馬斯科 (MAS) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2008 first quarter conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received the press release and supplemental information, they are available on Masco's website 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 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 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 by the SEC 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. 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 analyst 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 Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead.

Thank you, Marece, and thank you for joining us today for Masco Corporation's first quarter 2008 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 first quarter 2008 results. Needless to say, it was a very difficult quarter with sales in each of our product segments declining from first quarter 2007. Net sales from continuing operations for the first quarter of 2008 declined 13% to $2.4 billion compared with $2.8 billion in 2007. North American sales declined 16%, while international sales increased 1%. In local currencies international sales declined 8%. Income from continuing operations was $0.07 per common share and $0.35 per common share in the first quarters of 2008 and 2007, respectively.

The first quarter of 2008 results included noncash impairment charges for financial investments of $26 million pretax, or $0.05 per share after tax, currency losses of $10 million pretax, $0.02 per common share after tax, and an increase in our tax rate compared to the first quarter 2007, which decreased earnings by $0.03 per common share. These items in aggregate reduced first quarter earnings by $0.10 per common share. Excluding these items first quarter earnings would have been $0.17 per common share. The first quarter of 2007 results benefited from net gains related to financial investments of $22 million pretax, or $0.04 per common share. The Company has been focused on the rationalization of its businesses, including sourcing programs, business combinations or consolidations, plant closures, headcount reductions and other initiatives. During the first quarter of 2008 and 2007 the Company incurred costs and charges of $9 million pretax, or $0.02 per common share, and $25 million pretax, or $0.04 per common share, respectively, related to these initiatives.

Segment sales for the quarter included -- cabinets and related products were down 14%, largely as a result of lower sales in the new home construction market; plumbing product sales declined 3%, strong international sales helped offset a decline in North America; installation and other services sales declined 24% as a result of continuing softness in new home construction; decorative architectural products declined 10%; builder's hardware and paint sales declined as a result of lower than anticipated retail sales; other specialty products sales declined 22%, window and door products continue to be down as a result of the difficult new home construction environment in the western United States; key retailers sales from continuing operations declined 10% in the first quarter of 2008 compared with a decline of 2% in the first quarter 2007 and a decline of 5% in the fourth quarter of 2007. During the month of March, across all segments of our repair remodeling business, from small to big ticket items, the consumer exhibited significantly less willingness to spend on basic repair and maintenance-type activities. This trend has continued into April.

Gross margins were 25.7% in the first quarter of 2008 compared with 26.3% in 2007. Operating profit margins, as reported, were 6.5% in the first quarter of 2008 compared with 9% in the first quarter of 2007. SG&A expenses as a percent of sales, including general corporate expense, were 19.1% in the first quarter 2008 compared with 17.3% in the first quarter 2007. Higher SG&A expenses as a percent of sales in 2008 reflect lower sales volume and increased bad debt expense, principally related to new home construction. General corporate expense was 1.8% in both the first quarter of 2008 and 2007.

The Company's reported tax rate on income from continuing operations was 53% in the first quarter of 2008 and 37% in the first quarter of 2007. The Company anticipates that its tax rate on income from continuing operations for 2008 will approximate 48% to 49%. The increase in the expected tax rate for 2008 is primarily due to U.S. taxes on anticipated dividend distributions of low-taxed foreign earnings. These dividends are being distributed to utilize favorable provisions of the U.S. income tax law that are scheduled to expire at 12/31/2008. The Company estimates that its tax rate on income from continuing operations for 2009 will approximate 35% to 36%.

Working capital, defined as accounts receivables and inventories less accounts payable, at March 31, 2008, was 17.3% of sales compared to 17.4% a year earlier. For the 12 months ended March 31, 2008 and 2007 return on invested capital, as reported, was 8.5% and 8.8%, respectively. Return on invested capital as reconciled was 9.2% and 11.3%, respectively. Debt as a percent of total capitalization was 51% at both March 31, 2008, and 2007. At the end of the quarter the Company had a strong balance sheet with over $600 million of cash and cash equivalents, and $2 billion in unused bank lines.

