馬斯科 (MAS) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Masco Corp. 2007 fourth 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 of 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 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 factor 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 the result of new information or future events or otherwise. The financial and statistical data referred to on this call is included in the investor package distributed prior to the conference call and posted on the Company's website. In addition, we may refer to this call as non-GAAP financial measures as defined in SEs Regulation G accordingly. A reconciliation of the difference between such measures and the most director comparable financial measures calculated in accordance with GAAP is included in the investor package. The Company believes that such non-GAAP performance measures and ratios used in managing this business may provide users of the financial information with additional meaningful comparisons between current results and results in prior periods. The non-GAAP performance measures and ratios should be viewed in addition to and not as an alternative for the Company's reports result under accounting principals 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 analyst's questions. If we are unable to get to your questions during this call, please call the Masco Corporation Investor Relations office at area code (313)792-5500. I would now like to turn the call over to Mr. Timothy Wadhams, Chief Executive Officer of Masco. Mr. Wadhams, please go ahead.

Thank you, and thank all of you for joining us today for Masco Corporation's 2007 year end earnings call. With me are Richard Manoogian, our Executive Chairman; and Donny DeMarie, our Executive Vice President and Chief Operating Officer. This morning we released our year end results.

Net sales from continuing operations for 2007 declined 7% to $11.8 billion compared with $12.7 billion for 2006. North American sales declined 12% while international sales increased 15%. In local currencies, international sales increased 5%. Income from continuing operations was $1.62 per share and $1.99 per common share for 2007 and 2006 respectively excluding noncash impairment charges for goodwill and other intangible assets. Including these charges income from continuing operations as reported was $397 million or $1.06 per common share for 2007.

The Company has been focused on the rationalization of our business, including sources programming, business combinations, plant closures, headcount reductions, plant startups, systems implementations and other initiatives. During 2007 and 2006 the Company incurred net costs and charges related to these initiatives of $79 million pretax or $0.13 per common share and $47 million pre tax or $0.08 per common share. Our fourth quarter 2007 net sales from continuing operations declined 8% from last year to $2.7 billion. Masco's North American sales for the fourth quarter declined 3%. International sales increased 11%. And in local currencies, international sales increased 1% compared with 2006. Excluding the noncash impairment charges for goodwill and other intangible assets, income from continuing operations for 2007 fourth quarter was $0.19 per common share compared with $0.35 per common share in the prior year. Including these charges, loss from continuing operations for the 2007 fourth quarter was a loss of $0.39 per common share compared with a loss of $0.44 per common share in the prior year.

Segment sales for the fourth quarter cabinets and related products were down 11% largely as a result of lower sales in the new home construction market. Plumbing product sales increased 3%. Primarily driven by our continued international growth which was particularly strong at Hansgrohe. Installation and other services declined 19%. Sales with large public builder customers continue to be down more than other builder customers as they make significant efforts to reduce inventory and adjust their building pace to meet current market demand. Decorative architectural product sales declined 1%. Positive sales of paints and stains in the quarter were offset by weaker builder hardware sales. And other specialty product sales declined 12%. Window and door products continue to be down as a result of the difficult new home construction environment in the Western United States.

Key retailer sales from continuing operations decreased 5% in the 2007 fourth quarter. Compared with a decrease of 1% for the nine months ended September 30, 2007. For the full year 2007, key retailer sales declined 2%. During our third quarter conference call, we indicated that we expected to achieve or modestly exceed the top end of our EPS guidance of over $1.55 to $1.65 per common share. Obviously at $1.62 of EPS we didn't quite get there. As we mentioned on the third quarter call, October sales were relatively strong, declining low single digit. And we expected sales for the quarter to decline mid-single digit. Company-wide sales for November and December in aggregate declined low double digits as compared to 2006. This greater than expected decline in sales volume in the fourth quarter along with increased bad debt expense and employee separation related costs reduced our results by approximately $0.06 per common share from what we had anticipated at the time of the third quarter call.

Gross margins were 27.3% in full year 2007 compared with 27.6% in 2006. Operating margins as reported were 8.1% in 2007 compared with 9%. And those are full year comparisons. SG&A expense as a percent of sales including general corporate expense were 17.2% in full year 2007 compared with 16%. Higher SG&A expenses as a percent of sales in 2007 reflect increased bad debt expense, principally related to the new home construction market, increased systems implementation costs and increased employee separation and severance costs. General and corporate expense was 1.5% of sales in 2007 compared with 1.6% in 2006.

