi, good morning.

Good morning, Mike.

Question on the guidance. It appears, and correct me if I'm wrong, that you lowered the tax rate from what you were expecting from 36%?

Yes, just a couple of general comments. At the beginning of the year, we expected our tax rate might be around 36%. We're now currently expecting it to be 34 to 35%. Every 1% is about $0.04 a share in terms of benefits. So if you take the guidance that we've given for the year, we are estimating that we're having about $0.03 of additional expense related to stock based compensation adjustments that we didn't anticipate at the beginning of the year, about $0.05 of additional commodity cost increases we didn't expect a couple of months ago. That $0.08 is partially offset by the lower tax rate you referred to, which gives us back about $0.04 to $0.06 of that difference so in effect, we have a net loss there of about $0.02 to $0.04 that we otherwise would have had higher guidance. Tim, you want to add anything to that?

Yes, on the tax issue, Mike, that relates to distribution of foreign earnings. Earlier in the year, we had an estimate, it turns out that we are currently estimating that we'll repatriate a larger amount of cash and have a more favorable outcome relative to the tax related to that and that's the reason for the change, if you will, in terms of the reduction from approximately 36 to the 34 to 35% range. And as Richard mentioned, we expect to have about a $0.04 to $0.05 benefit from that.

And would that tax rate go back to 36 in '07?

Yes, I think for modeling purposes, I think closer to 36 in '07 based on what we would know today. Again, that's a fluid calculation that we'll be giving you quarterly updates on as we go along as we have to estimate that every quarter. But I think for modeling, using 36 would probably be a little bit on the conservative side but it's probably a good rate to use.

Okay. And then just on this line of questioning, the 3 million of costs from the -- I'm sorry the $0.03 incremental in the stock option, that is aside from the cumulative affect of the accounting change that was the $0.01, right?

Yes, that would be in addition to that, Mike. Basically at this point, we're estimating that stock related compensation will be up about $25 million over last year. We had about $75 million in total last year and we'll have about $100 million this year.

Okay. So if the tax rate is roughly offsetting -- the benefit from that roughly offsetting the higher material costs and you have a $0.03 hit from incremental stock option expense, what are the things that are going right that have allowed you to raise the guidance by still -- I guess $0.08 really, since the 5 and 5 offset.

I would say a couple things. One, our organic sales growth is running a little higher than we expected and we do obviously in the first quarter and we obviously do well on incremental sales. Secondly, I think we're encouraged that our -- even though it's being masked by our commodity cost increases, we are making some progress on our cost reduction profit improvement programs. And thirdly, I think you're starting to see the price increases that we're putting into effect beginning to bite a little bit and show up in our results, at least in a beginning sense. So I think it's all of those factors.

Right. It would appear that given that you've been able to turn the corner on margins in a couple of segments going positive in the first quarter, I guess that's consistent with that.

And given those segments had considerable cost increases during the quarter, the fact that they were able to recover a little of that margin from previous quarters was a good sign.

Right. Last question, in terms of divestitures and acquisitions. I think you disclosed there were a couple of small divestures during the quarter. What is your thought in terms of potential small to medium size bolt-on acquisitions, you started to talk about that at the analyst day, how is that progressing and what is your level of activity in terms of the M&A market?

Two things. We did divest, as you mentioned, two relatively small companies in April with aggregate sales of about $50 million on an annual basis. And we continue to evaluate our total portfolio of businesses and again, we might expect some additional relatively small divestures over the next 12 to 24 months. But we also continue to look at acquisitions and what we've said is we don't anticipate any major large size stand alone acquisitions, but we think there are a number of interesting opportunities for bolt-on acquisitions that would be added to existing platforms and there we continue to be an active situation, of looking at a number of situations that are relatively small in size but we think could be incrementally positive to us and any acquisitions we do, I would expect would be accretive.

And would that change your goal of $1 billion at least annually returning to shareholders? Would that impact that number?

No, we don't think it will because one, we continue to have high cash flow and secondly, the proceeds from divestures of companies we think on average may approximate the cost of the acquisitions and thirdly, we continue to have about $500 million of financial assets that we have said that we expect to liquidate over the next few years that will be another source of liquidity. So we think we have ample opportunity to do modest acquisitions and still continue to return significant dollars to shareholders.

