馬斯科 (MAS) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2007 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 the Masco's website, under the Investor Relations section at www.masco.com.

This discussion includes statements that reflect the Company's views about its future performance. These statements constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These views involve risks and uncertainties that are difficult to predict and accordingly, the Company's results may differ materially from the results discussed in such forward-looking statements. For an explanation of various factors that may affect our performance, refer to our most recent annual report on Form 10-K, particularly the risk factors section, and to any subsequent quarterly reports on Form 10-Q, all of which are on file with the Securities and Exchange Commission. The Company 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.

In addition, we may refer in this call to non-GAAP financial measures, as defined in the SEC Regulation G. Accordingly, and for reconciliation of the differences between such measures and the most directly comparable financial measures calculated in accordance with GAAP is included in the investor packet. The Company believes that such non-GAAP performance measures and ratios used in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, the Company's reported results under accounting principles generally accepted in the United States. Additional information about the Company is contained in the Company's filings with the Securities and Exchange Commission and is available on Masco's website.

After a brief discussion by management, the call will be opened for analysts' questions. If we are unable to get to your question during the call, please call the Masco Corporation Investor Relation office at 313-792-5500.

I would now like to turn the conference over to Richard Manoogian, Chairman and Chief Executive Officer for Masco. Please go ahead.

Thank you, Sarah. Our first quarter sales and earnings results, which were released this morning, were better than we anticipated when we spoke with investors on our year-end conference call in February. Net sales from continuing operations for the first quarter of 2007 declined 9% to $2.9 billion, compared with $3.2 billion for the first quarter of 2006. We had previously anticipated a low double-digit decline in sales.

While North American sales declined 15%, international sales increased 21%. In local currencies, international sales increased 10%, compared with the first quarter of 2006.

Income from continuing operations was $142 million or $0.37 per share, compared with $207 million or $0.50 per share for the first quarter of last year. Results benefited from net gains of $0.04 and $0.01 per share, related to financial investments in the first quarters of 2007 and 2006, respectively.

First quarter 2007 results, seasonally the lowest quarter of the year, were adversely affected by lower sales volume of Installation and Other Services, assembled cabinets, and windows and doors in the new home construction market and a continued moderation in consumer spending for certain big ticket home improvement items such as cabinets, as well as a less favorable product mix and increased commodity costs. Results were aided by increased sales volume of paints and stains and increased sales from international operations, particularly Plumbing Products.

As part of our profit improvement programs, the Company has been focused on the rationalization of our businesses including sourcing programs, business consolidations, plant closures, headcount reductions and other initiatives. During the first quarters of 2007 and 2006, the Company incurred costs and charges of $25 million pre-tax or $0.04 a share after tax, and $17 million of pre-tax or $0.03 after tax, respectively in those two years, related to profit improvement programs. Offsetting these charges in the first quarter of 2007 were lower stock based compensation expense and the gains on the sales of corporate fixed assets and the previously mentioned income related to financial investments.

Operating profit margins as reported were 8.9% for the quarter, compared with 11.2% last year. Operating profit margins in the first quarters of 2007 and 2006 include the negative effect of cost and charges related to profit improvement programs in both years and reduced sales volume in 2007.

Total SG&A expenses for the quarter as a percent of sales including general corporate expense were 17.3% compared with 16.4% last year. Although actual SG&A expenses declined by $20 million in the first quarter of 2007 compared with a year ago, SG&A expenses as a percent of sales increased in the first quarter due to lower sales volume and severance costs.

Sales changes by segment in the first quarter of 2007 versus last year's first quarter were Cabinets and Related Product sales declined 19%, Plumbing Product sales increased 7%, Installation and Other Services sales declined 21%, Decorative Architectural Product sales increased 7%, and Other Specialty Product sales declined 13%. International sales were strong, particularly for Plumbing Products, due to stronger European economies, market share gains and the favorable effect of currency translation.

Total key retailer sales from continuing operations declined 2% in the quarter, compared with an increase of 7% in last year's first quarter and a decline of 7% in last year's fourth quarter.

The Company's tax rate was 36% for the first quarter and the Company estimates that its effective tax rate for the full year should approximate 35% to 36%. The Company's tax rate in the first quarter of 2006 was 34.5%.