The Company's reported tax rate on income from continuing operations excluding the impairment charges for goodwill and other intangible assets was 36% in 2007 and 33% in 2006. The Company anticipates that its tax rate on income from continuing operations for 2008 will approximate 42 to 43%. The increase in the expected tax rate for 2008 is primarily due to the U.S. tax on anticipated dividend distributions of low tax foreign earnings. These dividends are being distributed to utilize favorable provisions of the income tax law that are scheduled to expire at the December 31, 2008. The Company estimates that its tax rate on income from continuing operations for 2009 will approximate 35 to 36%.

Working capital, defined as accounts receivable and inventories less accounts payable at December 31, 2007, improved to 15.4% of sales compared to 16.1% last year. For the 12 months ended December 31, 2007 and 2006 return on invested capital as reported was 8.6% and 9.8% respectively. Return on invested capital as reconciled was 10.3% and 12.4% respectively.

Even though our results reflecting the economic environment were significantly reduced from 2006 in terms of sales and earnings we were pleased with our balance sheet management and focus on improving returns, including working capital management which resulted in free cash flow, defined as cash from operations, less capital expenditures and before dividends of approximately $980 million. Masco over the past five years has generated $5 billion of free cash flow. Debt as a percent of total capitalization was 50% at December 31, 2007 compared with 53% a year ago. At the end of the year, the Company had a strong balance sheet with over $900 million of cash and cash equivalents and $2 billion in unused bank lines.

During 2007 the Company repurchased 31 million shares of Company common stock, including 2 million in the fourth quarter. The Company had approximately 41 million shares remaining at December 31, 2007, under its repurchase authorization. During 2007 the Company returned $1.2 billion to shareholders through dividends and share repurchases. The Company has returned over $6 billion to shareholders over the last five calendar years through the repurchases of 157 million shares and dividends. The Company expects to continue to return a minimum of $1 billion annually to shareholders on average through share repurchases and dividends as part of its ongoing commitment to value creation.

We anticipate that free cash flow, cash from operations after capital expenditures, which are estimated at $240 million in 2008 and before dividends should approximate in 2008, $700 million which is about twice the 2007 full year dividend payments. In addition we ended 2007 with over $900 million of cash and cash equivalents. Management will recommend to our Board of Director's later this year that we increase Masco's dividend for the 50th consecutive year. In addition, we have already repurchased approximately 3 million shares of our commons stock so far in 2008. Economic conditions remain difficult in a number of the Company's markets.

Housing starts declined 25% in 2007 due to excess inventories of homes and less attractive mortgage terms. The Company expects a further decline in housing in 2008, and continued softness in sales of existing homes. In addition, the Company anticipates a decline in consumer spending for home improvement products and notwithstanding recent actions by the federal reserve and the government to stimulate economic growth the Company believes that 2008 will be a difficult year for the overall U.S. economy. In the fourth quarter of 2007, the Company also experienced a softening of demand for certain of its international products due to declining European economies. As a result, the Company currently estimates that 2008 sales will decline, high single to low double digits compared with 2007. If our sales decline in 2008, this will mark the first time in 50 years that Masco has experienced two years of consecutive sales declines.

While forecasting future business conditions in the current uncertain economic environment remains challenging. The Company currently believes 2008 earnings will be in a range of $0.85 to $1.15 per common share. Even with this reduced earnings, as mentioned the Company's free cash flow will continue to be relatively strong and should approximate $700 million. This guidance reflects the Company's estimate that 2008 housing starts will decline an additional 25 to 33% to a range of 900,000 to 1 million units compared with the over 1.3 million units in 2007. The Company also expects that consumer spending for home improvement products will continue to decline and that demand for certain of the Company's international products which increased 5% in local currencies in 2007 will moderate. In addition the Company's guidance reflects an estimated full year 2008 tax rate of approximately 42 to 43% again due to the U.S. tax on the anticipated repatriation of foreign earnings. Which, compared to the Company's normalized tax rate of 36% will reduce earnings by approximately $0.11 per common share on a one time basis. As well as -- we also expect continued relatively high costs for certain commodities including copper and energy.

We have worked hard over the past several quarters to offset the impacts of the current market conditions on our businesses. As mentioned earlier, our gross margins were only down 30 basis points year-over-year even though our sales were down 7%. Obviously, we're pleased with that outcome. Since late 2006 we have closed 10 manufacturing facilities. In our installation services business, we have closed over 60 facilities and reduced vehicles by more than 2000. And Company-wide we have reduced headcount by approximately 11,000 reducing our North American headcount by approximately 22%.