Business conditions remain difficult in a number of the Company's markets. Obviously the first quarter of 2008 was very difficult for Masco. As we mentioned during our 2007 year-end conference call, low double-digit sales declines that we experienced in late 2007 continued into early 2008. In March the decline in our sales accelerated and our sales were down high teens in terms of percent. The Company continues to estimate that 2008 housing starts will decline an additional 25% to 33% to a range of 900,000 units to 1 million units compared to 1.3 million units in 2007. In the first quarter of 2008 housing starts declined 30%.

While the Company's view on housing starts for 2008 has not changed since it developed its earnings guidance earlier this year, the Company currently believes that consumer spending for home improvement products and demand for certain of the Company's international products will be weaker than originally anticipated. As a result, the Company currently estimates that its 2008 sales percentage decline will be low double-digits to mid teens compared to 2007. The Company's previous guidance estimated that 2008 sales decline would be high single to low double-digits.

While forecasting future business conditions in the current uncertain economic environment remains very challenging, the Company currently believes that 2008 earnings will be in a range of $0.50 to $0.65 per common share. This compares to the Company's previous guidance of $0.85 to $1.15 per common share. The Company estimates that free cash flow, cash from operations after capital expenditures and before dividends, will continue to be strong and approximate $640 million compared to its previous estimate of approximately $700 million. The Company's revised guidance also reflects increasingly competitive market conditions for its services and products and increasing costs for freight and logistics and for certain commodities, including metals and commodities impacted by energy costs.

The Company's revised guidance estimates that its full-year tax rate will approximate 48% to 49%, as I mentioned earlier, which compared to the Company's normalized tax rate of approximately 36% will reduce earnings by approximately $0.17 per common share. The Company's previous guidance estimated that 2008 full-year tax rate would approximate 42% to 43% and reduce earnings by $0.11 per common share compared to the Company's normalized tax rate. The increase in the estimated 2008 tax rate reflects a decrease in the Company's projected 2008 pretax income from continuing operations. Again, the Company estimates that its tax rate on income from continuing operations for 2009 will approximate 35% to 36%.

The Company's revised guidance includes -- The first quarter 2008 impairment charges for financial investments and currency losses; the impact of discontinued operations; and the benefit of the first quarter 2008 share repurchases. These items, together with the expected increase in the tax rate, decrease full year estimated earnings by approximately $0.27 per common share net. Relative to these items, the Company's previous guidance reflected that earnings would be reduced by $0.11 per common share, based on the expectation that the full year tax rate would increase to 42% to 43%. In thinking about our current guidance, which includes discontinued operations -- excuse me, which excludes discontinued operations, our current guidance of $0.50 to $0.65 per common share, if we exclude the impact of the financial asset impairment, $0.05, the currency losses of $0.02 and the increase in the tax rate of $0.17, our guidance would have been in a range of $0.74 to $0.89 per common share.

During the first quarter of 2008 the Company repurchased 5 million shares of Company common stock. The Company had approximately 36 million shares remaining at March 31, 2008, under its repurchase authorization. We repurchased over 500,000 shares of our common stock in April 2008.

Given our revised guidance and the difficult market environment, I'm sure that many of you have questions related to our strategy of returning cash to shareholders and the status of our dividend. As we mentioned on our last call, management expects to recommend to our Board of Directors later this year that we increase Masco's dividend for the 50th consecutive year. This reflects our current expectation from a macro standpoint that the decline in new home construction and the home improvement products markets will bottom in 2008 and at least modestly improve in 2009.

As I mentioned earlier, we expect free cash flow to approximate $640 million, which is almost twice our aggregate 2007 full year dividend. We have always said that over the long term we believe that our ability to generate excess cash will allow us to return $1 billion to shareholders on average annually and that there would be some years where we exceed that amount, as we did the last five years, and some years where we may be less than $1 billion. Given the current operating environment, 2008 aggregate dividends and share repurchases may not total $1 billion.