We continue to make progress on our working capital reduction program. Working capital, defined as accounts receivable and inventories less accounts payable, improved to 17.4% of the last 12 months sales from 17.6% a year earlier.

For the 12 months ended March 31, 2007, return on invested capital as reconciled was 11.3%, compared with 13.3% for the year ago period. While Masco remains committed to the continued improvement in ROIC, recent business trends have resulted in a reduction in operating profit over the last several quarters, which negatively impacted our return on invested capital. We continue to believe that we will achieve our return on invested capital goal of 18% by 2010.

Our liquidity and balance sheet continues strong at the end of the first quarter, with $1.2 billion in cash and marketable securities and $2 billion in unused bank lines. Debt, as a percent of total capital, was 51% at March 31st, and 46% a year ago. The increase was primarily due to our pre-funding of $300 million of debt coming due in August.

Masco has continued its active share repurchase program and repurchased approximately 9 million shares during the first quarter. In April, we repurchased an additional 6 million shares. At the end of April, we had approximately 21 million shares remaining under our share repurchase authorization.

During the quarter, our board of directors increased the quarterly dividend from $0.22 to $0.23 per share, making 2007 the 49th consecutive year in which dividends have been increased.

Masco 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 ongoing commitment to value creation. In the first quarter of 2007, we returned $361 million to shareholders through share repurchases, the 9 million shares I mentioned, and dividends and have returned $4.8 billion to shareholders over the last four calendar years, including the repurchases of 126 million shares.

Masco also announced today that we have made two acquisitions, one just completed last night, which will complement the services and capabilities of our Masco Contractor Services. We acquired Erickson Construction Company and the unrelated Guy Evans. Erickson offers a turnkey framing solution for residential homebuilders, providing prefabricated wall panels and millwork services in Arizona, California and Nevada. Guy Evans is a leading installer of millwork, interior and exterior doors, windows and bath hardware for residential homebuilders and commercial contractors in California and Nevada. These two companies have annual sales of approximately $200 million on a combined basis and are expected to be modestly accretive to our earnings in 2007.

While first quarter 2007 results were substantially below the strong first quarter of 2006, reflecting a decline of approximately 30% in housing starts, sales and earnings were better than we anticipated when we issued our full year 2007 earnings guidance in February. At that time, we anticipated that first quarter net sales would be down low double digits, compared with the actual decline of 9%.

Economic conditions, however, remain uncertain in our markets, and certain commodity costs, which had stabilized or even declined, have recently increased once again. Housing starts have fallen dramatically in the last 12 months, due to previous excessive speculative buying, rapidly rising home prices in recent years refusing -- reducing affordability and less attractive mortgage terms. Even with the recent decline in new home construction, the inventory of unsold new and existing homes has remained at unprecedented high levels. As a result, Masco has lowered our 2007 housing start forecast to between approximately 1.4 million to 1.5 million units.

In addition, we continue to see a moderation in consumer spending for certain big ticket home items, home improvement items such as cabinets.

We believe that the negative effect of our downward revision in estimated housing starts to a range of approximately 1.4 to 1.5 million units from the approximately 1.5 to 1.7 million forecast in our original guidance given in February, and recent commodity cost increases, will be largely offset by a combination of the stronger than expected first quarter results, the continued strength related to international operations, including the favorable effect of currency translation, share repurchases to date, and the profit improvement programs we are pursuing.

Accordingly, at this time, assuming no further escalation in commodity costs, the Company estimates that 2007 full year earnings will approximate $1.50 to $1.70 per share, instead of our original guidance of $1.50 or less to $1.80 or more per share. Our guidance continues to include approximately $60 million pre-tax or $0.10 per share after tax of costs related to plant start-up, severance, systems implementation and plant closures anticipated in 2007. We now anticipate that our 2007 full year sales will decline low to mid single digits, an improvement from our February forecast of mid to high single digit sales decline.

I am sure many of you are interested in our view of the current status and outlook for the housing industry. I should qualify my comments by mentioning that the economic graveyard is full of those who have forecast housing trends over the last 12 to 18 months, including Masco. We do, however, have a unique perspective, since typically over 40% of our sales go to new residential construction and through our Masco Contractor Services, we have teams of Masco employees performing installation work for over 90 of the top 100 builders and are working in over half of all the new homes built in this country. Obviously, homebuilders have to give us notice to schedule crews into their projects.