Great, thanks very much.

Our next question comes from Stephen Kim with Citigroup.

Hi, good morning. This is actually Nishu Sib for Steve. My first question is on the return on capital goal, the longer term goals you've outlined. How are you getting to 15% return on capital by the end of the year? How does that reconcile with the EPS guidance of the $2.40 to $2.50? Does that just barely get you to 15%?

If you just take the guidance that we have given, and assume the share repurchases that we've indicated for the year, and do the math, you would come up with about a 15% return on invested capital. We could help you with that offline if you would like, but, Tim?

I think the key points there are, Nishu, if we hit our 6 to 8% growth rate, which Richard indicated we anticipate doing, and margins, if anything, improve slightly over last year, and we generate the cash flow that we've talked about from a free cash flow standpoint, just a little bit shy of $1 billion, if you work that thorough, we do get to the 15%. The thing that's a little misleading right now with the 13.3 on a reconciled basis is the fact that as you might recall last year's operating profit, and we're using the last four quarters of information to calculate that number, was slightly down from the prior year, and if we hit the midpoint of our guidance at $2.45 and again that's not a projection, that's just in terms of doing the calculation, I think you will see the math would work out at approximately the 15% rate.

Okay, that's very helpful, and second question on the installation services had a very strong quarter, 16% growth in a quarter when starts were, at best, kind of flattish. Can you just help us to understand that, like how much of that was from price increases and how much of that was from other factors, let's say maybe the easier availability of installation or growth in non insulation, installation?

Several points, I think, first of all, even though housing is flat, we've said repeatedly that we think we can gain market share and do more per home than we've been doing. We expect our sales there to continue to grow significantly, even if housing starts were to decline 5, 10% over the next few quarters. Secondly, I would just mention we talked in the past about insulation prices going up significantly and so the pricing input in the 16% is probably a little higher than the low single digits that we have throughout the Company. So pricing would be a little bit of a larger factor in the insulation business than our other businesses.

Having said all of that, I would also add that we continue to be on allocation for material. And as we said in our investor meeting, our sales last year and in the first quarter of this year would even have been higher in our installation group if we could have gotten the material that we need to satisfy our customers and one of the things that we've talked about is that the two biggest headwinds we are probably running into as a Company right now are commodity cost increases and availability of material, particularly insulation, and if housing starts were to decline 5 to 10%, if that results in pressure coming off commodity prices and frees up some insulation material, we think the benefits, those two benefits would outweigh the negative impact of less housing starts and might actually be a positive to the Company going forward.

That's great and just a final quick question on the share repurchases. Back at your investor conference, I think it was Tim, you mentioned that should the share price fall, you would be willing to increase your leverage to step up your share repurchases. Just an update on that. Is that still your outlook and how much further past that $1 billion cash return to shareholders goal would you go through the use of leverage?

For a number of years, we've shown a slide that indicates that in an adverse environment, whether it's economic stock market, if our share price was even lower and more tried to lose today, we would be prepared to accelerate our share buyback and the reason that we're comfortable doing that is several reasons. One, I mentioned earlier that we know we have financial assets that are going free up over the next few years and secondly, even if in the short run we increased our leverage, because of our high cash flow within a year or two that leverage would quickly come back down into manageable or more attractive levels so we would be opportunistic and we wouldn't hesitate to increase that buyback if the opportunity was there.

Okay, great, thanks.

Our next question comes from Ivy Zelman with Credit Suisse.

Good afternoon, gentlemen. This is Justin Cameron for Ivy. Just a follow-up question on the installation. Did you provide the unit growth in that 16% number?

No, we did not give out unit growth in that number.

Can you approximate that? Was it low single digit or --?

We have not given that out for competitive and other reasons and secondly, it would be very hard to do because we have so many different products through so many different branches that it would be a hard number to have an exact number on.

Okay and your Decorative Architectural segment --

I would just add though that where we have said repeatedly is that our growth of non insulation products is growing very rapidly, and we continue to do well in the double digit growth rate of non-insulation products and in those products, the price increases have been less than they've been on insulation. So the fastest growing segment of that business is not the one that has the highest price increases.

Is that segment growing in excess of 20%?