We continue to aggressively manage our cost structure and have worked hard over the past several quarters to offset the impacts of current market conditions on our businesses. As mentioned earlier, our gross margins were only down 60 basis points quarter over quarter, even though our sales were down 13%. Obviously we're pleased with that outcome. Since late 2006 we have closed 11 manufacturing facilities and in our installation services business we have closed over 65 facilities and reduced vehicles by more than 2,500. Company-wide we have reduced headcount by more than 15,000, reducing our North American headcount by an excess of 25%. 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 these actions may have on our long-term performance.

Although the Company expects market conditions in its industry over the next several quarters to be very challenging, the Company is confident that the long-term fundamentals for new home construction and home improvement products markets are positive. The Company believes that its current strategy of dividend increases and share repurchases, concentrating on organic growth, improving returns and generating superior cash flow, 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 drive long-term growth and value for its shareholders.

Now, I'd be happy to take questions or comments. Joining me are Richard Manoogian, our Executive Chairman, and Donny DeMarie, our Executive Vice President and Chief Operating Officer.

(OPERATOR INSTRUCTIONS) We will go to our first question from Budd Bugatch with Raymond James.

Good morning, Richard, good morning, John. Can you make sure we understand how you're going from the $0.85 -- to $0.85 to $1.15 to $0.50 to $0.65? Can you go over those items because I come short on a couple fronts and I want to make sure I get that right?

Yes, what you've got, Budd, is basically an increase in the tax rate which we estimate's going to be about $0.06 per share, the impairment charges that we had in the first quarter which is $0.05, the currency losses which were $0.02 and then the discontinued ops. We had about -- in our original guidance we had about $0.04 of discontinued operations included in the $0.85 to $1.15 for the businesses were going to dispose, and if you take those items that totals $0.17. In addition to that, one of the other changes is the positive impact of share repurchases in the first quarter -- which were made in the first quarter which would have about $0.01 impact on the full year. So there's about $0.16 of items that we call, or term term maybe non-operating, if you will, or more of a one-time type situation.

So that leaves you $0.19 to $0.34 to account for from volume and commodity input costs, right?

Yes, that would be right. There's about $0.19 as well as about $0.34, and that really reflects the drop in volume, primarily, that we're anticipating, moving from high single to low double to low double to mid teens in terms of sales decline. Most of that decline, if not all of it, is really related to the consumer side of the business as well as Europe.

Now that gets me to about $0.12 to $0.24 which then eaves me to like $0.07 to $0.10 short, which would be commodity? Is that the way to think about that and size it?

No, I'm not sure that I would look at it that way, Budd. It depends, obviously, on what sales decline number you're using so that gets to you to a certain extent. And I'm not sure what contribution margin you have, but basically that fall off would be a combination that is mostly driven by volume decline. There would be a little bit of commodity-related costs in there, as well.

Well, I was using 2% to 4% is the difference from your original guidance and about $0.06 a share or a 35% contribution margin for each 100 -- each 1% difference in that volume. Is that not the way to think about it?

Yes, I'd be looking at a little bit higher change in sales.

A little bit higher change in sales. Then what about the contribution margin?

You're right about where you need to be on the contribution margin.

All right, very good. Thank you very much, I'll let some others ask questions.

Thank you, Budd.

We'll take our next question from Michael Rehaut with JPMorgan.

Yes, hi, good morning, how are you?

Hi, Mike.

First question is just on a couple of the different segment margins. You were well below what I was looking for in cabinets, and actually a positive surprise on the plumbing --

Right.

-- and I was wondering if you could just go through the drivers of what was this quarter the surprise on the downside of, I'm thinking, perhaps freight or energy for cabinets or if there were things that went your way on plumbing, if that was all international currency, or what were the drivers there?