In the last few weeks, it would appear that our incoming orders for installation services, which had declined steadily for many months, have stabilized and actually improved modestly, although less than what we would have expected on a seasonal basis. As a result, we believe that the decline in housing starts is showing the first tangible signs of bottoming in terms of sales in our businesses.

Two important caveats. First, there is always the possibility of a macro economic trend such as a dramatically slowing economy, higher interest rates or greater than expected repercussions from the challenged mortgage environment that could result in another lag down in housing starts. And secondly, while we believe we are seeing a bottoming in housing starts, that is different than from a recovery. Our best guess currently is that a significant recovery is still at least a few quarters away, if not longer.

In addition, in recent weeks we have also seen a modest improving trend in incoming orders for a number of our home improvement businesses. All of this gives us some modest optimism in terms of our outlook for the balance of 2007, and is even more encouraging for our 2008 earnings outlook, when many of our current expansion and profit improvement expenses will be behind us.

Now I'd be happy to open the meeting up for questions or comments and joining me are Alan Barry, our President and Chief Operating Officer, and Tim Wadhams, our Chief Financial Officer. Operator, we'd be happy to take questions.

Thank you. (OPERATOR INSTRUCTIONS) We ask that you please limit yourself to one question and one follow-up question. (OPERATOR INSTRUCTIONS) Our first question will come from Budd Bugatch with Raymond James.

Good morning, Richard.

Morning, Budd.

Morning, Tim.

Hi, Budd.

Question for you, and also Alan, sorry. On installation services where the margin dropped really significantly, I think under 5% on a reported basis and maybe 5.6% on an adjusted basis, can you talk a little bit about maybe where you see that going for the rest of the year, if you're seeing some modest improvement in order flow, and what kind of cost reductions have you taken in that area?

Budd, we did see a significant decline in margins in our Contractor Services in the first quarter. Obviously, part of that was driven by sales volume being down significantly from the year before. But another important factor was that at the beginning of the year, as we had said in our February guidance, we had expected some improvement in housing starts in the second half of 2007. And as a result, we probably were a little slow in terms of cutting costs in our Contractor Services. Once we realized as the quarter progressed that the recovery was going to be farther out, then we undertook much more aggressive cost reduction programs in terms of headcount reductions. We've consolidated about 10% of our branches where we're serving markets from a single branches rather than multiple branches. We've undertaken a number of other cost reduction programs. So we're pretty comfortable that our margin for the remainder of the year will average higher than it did in the first quarter of this year.

You care to give us how much higher or give us at least some way to quantify that? You told 10% of the branches, is that -- is there a way to equate from there to a margin number.

I'd rather not put a number on it but we would expect a significant improvement in margin for the balance of the year from the first quarter.

And significant being what?

[ LAUGHTER ] We'll answer that question a little better in the second or third quarter calls.

Thank you. Thank you very much.

Our next question will come from Armando Lopez with Morgan Stanley.

Hi. Good morning, everyone.

Good morning.

Just a couple of quick questions. One, on the acquisitions, and I may have missed this, I ended up getting on the call a bit late, but could you talk a little bit about -- I think you disclosed the sales of the acquisitions but the profitability of those acquired companies and what was paid for them?

We didn't disclose that. We mentioned that on a full year basis, and we only completed these acquisitions in April, so we'll only be picking up about eight months of sales. On a full year annualized basis, they have about $200 million in sales. We did not disclose the purchase price but that purchase price would be a little less than $1.00 for sales so let's say less than $200 million, but a significant purchase price. And based on that purchase price, you can assume that they have relatively good margins because we think they do have some unique capabilities and services they're bringing to the marketplace.

Okay. I mean, great. And then, Richard --

And Alan, maybe I'll ask Alan just to describe some of those services and what we think they bring to -- to Masco.

Well, Erickson basically is a provider of prefabricated wall panels. Both of these companies are basically new construction oriented and we believe that the systems that they have are portable, that we can grow with those. So we're quite excited about those two acquisitions.

I might just add that in the past, we've shared with the investment community that if you take the top ten products that we presently install, that averages -- could average up to $20,000 per home. We're only running at about $3,000 per home in terms of market share penetration. These two acquisitions add an additional $38,000 to that total. In other words, our opportunity now for a home that uses both Erickson and Guy Evans as well as if we get our other 10, 20 different product lines in, we've more than doubled our opportunity for future sales per home because of these acquisitions. Now clearly, these companies are only in certain markets and our plan would be to roll out some of those skill sets and products to other regions over a period of time.