I think the answer to that would be yes.

Okay. In your Decorative Architectural, your margins were significantly better than the last couple of years in the first quarter. Do you think you'll be able to continue to see improvement in this segment with oil prices at $70?

Well the, last year I think we had relatively depressed margins because we really, that group was particularly hard hit by some of the cost increases, particularly the refineries shutdowns due to the hurricanes in the Gulf caused a real run-up in some of our costs related to petroleum derivatives that go into the making of paint. So I think you can assume that some of that margin recovery is catching up a little bit in terms of pricing offsetting some of that cost increase. On top of that, as you can see from the numbers, we had double digit growth in paint and stains during the quarter. And on incremental volume, we typically do well in terms of adding to margins, but I would just point out that we're not getting up to high levels of margin. We're just recovering some of the margins that we have lost in the past year or two through cost increases. And I would just emphasize again that when we talk about recovering the margins that we lost last year, that's not necessarily getting back to record margins, that's just getting back to the margins that we had a year or two ago and recovering our recent cost increases.

Sure, thanks. In cabinets, your growth was fairly strong. Can you walk us through your new construction, your retail lines, as well as Europe?

Well, I would say that we did well both on the retail side and the new construction side. European sales were probably not as strong as domestic and therefore you can assume that our domestic sales were even stronger than the double digits we referred to in terms of impact on our results. We had a very strong sales in North America. On the other hand, the RTA business continued soft as I mentioned earlier and also I would mention that in the case of cabinets and some of our other segments, where we have a significant European input, currency being down about 8%. You have to remember that whatever sales we had in Europe translated to dollars would be lower by 8%. We do have significant RTA cabinet sales in Europe and even more importantly in our Plumbing and Other Specialty Products, we have very large components of European sales. If you take Europe out of our North American faucet sales, for instance, we would have been up high single digits in our plumbing sales in this country. So a couple of those segments did better than it might appear because of that declining foreign currencies.

Okay and my last question is, you've provided some of your sales trends into April being flat, but can you differentiate or give a distinction between your new construction and retail channels?

I would say that, Alan, it's pretty much across the board in terms of our business.

Our contractor services business, which is primarily the new construction market, continues pretty strong. So I don't know that there's any particular segment that we've seen any problems with. Pretty much across the board our business is continuing at similar levels. April had one or two less days in it because of a holiday, but other than that, we're pretty pleased that the volumes that we're seeing across -- pretty much across the Company, are still pretty strong.

And the installation, your relationship with your builder customers, has it changed or have discussions changed given that the environment is slowing now?

No, we haven't had any changes there that we've seen at all. And again, keep in mind the majority of our products come in three to four months after the initial start. So we're still working on housing starts back from November, December, January and February.

Thank you very much.

I would just add to that that our experience has been that when housing becomes more competitive and slows down, home builders are looking for additional opportunities to reduce costs and we believe that we have some real value added proposition in our installation business for home builders and I think in an environment of more competitive situation that the number of things that we do may appeal even more to home builders than when times are good and they can sell things as fast as they can build them.

Thanks a lot, guys.

Kevin Boler with Merrill Lynch has our next question.

Good morning. The paint sales, as you noted earlier, was quite strong. What do you attribute this to given prior comments regarding the low end consumer being impacted by higher gas prices? Was it half pricing in the 10% number or what are your thoughts there?

A couple of things I would always say too. It's always hard to take any -- excuse me -- any individual product line in a single quarter. If I remember right, we had pretty negative weather in 2005 in terms of snow and other things which might have affected the year ago numbers. And also, I would just point out that the sales increase you're seeing there is for the entire segment, although we've said that paints and stains are up double digits. So it gets affected by other things that are in that group as well but I think it gets back to historically our paints and stains businesses have continued gaining market share within the store, within the department, and I think the home centers continue to gain share, at least the customers that we have versus their competitors in terms of increasing their sales of architectural coatings. I think it's a combination of all of those things.

One of your large competitors mentioned losing some sales volume to someone getting shelf space at one of your key retailers. Were you picking up incremental shelf space at one of your key retailers?

Yes, we never like to talk about any specific customers or competitors, but yes, we have seen some pickup in volume from some customers.