While these actions have been difficult, we expect that additional actions to address current market conditions will be even more challenging as we balance what we can do to mitigate the impact of current market conditions on our near term results and the implications of these actions on our long term performance. The Company expects market conditions in its industries in the next several quarters to be very challenging. The Company is confident that its strategy of dividend increases and share repurchases while concentrating on organic growth, improving returns, and generating superior cash flow will generate value for our shareholders. The Company's strategy together with the leveraging of the combined market strength of its retail service, distribution, and installation capabilities, brands, and scale will allow Masco to continue to differentiate itself and drive long term growth. Now I'd be happy to take questions or comments. Joining me are Richard Manoogian, Masco's Executive Chairman; and Donny DeMarie, Masco's Executive Vice President and Chief Operating Officer.

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll take our first question with Sam Darkatsh with Raymond James. Please go ahead.

Good morning, gentlemen. Three quick questions if I might. First off, looking at the returning -- I'm sorry -- the repurchase of stock prospectively in 2008, your free cash flow,it looks like half of it is going to go towards a dividend. Would you at current levels choose to leverage up the balance sheet a little bit? I know on average you said $1 billion. That doesn't mean every year. Or would your just choose to take the remainder of free cash flow and look at it in that way.

Sam, as we've said in the past, we expect to average 1 billion and when we made that communication several years ago, we indicated that that was a long term expectation. We also said at that time that there would be some years where we'd be above and some years where we might be below. At this point in time given the uncertainty in the marketplace, I don't think it's very likely that we would leverage up in terms of share repurchases. We do have as we said $900 million of cash plus an expectation that we'll generate another $700 million. It is possible that this year we might be a little bit below that $1 million number. But again, I think it's a little early in the year to make any kind of prediction on that. As we mentioned earlier, we do anticipate recommending to the Board that we'll increase the -- or suggesting to the Board that we increase the dividend this year.

Two other quick questions. Key retailer sales down 5% in the quarter after having been a little bit less onerous than that earlier. Was that at least in large part due to inventory rationalization at retail? And then what are you assuming for key retailer sales in 2008 in terms of a change versus '07?

Sam, there could have been maybe a little bit of inventory rationalization. I don't think that was a major issue for us. Basically we saw a decline in the latter part of the year pretty much across all of our channels. And certainly new home construction was difficult. But sales to key retailers, sales through wholesale distribution channels were also challenged in that period of time. In terms of your question relative to '08, we do expect some continuation of slowness on the consumer side. And in fact our January sales were down low double digits, a continuation of what we really saw in November and December late last year.

Last question and I'll defer to others. The international degradation of organic sales on the international markets. Are you assuming also that the international end markets and local currencies are down on a year on year basis in '08?

I think based on what we know right now, Sam, we would expect that sales internationally in local currencies would probably be down, flat to down in 2008, yes.

Thank you for being clear on the questions. Thanks much.

Thank you, Sam.

We'll take our next question with Michael Rehaut JPMorgan. Please go ahead sir.

It's Jen Consoli on the line for Mike. My question is in looking at some of your FY '08 guidance assumptions and trying to back into some of the numbers here I'm getting to about an operating margin year over year contraction of about 180, 190 bips. I just wanted to see, number one, does that sound reasonable? And number two, if you could kind of walk us through the different individual components of what would make up that decline specifically? Cost savings in productivity? Any type of raw materials guidance? And I know you also talked about the bad debt expense. How much of an impact do you expect that to have in 2008 as well?

We typically don't give guidance on margins. I think you would expect, obviously weve indicated that we expect sales to be down high single digits to low double digits and with high contribution margins at approximately 30%, there obviously would be a decline in or an impact on operating margins. Having said that, based on what we know right now, the expectation for commodities I think is relatively stable at this point in time. Obviously, energy is a little bit of a concern and we may see some issues there relative to some of the petroleum based commodities. Copper has been up a little bit lately offset by zinc being down just a little bit lately. At this point we don't really see a lot there. We do have about $0.06 to $0.07 in the guidance that relates to some of the different initiatives that we've been pursuing, which was about $0.13 this year and that includes ERP system implementations, plant closures, severance, and some other issues so that is in the guidance. Those would be, I think pretty much the major components.