Okay. Great. And then just one last one. As you think about the -- you guys have taken a lot of -- done a lot of restructuring and taking cost out of the business over the last couple years, and as you think about the Company going forward and the top line and bottom line growth, how do you think about that, if we were in, say, a flattish housing market over the next three years?

Well, as you probably remember, one of our biggest challenges and headwinds has been increasing commodity costs and in past calls, we mentioned how our commodity costs have gone up. They went up $200 million in '05, $200 --- I think it was $200 million in '05. They went up another $250 million in '06. We're estimating now they've gone up another $50 million to $100 million in '07. So when you put all that together, that's about a $600 million, $700 million increase in commodity costs.

We implemented $350 million worth of price increases through the first half of 2006. We are implementing during the first half of 2007, spread out over that period, another $100 million of price increases. But even with those increases, we're behind about $200 million or more in terms of pricing versus commodity costs and that has offset the benefits that we've had of over $200 million of savings in other profit improvement programs. And what we've said in the past is that we have a one to two quarter lag in terms of our ability to pass on costs, commodity cost increases, in pricing. If we reach a point in time where commodity costs level off for a few quarters, or even decline, we would be able to recover a major portion of that profit decline, which would help our margins and our total profitability. If you combine that with our goal of getting back to our historic 6% to 8% organic growth rate with the contribution margins that contributes, then when you put all that together, our goal is to get back to close to the margins that we had two or three years ago, which are substantially above our present margins. And frankly, we would expect to do that even if housing starts only showed a modest recovery over the next few years. And that's our goal.

Okay. All right. Great. Thanks a lot, guys.

Our next question will come from Michael Rehaut with JPMorgan.

Hi, good morning.

Good morning, Michael.

First question was just on the sales growth by segment. You obviously had some disparate results and you mentioned Plumbing was helped by international. I was wondering if you could give us a sense of how that did in the U.S. versus international? And then comment on the strength of Decorative as well as Cabinets falling just as much as Installation, despite not having as much of an exposure to new construction?

Yes, you're right, Michael, in that the two segments that have the highest European content, which would be Cabinets, Plumbing and Other, did the better performing in terms of comparisons. Our faucets in Europe were up double digits. Our faucet sales -- plumbing sales in the United States were down low single digits. So even though it was down, I think that was still a relatively good performance, compared to the industry. In terms of our architectural coatings being up, they were up about 7% in terms of that group and while that might sound good in this economic environment, I would just remind you that historically we've grown in the high single digits in terms of market share gains, new products. So that's just sort of returning to our historic growth rates. The two segments that were down did show significant declines, Installation Services was down, if I remember right, 21% and Other Products were down double digits. But if you compare that to the industry decline of housing starts going down 30%, then I think we continue to gain market share, continue to introduce new products and are growing faster than the industry. But when we have that dramatic a decline, obviously we can't overcome the entire shortfall in sales.

Mike, in terms of cabinets, you asked about cabinets, and remember, we've had a little bit of slowness at retail for the bigger ticket items, including cabinets, for a couple of quarters now. The other thing that affects cabinets is ready-to-assemble, both in Europe and North America, which have been slow.

So regarding cabinets, maybe you're losing some share or having the difficulties in ready-to-assemble and --

I don't think we're losing share. You have to be careful when you compare Masco with any other companies because we have different penetration in different markets. As an example, we probably have a higher market share of new construction in our cabinets than some of our competitors do, and perhaps a lower penetration in dealer sales. So that when housing goes down, we would feel that more than others might. That doesn't mean we're losing market share. As a matter of fact, we saw reports recently from our Cabinet group for 2006 and they actually gained share with the large homebuilders so we're fairly comfortable we're losing share but you have to analyze that by respective markets, not in aggregate.

Secondly, you have to remember that we're in Europe. Some of our competitors are not in Europe. And we're fairly large in RTA, particularly in Europe, which our competitors are not in, and that's been the weakest part of our business the last two, three years. So again, that tends to distort the numbers a little bit.