Thank you, and then I guess with the changing track with the order rates at many large builders appearing below your current 5% estimate. What steps are you taking, basically a Plan B if housing declines and realizing on your installation side you have am call it a three to five month lag. What visibility do you have into the other parts of your business? What's your Plan B and how does your visibility vary by -- ?

A couple comments. First of all, we are projecting, in terms of on of our earnings guidance, a decline of 5% in housing but I should amplify that that's based on pretty much a flat expectation for the first half of the year. Partly because sales are still relatively strong compared to a year ago and secondly because some of the lag in terms of when our products go into the home, and what we're using for modeling and planning purposes is a 10% decline in housing for the second half of the year. Our model's already include and our guidance already includes a run rate that shows housing down 10% in the second half.

Secondly, in the case of our installation business, we have said before that because of the additional products we're adding, the additional value added that we're giving to our customers, we would expect our sales in that group to go up even if housing went down by 5 to 10% because of all of the things that we're doing and hopefully that would free up additional material and on top of that, our costs in that group are fairly variably. Our workers, even though they're full-time Masco employees, work on a piece rate so that if we did have any kind of a slow down, we have less overhead cost and more variable costs in terms of reducing our costs going forward.

The other thing I'll just point out too that we've said if housing does slow down, the other benefit we get from that is that one of the difficulties we have on the remodeling renovation side of our business, home improvement, is the availability of skilled workers to build new kitchens and bathrooms. And if housing were to slow, our experience has been that small builders and tradespeople switch over from new construction to remodeling renovation work and that should help our other side of our business if we did see a bigger slow down in housing.

Thank you very much.

Our next question comes from Keith Hughes with Suntrust.

My question has been answered. Thank you.

Yes, Operator, maybe we take one more question.

Okay, wonderful. Our last question comes from Dana Richardson with Argus Research.

Good morning. Congratulations on a good quarter.

Well, thank you.

I just have one question on the follow-up. The incremental stock option expense of $0.03 for the year that you indicated. How much of that was taken in the first quarter?

There would have been about $0.01 in the first quarter, so the incremental cost for the full year is $0.04 but it's not only related to stock options. It also has implications to stock awards as well as stock appreciation rights so it's a broad based accounting pronouncement that we put into effect as we were required to 123R.

As a follow-up, I just wanted to have another pass at the guidance question because you indicated that your first quarter results outperformed the analyst consensus by $0.07, I believe, and you increased your guidance by $0.05. So I just wanted to have another, little more color on why overall that would indicate a sort of $0.02 reduction, if you will, for the rest of the year?

Just to repeat, the stock option and award change in accounting costs us about $0.03 for the balance of the year. The increase in commodity costs in the past four to six weeks would cost us an additional $0.05 over and above what was expected. So that's $0.08 in cost increases and then I mentioned we're getting a benefit of about $0.04 to $0.06 in a lower tax rate than expected. Then the other thing I would just mention is that we did come in $0.07 better than analyst guidance in the first quarter but I point out that was analyst guidance, not our guidance, and frankly, if you look at our full year guidance and go by past seasonal patterns, we probably would have had a little bit of a higher number in the first quarter and a little bit lower number in the fourth quarter. So while we did beat guidance by $0.07, that might be a little different than what we would have had internally.

Okay. But overall, looking at it, factoring in the commodity increase and the tax benefit, that basically leaves you with the $0.03 of higher incremental stock option expense. So --

You have $0.08 of additional costs and you have $0.04 to $0.06 of additional benefits through taxes so that would have ended up with a penalty of $0.02 to $0.04 which would be the difference between the $0.07 we beat guidance by in the first quarter and the $0.05 that we raised the year's guidance.

Yes. So my point is that basically your outlook for the industry has not changed that much? Going forward, would that be a correct characterization?

I think that's fair plus the fact that we did better than expected in the first quarter and that's the, improved our outlook for the year -- in total.

Right. Okay. Thank you very much. Congratulations, again.

Okay, thank you.

That concludes the question and answer session today. At this time, Mr. Manoogian, I would like to turn the conference back over to you for any additional or closing remarks.

We just appreciate all of you taking the time to be with us and we look forward to our next discussions together. Thank you very much.

This concludes today's presentation. Thank you for your participation and have a wonderful day.