Sure. On cabinets, Mike, we'll start off there and we've got about a $95 million drop in sales and about a $50 million drop in profit year over year, and obviously that's a bit beyond contribution margin. We did have some significant inefficiencies in manufacturing in the first quarter. In fact, we did have one of our major plants closed -- literally close for about a week early in the quarter. We also, as you probably remember, have a couple new plants that we're bringing up in the western part of the United States, and obviously we launched those early last year and those continue to be pretty inefficient, and in fact, from the utilization standpoint across that segment we're pretty inefficient relative to current volumes. As we've mentioned in the past, on the builder's side particularly, we have an interrelationship, if you will, among the plants with component plants that supply assembly plants and finishing plants and that type of thing and we're running one shift in a lot of those locations. So at this point, we're not real efficient, but we don't really have a whole lot of choice in terms of the interrelationship of the manufacturing footprint.

We also had significant decline in performance in Europe, particularly in our Moores operation, which is in the UK, which not only builds but also installed cabinets and I think you are aware of the climate in the UK relative to new home construction. A couple other things there, we had some incremental customer-related expenses in the first quarter versus last year and I think the other item that I would mention too is mix. We've seen a shift in mix -- we've talked about this for a number of quarters -- away from high-end cabinets, which typically have a higher margin, to some lower-end product. So I think, Mike, those would -- that's a lot of different items but I think that pretty much covers the landscape relative to cabinets.

In terms of plumbing, we were up -- excuse me, we were down about $20 million in sales, and up about $19 million or so in profit andI think a couple things there. Number one, we continue to do very well in Europe with our Hansgrohe operation. That business continues to perform quite well and as I know you're aware they have a nice globalization strategy that they're following, so we had very good performance there. We also had -- even though sales were down in North America, we had good performance, some continuing improvement, if you will, relative to our North American operations.

As you know we've had some leadership changes in a couple key situations there and have been working to really rationalize the supply chain in terms of some of the outsource product that we have been working on over the last couple years and we're starting to see some of those benefits show up and I think that's a continuation of what you saw during 2007. I would tell you, having said that -- and we're very pleased with the first quarter performance in that segment -- you may be aware copper prices are starting to tick up a little bit and commodities are probably going to be a little more challenging going forward. Obviously we'll do everything we can to offset that, but we're real pleased with the performance in plumbing in the first quarter.

I appreciate that detail, Tim, that was very helpful. Just a follow up, on the cabinets you'd mentioned a bunch of things and I guess it would seem like the inefficiencies that you had mentioned off the bat are really coming to bear a fuller brunt on the margins. You had mentioned that you have some obligations there, that you have some partnerships, but are we to expect a depressed margin for a year or two given the -- if we were to expect a more depressed level in housing starts, or are there things that you can do -- because I would assume otherwise, if you have to run these plants, you might be stuck in a mid single-digit margin for a year or two.

One thing, Mike, real quick, you mentioned partnerships, I didn't mean to imply that. What we have really are -- these are all facilities that we own that in terms of our supply chain we've got some plants that make only components, for example, that do not assemble and we'll ship components to our assembly plants. It's not like we can take out just a plant that -- the plants aren't doing all of what needs to be done to make a cabinet, so we've got that into relationship issue. In terms of things we can do, I think obviously when you look at the headcount reductions -- you might remember that when we talked just in mid February we had reduced headcount by 11,000 people from late 2006 timeframe. That number currently is at 15,000, so that means we've been obviously pretty active over the course of the last couple of months in addressing the downturn.

And I think as we said before and as we saw late last year, I think both of our cabinet operations in North America have done a very good job of trying to right size to the market conditions, so I think -- are there things we can do? Sure. There are things we will be doing, there are things that we're on top of, but having said that, I think in terms of the volume levels we're at today and again with the mix change that we're seeing, it's going to be a little bit of time before things start to pickup and before we start to see volume return.

Michael, this is Donny, let me jump in here. There are some things we can do that we're working on, one of them is looking a common architecture on all of our boxes and that we can make any box at any plant. The other thing we're working on is really are spending money in the factories and investing capital to be able to do order-to-finish at all of our facilities. So if we can get that done during this year that certainly gives us some more ability to go after the cost side, without impacting our ability to perform on the way back up with the market.