Okay. Thanks. And just a second question regarding the operating margin improvement in a couple of sectors, in -- I guess in the two sectors that you did have the sales growth. Maybe you could review with us how you're coming along in the different -- I guess for Plumbing, the outsourcing efforts and for Decorative, how the cost and price increase situation is or was the improvement largely just driven by the top line leverage?

That's a number of questions but I would say that we're making good progress in terms of outsourcing. I think our outsourcing last year was well over $700 million, greater than our forecast for the year, and we expect it to be up probably another 10% this year. Having said that, we're not getting all the benefits yet of that outsourcing because of a lot of the inefficiencies of transferring a lot of our work offshore and all the supply chain inefficiencies that's we're still in the process of correcting. We would expect the benefits of that to improve significantly later this year or particularly in 20008.

In terms of Decorative Products, we've historically done very well in that product segment because of the marketing efforts and the new product development of a number of the companies in that group, and I think that segment is a good example of what happens when costs finally level off. Our costs in those areas have been relatively level now for one or two years and what's happened is that we've been able to get back to our historic profit margins, because of the factors I mentioned earlier. And that's the type of thing we would expect and hope to have happen in our other segments if we get a period of relatively stable commodity costs in the next year or two.

All right. Thank you.

Our next question will come from Ivy Zelman with Credit Suisse.

Good morning, gentlemen and Maria. How're you doing?

Hi Ivy. How are you? (laughter)

This is actually Justin Cameron for Ivy. I just had a few questions, if you'll permit me. The first being, just looking at the inventories through your channels, particularly through the home centers, if we could talk to maybe the trends, maybe the sell-in versus the sell-through trends.

Yes. We don't have the same type of impact that other companies have on sell-ins or inventory reductions. I can't say we don't have some effect from that but a number of our products like cabinets, there literally is no inventory in the home improvement channel because we build to order and ship directly to the site. Some of our other product categories, we have 100% fill rates so we tend not to have as big inventories as there might be in other products. So I would say net net, there hasn't been a significant impact on our business in the first quarter from an inventory situation and we wouldn't expect any significant change in the next quarter or two because of changes in inventory at the home improvement or retail level.

I'll just mention on the wholesale level, and I said this in previous calls, that it's not unusual for customers to try to cut inventories when demand falls off and so sometimes you will get some adjustments on the wholesale side. We might still be seeing some inventory cutting in the wholesale side but that will typically level off once their end customer's demand levels off.

Okay. I thought it was interesting in your comment in regard to commodity costs and getting costs realigned. But do you think that it's still achievable to get Plumbing Product margins back to historical levels?

What we've said is that we think a combination of pricing recovering of commodity costs, outsourcing, lower costs in some of our products or components in foreign sourcing, that we think we can get our margins in plumbing back to low to mid teens in terms of profit margins and I think all we've seen thus far, just continues to encourage us that that goal is achievable. But we've also said, I think, that that goal is probably going to be more like 2008 than 2007.

Okay, and last two questions, just one, more housekeeping.

By the way, while I'm talking about plumbing, I would just like to put a compliment in for our Hansgrohe operation in Europe. They have just done an outstanding job, not only expanding in Europe, but in distributing their products and manufacturing them around the world including operations in Asia and they've been a major factor in terms of innovation, new products and have made a real major contribution to the success we've had in our plumbing business in recent quarters.

Am I still on for another question?

Yes. Go ahead.

Sorry. Just in terms of operating cash, how much did you generate in the quarter and are you changing at all or revising your full year free cash expectation?

I might turn that over to Tim but I would just give one comment on the full year cash flow. Last year, we generated about $800 million of cash before dividends, down from about $1 billion the year before and we have said that we expect to generate the comparable $800 million this year, even though our profits would be down. And the reason for that is that our capital expenditures will be down significantly this year from last year and our working capital needs will also be down this year over last year so those two would offset any decline in profitability. We do have seasonal swings in cash flow and working capital demands, but Tim, do you want to make any comment on that?

Yes, I would echo what Richard mentioned. We are expecting about $840 million for the year. Our first quarter is not generally a very good cash generator. Cash from operations was $90 million this year versus about $30 million last year. So again, that's not really indicative obviously of what we'd expect to do for the full year but we do expect to be in excess of $800 million again this year.