Okay. And can you remind us what your raw materials, if you could what your raw materials headwind was for 2007?

2007 we didn't really have a lot of negative impact from commodities. If you look at our gross margins, Jen, we were only down I think 30 basis points for the year and I think that's indicative of our ability to offset any cost increases with either pricing and/or productivity. So from that perspective, I think we were in pretty good shape last year relative to commodities. There may be a couple businesses here or there. Plumbing continued of have brass related cost increases. Generally speaking, from a Corporate-wide perspective we were able to manage our way through that.

Okay. And next question would just be focusing more on the installation services. I know that you continue to pursue a lot of these initiatives within the business trying to increase you take per unit. New products. So I just wanted to get some color on that if you could provide a little bit of an update. And also given that the operating margins continue to decline in that business, where do you see that kind of trending over the next year or so given these initiatives that you're pursuing.

Before Donny takes that question on, yes, I think we're making some pretty good progress on the ERP implementation. Donny can add a little color on that. The other thing I would point out is that even though the fourth quarter margin was down a bit, the bad debt expense I mentioned earlier did have an adverse impact because most of that was in that particular segment. With that I'll ask Donny to maybe comment on your question.

We did have the ERP system that we continued to develop last year that went live in the pilot in December. And we actually have four more locations going on latter part of this year. And that system is on track. Also it related to the strategy we still believe strongly in the installation services and the ability to add additional products and core capabilities. We did a couple of acquisitions. Last year, you might recall in Erickson which is a panelized wall framing business that we feel good about that's performed well and Guy Evans which is a trim contractor. So we're going to continue to add. If anything we believe that this environment probably creates some opportunity to look at some reasonable acquisitions to bring out more core capabilities and add to the infrastructure we have today.

Okay, great. Thank you.

We'll take our next question with Peter Lisnic Robert W. Baird & Co. Please go ahead.

Good morning, gentlemen. Tim, can you just give us a sense in your free cash flow forecast the working capital number as a percentage of sales in '07 was around 15%. Is that -- are you kind of running all out there? Is that kind of the optimal number or should we see some improvement in '08?

Well, we're actually at 15.4%, Pete, after two years at 15.9 in '05 and 16.1 in '06 and so that improvement, 70 basis points, was certainly pleasing to us. To be a little bit conservative and to also take into account potential slowness on the receivable side our cash flow number projects that get back up to around 16%. Having said that, we do have significant incentives in place at the business unit level to drive continued improvement in working capital. And I thought Donny and John Sznewajs did a really good job on our budgeting process of putting a lot of emphasis on that area, particularly on the accounts payable side. I would hope that we wouldn't get back up to that 16%. But again, for conservativism we are using a rate like that.

Then if you look at the businesses outside of installation, how comfortable are you that the cost structures there are low enough or well aligned enough to reflect current market demand? And are you at all concerned that you've maybe taken too much out to to be in a position for a positive market environment whenever that might be.

That's a really good question, Pete, and a really good point. I think as we sit today, I don't think that we've taken too much out to be in a position to capitalize when the markets recover. But we are getting pretty close to a point where -- well, we're very close to the point -- actually at the point where decisions going forward relative to managing capacity and managing some of the our capabilities, the ERP implementation, things we've got going on. Where we've got to be really, really careful that we don't make decisions on a short term basis that may help 2008 for example but hurt our long term capabilities going forward. We've really got to try to balance that. So that's a really good question, it's going to be a real big challenge for us quite frankly going forward.

I guess another way, maybe another way of asking it would be if you look at -- you mentioned the contribution margin on the downside, 30%. Do you think you've done a lot of work here to increase the contribution margin when you kind of come out of the cycle relative to previous cycles?

Pete, I would think that when we come out of this that we should be in really good shape from a contribution margin standpoint. We've still got additional work to do in terms of process and some efficiency issues. We're looking at everything relative to the cost structure. But I would think when we come out of this that we should do very well on the contribution line.

Okay. Thank you very much, Tim.

Thanks, Pete.

We'll take our next question with Keith Hughes with SunTrust. Please go ahead.

First question on SG&A. It was up $11 million year-over-year. You talked about some one time items was that included in that number? And if not, I would expect it had to be a little bit lower. Could you give us some commentary on that?

That's the fourth quarter number, Keith, we're looking at?

That's correct. 500 versus 49 prior year.