Hey, Mike, one other thing to that I forgot to point out is, keep in mind that the first quarter seasonally is a low quarter just in terms of volume. The first and fourth tend to be our lowest from a Company perspective and that would certainly be true in the cabinet segment.

Great, I appreciate it. Just one more, if I can squeeze it in, just on the installation, Donny, I appreciate the incremental comments on cabinets but I guess turning to you on your core -- you know, bread and butter, obviously it turned a little negative in terms of operating profit, extreme depressed volume, but at the same time, we've always understood this to be a highly variable cost business. I was wondering if you can review with us, A, the fixed versus variable cost structure and if there are some structural improvements that you can make to boost the margins over the next couple years, even within a depressed volume environment?

Sure, I'll be happy to talk about it. Michael, we don't give out the breakdown between fixed and variable, but let's talk a little bit about what's going on in that segment to address the changes. We clearly have been trying to play catch up. There's a lag between the point at which we can take the costs out of the business and the reduction in the housing starts, and as that segment has worked very, very hard to continue to reduce costs. They are constantly having to reevaluate their position relative to new housing start numbers and so they have played catch up now for the last 18 to 24 months with a constantly moving target related to the housing starts. There is more we can do. We continue to look at our cost structure, we look at our facilities, we look at our people, we look at our vehicles, all of which tend to be variable in nature and we continue to cut away at it. There are things we can do to grow certain product lines where our direct margins are still doing well and we're looking at that as well.

But at the end of the day, service is about being able to perform in a market that's going to be a little bit more robust than 900,000 units, so we've got to be careful not to take out the facilities that we'll need in the major metropolitan areas and the product lines and capabilities we'll need all the way back up. So it's a balancing act. I think the group's done a very, very good job. I think if you look at their performance versus the peer group I think it's been outstanding. And I think if you look at their performance really relative to the sales decline based against their contribution margin, you'll see they've done a really good job of taking costs out of the business. So we'll continue to go after it, there's more we can do, but it's going to be challenging, it's going to be a challenging year for that segment.

All right, appreciate it, Donny.

We take our next question is from Pete Lisnic of Robert Baird.

Good morning, everyone.

Good morning, Pete.

Hey, Tim, just on the -- thanks for the capital allocation caller, I'm just wondering if you look at the leverage situation, is there going to be a point in time here where we start to talk about deleveraging the balance sheet instead of buying back shares a bit? If you look -- well, I don't know, our preliminary model, that's an EBITDA starting to approach three times on a forward basis, where do you get concerned or when do we start talking about deleveraging?

Well, Pete, we have $100 million due this year in -- I think it's either September or October and we're planning to repay that with internally generated cash, but as we look into the future the only significant debt we have due -- I think we've got $300 million due in 2010, which is a floater, which at this point I don't really have a feel whether we'll refinance that or pay it down. But then you really have to go out to 2012 before there's any significant debt payable and so from that perspective there's no major issue at this point in time. We have very attractive interest rates. We believe we were fortunate enough to time some of our financing over the course of the last three, four years to affect some pretty good interest rates. So I'm not concerned about our leverage at this point in time, I don't have that concern. As you know we generate an awful lot of cash. Even in difficult times we generate good cash and certainly when the markets recover and we get back on an upward trajectory we should be in a very good position from a cash standpoint.

Okay, thank you for that and then second question -- and I may have missed this in the opening commentary, but in terms of the competitive landscape can you touch on how you're faring competitively in the various businesses relative to your competitors in terms of share? Are there particular businesses that are under significant competitive pressure relative to others or just some commentary on that front?

Well, I think in this environment, Pete, just about all of our businesses are in a very competitive environment, if you will. As I mentioned, from a share perspective my feeling is that we're holding our own. That doesn't mean there aren't certain situations where we'll walk away from an opportunity if price is not attractive and we will do that and we have done that. I would say in cabinets, a couple points there. I mentioned the shift in mix that we talked about a little earlier from -- into more of a value concept, if you will, from high end.