I should add that the cash flow comments we make do not include acquisitions and divestitures and one of the things we've said in the past is if you take a multi-year view on that, we expect that our divestitures will approximate our acquisitions and therefore either one will not have a major impact on our ability to buy our shares back or pay out higher dividends.

Okay. And last question, just on your maybe pricing for your different product categories where you were able to push through pricing and what your expectations are there?

Well, I want to emphasize that pricing is never easy, particularly when you're dealing with large customers. But we have found that the strength of our brands, the relationships we have with the customers, if we have valid cost increases, commodity -- particularly commodity cost increases, that by and large we have been relatively successful on implementing that with our customers, other than the fact that we do have typically a one to two quarter lag for a variety of reasons of getting those cost increases implemented. So I mentioned that we're putting in over $100 million of price increases in the first half of this year and I don't think we have any doubt that we'll be successful on implementing the great majority of those increases.

And those would apply to almost all of our segments.

Perfect. Thank you, guys.

Our next question will come from Stephen Kim with Citigroup. Stephen Kim, your line is open. Please go ahead.

Hi, can you guys hear me?

Yes, go ahead, Stephen.

Okay, sorry about that. First question relates to the acquisition you recently announced. The framing company, in particular, I was curious if you could help me out with something. My conversations with the builders in the past have led me to believe that the framing side of the subcontractors -- of the -- the framing subcontractors in the housing business tend to be relatively large and fairly influential as compared to some of the subcontracting operations that do other things. And as a result, I was wondering if you had thought about whether or not some of your larger customers might be concerned about using your services, your framing services, in fear that there may be some sort of retaliatory action on the part of some of the framing operators or whether that's something that you really don't think framing is really particularly very different from other subcontracting operations in terms of sort of the power dynamics in the business?

Stephen, this Alan. Clearly, in going through the acquisition and looking at their customer base and talking to some of their customers, especially larger customers, they were very pleased that a Company with the wherewithal of a Masco would be getting into this. They see that as a very positive thing as opposed to dealing with some smaller people. We don't see that in any way at all as a negative and this is not your normal, typical, your normal framing type operation. This is a manufactured, prefabricated wall panel that is done in a factory and delivered to the job site. When you look to the future, this is a big opportunity to reduce builders' costs, a much more efficient way of doing the construction process, so we think that this is really going to be something to look forward to in the future.

Okay. And can you also comment a little bit on the geographic spread? When you were talking about these acquisitions, you talked about the presence in the southwest portion, south and west portion of the country. Is this -- should we be led to believe that if this acquisition proceeds as you expect, that you would be looking to do these sorts of -- enter these sorts of businesses in other areas of the country, or is there something particular about the way the framing subcontractors and the trim carpentry operations work in that portion of the country?

No, I think this is a new venture for us and I think that in going through this and analyzing it before we did it, we think this is clearly an expandable program. And whether we do it through acquisition or whether we do it through greenfielding remains to be determined. But clearly, it's something that we feel there's great opportunity to grow.

And in the past, we've typically done both of those things. We'll make an acquisition that gives us the know-how and skill sets and then roll that out to other branches or make other regional acquisitions that would help us to expand that capability so it could well be both those areas.

Okay, and then switching gears, if we could talk a little bit about some of the things that you have seen in the plumbing business, again. Can you talk about how much your plumbing operations or your plumbing sales were up or down, I assume down, domestically, versus how much they were up in Europe?

Yes, I think I mentioned that if you take our plumbing U.S. sales, they were down low single digits and obviously up double digits in Europe and international. That would include all international sales as well.

I see. Okay. And with respect to the Cabinets and the Masco Contractor Services divisions where you saw some significant sales declines obviously because of the housing environment, was there some geographic commentary worth making in terms of what happened either in the quarter or some of the things that you've been talking about more -- in the most recent month or so in some of the trends? Is there some geography that we could have a conversation about?

No. We've been pretty much -- if you look at where the housing starts are, that's where we've been impacted. There is nothing that I would say that's very unusual about the results of the quarter.

One thing I'll mention that we talked about $60 million of unusual expenses this year. About half of those, or a little bit more, are related to the new -- two new major facilities that we have coming on stream in the first half of this year in our Cabinet business, which will improve our capability to deliver and service our West Coast customers so but that $60 million will be weighted, and we mentioned $25 million in the first quarter, and that gradually will phase down as the year progresses to a lesser number in future quarters.