49 versus 500. You're exactly right. The bad debt expense that we talked about is in there. We also had some acceleration of separation costs for a couple of retirees that were pretty substantial that went into that category. We've got the ERP system, implementation costs are in there and some of the other costs that we've incurred for some of the rationalization activities that we've had going on. Definitely that did have some impact. On the other side, professional fees were down a little bit and there was probably one other category that doesn't come to mind right away that might have been down just a little. But those three were areas that did increase the cost there.

if you look at 2008 given your demand outlook, would SG&A just in terms of the total dollar number be down similar to what revenues are going to be down or how is that going to work?

Well, Keith, that's a good question and one that we've been kicking around a little bit. Obviously in 2007 with gross margins pretty much flat we didn't get a lot of leverage out of the SG&A side and one of the things that we'll be very focused on as we get into this year and have been very focused on is trying to get more leverage out of the SG&A line. And I think that's probably the one area where we've got some improvement opportunities. I can't necessarily tell you what those are right now. But I can tell you that we're looking at that very closely and would expect to get some leverage there in 2008.

Final question on the goodwill and impairment of intangibles charge in the quarter was that concentrated in the specialty business inside.

There's a little bit of that in plumbing and the rest it would have been in other specialty, yes.

And was there one specific business where we were writing down or was it several?

There actually were three. One in plumbing and two in the other segment, the North American window operation that we have was included there from a trademark standpoint and that's a discounted cash flow analysis based on prospective future sales and there was also a European business included in that segment.

Were these just a function of, to your point decreased cash flow given the end user market or was there something specific in their markets that caused the writedown?

It's really more driven in North America by the actual marketplace and in terms of projected sales going forward.

All right. Thank you.

Thank you, Keith.

(OPERATOR INSTRUCTIONS) We'll take our next question from Daniel Oppenheim with Banc of America Securities.

Hi, this is Mike Wood. Can you talk a bit about how you reacted to the volume declines in 4Q from pricing standpoint? If there were any particular product lines. I guess you don't want to count on product lines, just maybe how you reacted during the quarter with being more promotional and what the plans are for the start of '08?

Well, in terms of pricing, we were successful last year with pricing in areas where we needed it relative to cost increases. I can't tell you necessarily that there was a lot of fourth quarter activity related to pricing. And the second part of your question was on promotional activities. We do continue to invest in promotional activities, particularly in the decorative architectural space. And as I think I mentioned in the third quarter call we did have some promotional expense in the fourth quarter related to that and some of that's continued into the early part of this year.

On the remodeling weakness that you talked about that you had seen in the quarter, can your just provide more color with big ticket versus smaller ticket? Was it just -- we could see the segments where the sharper declines occurred. But I was curious if there were any smaller ticket remodeling items that you would characterize where you did begin to see a weakness there.

Well, I think the big ticket area has been one that's been slow for us now for probably six, seven quarters. We don't think we're losing any share there but people have been putting off major remodel activities. There's no question about that. In terms of other products, we did see, with the exception of paint and stains, some decline from the consumer side, probably across the rest of the product lines.

Okay. Thanks.

Okay, thank you.

We'll take our next question with Kenneth Zener with Merrill Lynch.

I'm interested, given that we had a million starts last month. What gives you confidence for your new housing outlook that starts should be flat or potentially only down 10% to 900,000 this year? Are you seeing construction from your builders? Are they doing this because they need to create the volume in order -- your smaller builders especially in order to feed bank debt. What gives you that confidence?

Well, I think Ken, what we're really looking at is as we look at it, starts were down around that million level and I think on an annualized basis in the fourth quarter, our expectation is that the first half of the year we could be below the 900 to a million units. We think that's a possibility. We do think though that that may come back a little bit late in the year. So that's our feeling at this point in time. And again, it's a very, very difficult situation to forecast. I don't know Donny if you want to add any color to what you're seeing on the MCS side?

Ken, we really wrestle with this. Very difficult environment to make a housing forecast. We felt that we were being realistic with 900,000 to 1 million. And certainly you could pick out a month. But given the way those months are seasonally adjusted, I think you have to be careful with picking out a month and relating that to an annual forecast.

I agree. For your $0.85 is that using the 900,000, is that the stress test?

I'd move that up the ladder a little bit, Ken. As we said, we are anticipating right now that sales overall for the Company could decline high single to low double digits and so at the low double digit rate that would include that 900,000 assumption as well as continued softness on the consumer side. And internationally.