We've also in the past mentioned from a cabinet perspective that a lot of our activity on the builder's side was with some of the larger builders, and as you know they're down anywhere around 40% plus where some of the smaller local regional guys may be down -- previously maybe 15%, now maybe more like 25%. So in terms of them having a little bit more difficulty, if you will, in this environment we're in, that's impacted us on the builder cabinet side, but beyond that I think we're holding our own. This is a very difficult marketplace to really assess share one way or another really, but I'll let Donny comment a little bit, but I don't think we've got any concerns any place that I'm aware of. Donny?

No, we seem to be doing well. We do have that mix, though, both on the builder side and the retail side in cabinets, with the builders' really decontenting and moving down to a more value product line, and you also have in retail where we've seen the special order premium product, sales have been soft now for several quarters but the in-stock assembled cabinetry seems to be doing reasonably well. And I would mention that one bright spot is tha we believe that Behr continues to take market share and in spite of the sales decline in the quarter in decorative, the Behr relative to its competitive peer group appears to be taking share and we're very proud of their efforts.

Okay, that does it for me. Thanks for the color, guys..

Thanks, Pete.

Next question is from Dennis McGill with Zelman & Associates.

Hello, guys.

Hi, Dennis.

This question would either be for Richard or Tim. You guys have talked about in the past the typical counter cyclicality of the home improvement market and the idea that consumers are more apt to invest in their current house if there's not a lot of turnover on the new side and that certainly seems to be going against the traditional trend. I was wondering if you could just talk about what your opinions are about the risk of that segment deteriorating even further. It seems like any risk to the earnings would be more on the consumer side and the DIY side than on the construction side at this point, but just thought you could address that relative to some prior comments that you guys have made.

Dennis, I'll take a shot at that and then Richard can weigh in and give a little bit of his economic view, but no, I think that's right. I think that on the consumer side at this point in time -- think I heard just a couple days ago the University of Michigan consumer confidence index fell from 69 to 62 for the third or fourth straight month and I think with energy prices where they are right now -- energy affects us from an operational standpoint, it affects us from a raw material standpoint, but it also affects us from a end consumer standpoint, particularly for lower-end items, and when people are paying the kind of prices they're paying at the gas station there's a lot less left, and so we even saw a bit of slowing for lower-ticket items.

I think the other thing that we've experienced that we've talked about in the past is that if you go back three or four years and look at the equity extraction that took place and the investment of some of that in repair/remodel, obviously that's not going on now. Those things can be deferred for a while, but we certainly believe that when this comes back that there will be a pent-up demand in terms of repair/remodeling and our hope would be that would include, obviously, the products that we certainly manufacture, the sweet spot where we are in the kitchen and bath.

Yes, this is Richard.Just to reinforce what Tim has said, I've been through a lot of cycle's over 50 years and this is only the second one in which home improvement products went down at the same time as home building. The only other time that happened previously was back in the 1970s when interest rates were in the teens and consumers weren't buying anything to speak of. And as Tim mentioned, the one change here is that we have had equity extraction the last few years, it's hard to determine how much business might have been pulled forward into the previous few years. And secondly, this is a consumer recession and consumers are cutting back where they can, and in fairness, they're uncertain as to the value of their homes.

And until home prices bottom out I think there's a lot of reluctance for people to put thousands of dollars of additional investment in their home in high cost kitchen and bathroom expansion, so I think all that just takes time to work out. But our experience has been that ultimately, if anything, a slow down in housing stimulates renovation and repair and remodeling of people staying in their homes and if it takes an extended period of time for that to work out you might even get some deferred demand down the road in two or three years. So I think it's an unusual situation, I think it's temporary, the difficulty is it's very hard to say what the bottom is and how long it might last before we get back to normal economic trends.

Given what you touched on there it sounds like you think we are in a recession and given how deep this has turned out to be on the housing side relative to your experience do you think that expectations are too high for the second have of this year that this could be this could be a quick turn around?