Okay. Great.

I should also mention, we've closed one facility and transferred that work, one less efficient facility, a smaller facility in the cabinet business, and we've transferred that work to the West Coast operations so that should also improve our profitability in future quarters.

Okay. Great. Thanks very much.

Operator, maybe we have time for one more question.

Our question will come from Kenneth Zener with Merrill Lynch.

Hi. This is Phil Jones on for Ken. I was was wondering if you could talk a little about the success you're having with your negotiations was the builders regarding trying to make up price concessions with increased volumes (audio difficulty) packer services?

Sure. As you can imagine in this kind of environment, homebuilders are looking for all possible areas of either efficiency or cost reduction. And again, I can't tell you that it's easy when it comes to negotiating these matters but what we have said in the past is that when we get a request for some concession, we sit down with that customer and say what else can we do together that's beneficial to both parties, and if we're going to give any concession we ask for either additional products, additional regions, expansion of product areas, and generally end up with a win/win situation where both of us come out ahead because we feel we are giving value and added capability to our customers so we've been relatively successful in terms of pricing and giving concessions to customers.

I might just mention, we've talked in the past about national contracts with homebuilders in our Contractor Services and in the last few months, we have signed an additional national homebuilder so that we now have seven of the top ten homebuilders. Prior to that time, we had, I believe, six. So again, we continue to find homebuilders do find what we provide to have value added, either in costs or service or shortening the time span of producing the home or the quality of the home, and all those things are significant cost savings and benefits to the homebuilder and typically those tend to outweigh the importance of pricing. Again, I don't want to de-emphasize pricing but we think we bring a lot of value to the equation with homebuilders as opposed to individual local subcontractors who are primarily just providing labor.

Okay, great. And then are you still assuming a flat remodeling spending for the year in your guidance and how in your view has remodeling held up so far in a weak housing market?

Well, I -- as many of you know, I've tended to be more negative than most on the general economy. I think the economy is weaker than most people believe and I believe consumer spending is going to be softening as we go forward and I think that's only just beginning to show up in some of the government numbers so our guidance includes a relatively conservative outlook on consumer spending. I think that all that in a slowing economy actually is positive because the biggest risk we have, in my opinion, in the economy is inflation and commodity cost escalating and it's hard to imagine that if the economy slows, we don't see a tapering off of inflation, and my own feeling is that if all that happens, then we're more apt to see a reduction in interest rates which would help both consumer spending and particularly homebuilders. The worst of all worlds is if we're wrong, inflation escalates, the Federal Reserve raises interest rates rather than lowers it, and then we end up in a recession in 2008. So I think an economic slowdown is an important positive and important element to the overall economy doing well, not only this year but particularly in the next couple of years.

Okay. Thanks a lot.

Operator, I might just say to summarize, in the first quarter of 2007, sales declined 9% to $2.9 billion. We had $1.2 billion of cash and marketable securities and we returned $361 million to shareholders through the repurchase of 9 million shares and dividends. In addition, we increased our dividend for the 49th consecutive year.

I think we've made significant progress on our strategy of simplifying the Company, investing to grow our business organically, aggressively managing our business unit portfolio, improving our balance sheet, generating superior cash flow, returning cash to shareholders through share repurchases and dividends. And we really appreciate the efforts and dedication of our over 50,000 worldwide employees and believe that that dedication, our leadership products and brands, the multiple distribution channels, the price points and capabilities that we have in Masco will enable us to deliver future value to our shareholders.

And I'd just like to add two words. As most of you know, I have recently announced that in July, I'll be stepping down as Chief Executive Officer and moving into a new role as Executive Chairman of the Company. And while I will continue to be involved with Masco on a full-time basis working on our corporate strategies oriented towards creating shareholder value and other business matters, today may be the last time after many years that I may be hosting this call, so I really look forward to turning those responsibilities over to Tim Wadhams, our Senior Vice President and Chief Financial Officer, who I anticipate will become our new Chief Executive Officer, and assisting Tim in any way I can as he leads our new generation of leaders into what I believe will be a very bright future for Masco. So thank all of you for taking the time to be with us and look forward to seeing you and talking to you again. Thank you.

Thank you. That does conclude today's conference call. We thank you for your participation and have a great day.