Right. Richard, like you said, two years of, if your forecast turns out to be correct, two years of sequential decline which is unprecedented the guidance, obviously that you guys issued. How shocked are you that the economy or specifically residential and remodeling are in such a condition? Because it is, really in my view unprecedented.

You're right in the sense that in most declines in the past in new construction if anything home improvement repair and remodeling was countercyclical. As people fixed up homes instead of buying new ones. In this cycle we're seeing a significant decline in both segments and obviously, I think that is driven by a number of things. One of which is that we may have pulled forward some repair remodeling work with the excessive home equity loan financing that we provided consumers the last couple of years. And secondly, I think there's been a dramatic deterioration in consumer confidence in the value of their homes with the decline in selling prices and until consumers feel they know the situation and know what the bottom is in housing, I think they're going to be cautious to invest more money into their existing homes. We're seeing a negative effect in both areas.

Our best judgment is that I would be surprised if we don't see close to a bottoming in the pricing of new homes in '08. There are a number of people who feel that we're farther behind in existing homes and existing homes may decline for another year or two to get down to equilibrium levels. I think '08 is going to be tough on the new home side and you may have some carry-forward into '09 on the existing home side. Our own feeling is that we think we're getting closer to the bottom and I just would be surprised if we don't see that bottom on the new home construction side sometime in the first half of '08. But that's just a personal forecast.

Thank you.

Thanks, Ken.

We'll take our next question from Nishu Sood, Deutsche Bank.

Thanks, good morning, guys. First question, obviously, these are tough times. Probably some of the hardest, most difficult housing market conditions you've seen. I was wondering if you can give us perhaps a quick preview of you investor conference. What sorts of strategies are you considering or pursuing to address these tough times?

Well, if we gave you a preview, we probably wouldn't need to hold a conference. We probably want to defer that at this point in time. We are, just so everybody knows, tentatively looking at the first part of June for an investor conference that we will host here. And so I think at that point in time it would be more appropriate for us to get into some of the strategies going forward. I would reiterate, though, what I said earlier, that we do believe that we can take advantage of the opportunity that this downturn presents, that we've got a lot of significant capabilities that differentiate us in the marketplace. And our plan going forward is to continue to invest where it's appropriate and in a prudent way and really try to take advantage of this particular time so that when we come out of this, we'll be in a much stronger position.

Okay. Just shifting gears a bit, you're talking about seeing an incremental slowdown in Europe not only in the fourth quarter but what you're expecting for this year. I was wondering if you can give us some more color in terms of what you have seen already. Where the weakness is showing up in terms of products or channels or geographies?

We have about three operating business in the U.K. And as you probably have read, the U.K. has been hit with some of the same credit related issues that we've experienced here, some of the same issues around affordability as well as declining home values. So the U.K. would be one area. Germany is also particularly slow at this point in time. The consumer seems to be much slower in Europe than it had been previously. I think it's fairly, we don't do a lot of new home construction. We got a little bit of a business in the U.K. that is addressed more to new home construction there. But most of what we do in Europe is repair, remodel, renovation. So we would expect to be challenged pretty much for the next couple of quarters. The one exception to that might be our Hansgrohe operation which has done a really good job over time of diversifying its geographic base if you will, and really doing a good job from an international perspective. So we would expect to see that to continue. But our other product offerings we think things are going to be a little bit slower.

Just one quick question then on free cash flow and the cash you're going to be returning to shareholders. I think you said 700 million you're targeting in free cash flow but you're still maintaining that goal of returning more than 1 billion. I was just wondering what that implies for asset sales or divestitures, whether that will be a source of cash that you're going to draw upon to continue to pay out dividends and repurchase shares?

There is a possibility that we could generate some cash from divestitures. But typically as we've said in the past, you could kind of assume that that maybe gets offset by what we might do acquisition wise. We continue to have about $300 million in financial investments. And we did take cash out of those investments last year and I think that number might have been around $100 million plus as I recall. So that would be another potential source.

Okay. Thanks a lot.

Thank you.

We'll take our next competent from Dennis McGill with Zelman and Associates.

Good morning, Dennis.

My first question just has to do regarding your home improvement outlook for 2008. You talked about this a little bit at the key retailers. But if you think about all of your channels that serve the home improvement market. What would you be assuming for the decline in that market next year and maybe give us a range between some of the products that you think can outperform and those that are going to be worse than the average?