Well, it depends on whose expectations. We've been saying for some time that we're seeing a consumer recession and I think you're beginning to hear that in more places. It wouldn't surprise me if you get some static and counter reports for the next few months as the stimulus packages go out and get spent, but my own feeling is I think that's temporary. I think the consumer is stretched. I think their balance sheets are hurting and the home equity financing is down, the value of their home is down. I think you'll see an increase in unemployment. Therefore I think the consumer recession is going to get worse before it gets better, and part of that is factored into why we've been, we hope, more conservative in our projections for the next nine months that that trend is going to be in the negative side.

All very positive stuff, Richard. (LAUGHTER)

Well, you know we're sorry to think that way, but if you don't plan for that -- it's a lot easier to plan for things getting better than it is getting worse if you don't plan ahead.

No, we completely agree and just one other quick one. Donny, can you remind us on the install business, on the labor side all of those would be employees of the Company, is that correct?

Yes, that's correct. We subcontract labor in just a few markets but it's more related to the business model, but it's really a small percentage of the total labor force.

Okay, great. And Tim, the forecast for home improvement spending for this year, I think last quarter you guys were saying in the low single-digit type number, would you have an update on that?

Yes, what we said, Dennis, last time was that we expected in the U.S. that we could be flat to down 3%, and we'd be more in a range now in the U.S. of probably 3% to 5%, down for our products. And again, that would be for -- as we think about sales into that segment. The other thing I would mention too is Europe. We talked last time about Europe and you might remember that we were cautious about it. It looks now like Europe is even going to be a little weaker than what we anticipated. Just a reminder that we were down 8% in local currencies. We do have a favorable translation there and we think that that ought to offset, but we expect Europe to continue to be pretty soft, as well.

Okay. All right, thank you, guys.

Thank you.

Our next question is from Nishu Sood of Deutsche Bank.

Thanks. Just wanted to follow up there. Tim, you were talking about European operations. The color you gave was that certain items had -- certain product lines had weaker sales than others. I imagine Hansgrohe was one of the stronger ones, so I was wondering if you could maybe give us some color on the product lines, the distribution channels where there was greater weakness?

Yes, Grohe, again, is a global entity. They are headquartered in Germany but a predominant amount of their sales are to export markets, so that insulates them a little bit. But we did not have any strength in Europe outside of the Grohe organization. As I mentioned, the UK was very, very challenging. We've got three businesses; a window business, a cabinet manufacturer/installer, as well as a plumbing distribution-related business and all of them showed significant declines in the first quarter. In addition, relative to our ready-to-assemble operation there, another in-the-cabinet segment, which is a large operation, they had a very difficult quarter, as well. You might remember a couple years ago we had some trouble there operationally and particularly with particle board-related prices, the operational problems have been addressed but there was a significant decline in demand from several of their major customers during the first quarter.

We might just remind everybody, too, that Easter was in the first quarter of this year, unlike last year when it was in the second quarter, and in retail in home improvement, Easter tends to be more of a negative than a positive, and I think particularly in Europe where they have even greater Easter holidays than we do here, that probably pushed some business from first quarter into second quarter.

Okay, great, and second question, you mentioned particle cost, commodity costs, I was wondering if you could just update us on the quantification that you've given over the past few quarters on commodity costs. I can imagine -- you mentioned incremental costs in metals and energy, there's been some offset from the wood-based products and insulation, so I was wondering if you could give us an update on the numbers there?

What I would tell you, Nishu, is that if you go back, and as we've said many times we really started getting hit with the wave of commodity cost increases in late 2005 and probably didn't react as quickly as we should have. We got behind the eight ball and I think at one point our estimate was about $150 million of commodity-related costs that we had not offset by pricing. Since that point in time we have been much more aggressive in working to offset commodity costs, whether it's through pricing, productivity or sourcing, so we've been very active and my feeling is that at this point in time, absent that negative carry from the first onslaught of commodity costs increases, that we're in pretty good shape in terms of commodity costs versus our ability to offset it, again with pricing or productivity and I think you can tell that relative to our gross margins. If you go back to 2007, we were only down 30 basis points in gross margins on a 7% sales decline, and as I mentioned in our prepared remarks a few minutes ago we only dropped 60 basis points in gross margin in the first quarter of 2008 compared to the first quarter of 2007, even with a 13% decline in sales, which is really more like a 15% decline in terms of volume because of foreign-currency.