Well, in terms of a range, our feeling would be that we could be flat to maybe down say 3% in, across the board relative to the consumer side of the business. And I think that big ticket items, retail cabinets would continue to be an area that will probably be challenged. Paints and stains, I think our sense would be will hold up pretty well in 2008. At least that's our sense at this point in time. And so I think the rest of it would probably be spread, the plumbing side of business would be one area. Europe kind of falls into that consumer category. Your question was more North America.

Yes. Okay. So total down in the low single digits?

I'm sorry, Dennis?

The total would be in the low single digits is what you said 0 to 3?

Flat to maybe 3% is what we're thinking at this point in time. Again, it's very difficult to forecast in this environment.

Right. Okay. And then the second question just related to the builder bad debt expense that you talked a little bit about. Could you give us an idea of maybe what the size or the impact of what that was this quarter? Who you're seeing that pressure from? Whether it's big, small, or medium builders and then also what kind of exposure you guys are thinking going forward there could be in the numbers.

That number was I think year-over-year we were up $14 million and about 11, 12 of that it was in the fourth quarter. And Donny and John Sznewajs, our CFO have been doing a really good job of monitoring receivables with our bigger customers. And maybe, Donny, you could give a little bit of flavor for what you're seeing there?

Sure, Dennis. We're seeing no real trend related to the size of the builder. We've seen some, I would say very large builders have cash flow problems and we've seen small and regional builders have cash flow problems. So it appears to be a problem that's affecting all sizes of people who participate in this market. Having said that, we really do not have a very large concentration of sales with any one customer in the new construction side. And we have been watching very closely our top 100 receivable customers and feel that we are adequately reserved for whatever risk we have out there. We're doing a specific review account by account and we also have a general reserve against the receivables. We feel comfortable that we understand the risk and have our arms around it, but on a going forward basis as the economy continues to deteriorate, we would expect that this would just become a greater risk for us going forward.

Those things can move pretty swift, pretty quickly too, Dennis.

For the builders that have been current and are paying, are you seeing them push out terms a little bit? Or is it a dichotomy between they're either paying or they're not?

Dennis, we're seeing them attempt to push out terms. Lately, it's become more and more of an issue in the contract negotiations. We obviously are resisting all attempts to push out terms. This is not the environment that we want to extend terms in. Clearly, there have been a number of builders who have asked for extended terms.

That's helpful. Thanks again.

We have time for one more question.

We'll take a follow-up with Michael Rehaut with JPMorgan.

Thanks. My question is on the plumbing segment. I know late last year you guys had talked about feeling optimistic with some of the leadership changes and the Delta Faucets. I was wondering if you can just give us an update on that?

I think we continue to feel very good about that particular segment, Jen. We have made good progress this year, we've had some very significant managerial changes. Including the overall Corporate leadership of that group, as well as, at Delta Faucet,, one of our primary operating businesses. But our feeling is that we've made good progress. And we expect to continue to do that going forward. We've got that business very much focused on improving the supply chain which is an area that, where we've done a lot of sourcing in China and that is starting to settle down a little bit and we're starting to see some of the benefits of that. We're encouraged going forward. We would expect to see continued improvement. We think we can get those segment margins up into the low double digit range and that was sort of the target we set for ourselves a year or so ago. And we're feeling pretty good about the opportunity to get there.

Great. Thanks.

Thank you. Again, I'd like to thank all of you for joining us today. To recap 2007, even though our net sales declined 7%, we were able to offset volume decline and essentially maintain our gross margins. We improved working capital management. We generated approximately $980 million of free cash flow and returned $1.2 billion to shareholders. In the tough market conditions, we're very pleased with these accomplishments.

The near term outlook for our markets continues to be uncertain and we expect 2008 to be even more challenging than 2007. While we continually look for ways to improve efficiency and cut costs our primary focus must remain on managing for the long term growth and profitability of the Company. We need to be careful not to hurt the Company's future growth by eliminating investments that will differentiate our future products and services. Rather we will continue to invest in innovation, new products, and improve the business systems within our operating divisions and upgrade our plants and facilities. We believe that the industry will eventually rebound. When this happens we expect Masco to be well positioned to leverage our strengths and market positions. We're extremely proud of the efforts and dedication of our employees around the globe. We have got a great team in place. And in this tough environment their commitment to our customers and shareholders is demonstrated day in and day out. We believe that their dedication combined with our leadership products and brands position Masco to deliver future value for our shareholders. Thanks again.

Once again. This will conclude today's conference. We thank you for your participation. You may now disconnect.