So having said that I think that we're in pretty good shape at this point in time. We have seen copper, which is a major component for brass, tick up a little bit lately. We have also seen the petroleum-based costs for some of our other manufacturing units in terms of resins for windows, components for paint, tick up relative to energy costs that have gone up. On the other hand to part of your question we have seen some reduction in other commodities, like for example insulation, for obvious reasons given the decline in new home starts. So I think right now we're in pretty good shape and I also believe that we've good discipline and focus in terms of being very reactive and proactive in terms, if you will, in terms of doing what we can do to offset commodities and I feel pretty good about that going forward. That's not to say we might have an issue here or there from time to time in our product group, but our guys are on top of that and doing the best they can to make sure that we deal with those on a timely basis.

Does that mean that you pushed through more price increases in the first quarter to recover? I think you'd said last time $150 million, as you mentioned, $200 million in unrecovered costs as of the end of 4Q, so I was just wondering if since then you've pushed through any additional prices to recover some more of that?

Yes, there would be some price increases in different areas, different product groups in the first quarter.

Okay, thanks a lot.

Thank you.

We go next to David Goldberg with UBS.

Good afternoon.

Good afternoon, David.

Wondered if you give us -- if we could talk about MCS and the number you guys dropped there with the total opportunity, the 20,000, and where you are now and what you think in this lower demand environment as starts are down in the range where we are now for some extended period time, what you guys can do to gain greater market share and maybe drive some operating leverage in the business?

David, explain to me what you mean by the 20,000?

The total opportunity in the house, the total opportunity for --?

[Oh, the 20,000 of take]. David, what we've done there is I do think there's opportunity to continue to hack away at the MCS cost structure, but I do believe it's important that we maintain our location and it takes a certain number of people to maintain the locations, so what that really forces us to do is take a look at each of the individual product lines and really look at opportunities within those product lines to grow those products where the direct margin is still attractive or accretive to the overall earnings and that's what the group's really been focused on. So they're really rationalizing their product based and growing those products where think will have a positive impact on earnings.

The other thing we've been focused heavily on is we've continued to lead the home -- the new home construction market in green and we brought environments for living to the building community in 2001, we partnered with GE on ecomagination, and we believe that that creates tremendous opportunity to really increase our take per unit along energy efficiency, which is highly attractive from a direct margin point of view. It's really the core capability of that group,so anything we can do to increase inflation values or take per unit has a big impact on our profitability. So we're really focused on rationalizing the product line, continuing to take costs out, but really trying not to impact the footprint too dramatically so that on the way back up we really have the number of locations to serve the demand.

I wonder maybe, Donny, give us some more detail on the green and the environment for lifting-type products?

Sure --

The profitability there is better. Can you give us an idea? Are consumers willing to pay more for it, what's the adoption been like among consumers and how do you think that trends over time?

Well, I think trends over time is a generational issue and I think it becomes more important with the younger generation. As you get the younger home buyers coming in and first movers, you clearly see the trend to green and sustainability being more important with those consumers. Our revenue related to environments for living is that these homes are high-performance homes, which means they have to work, and we drive a lot of revenue sources, but part of it is in home testing, so we test these homes. We have planned review where we work and design and engineer the specifications. We also have higher inflation values in the home, so it raises the take per unit. Obviously we're very excited about the partnership with GE and those homes and the ability to market them under the ecomagination brand. So a lot of good things in this space, we think a lot of opportunities for us to drive some profits.

And then if I could just get a quick follow up along the same lines, are you seeing any -- can you give us an update on the financial health of your home builder customers and if you're seeing any differences in the health of the larger, public versus smaller private guys or more regional private guys?

Sure. John Sznewajs and I started monitoring the top 100 builder receivables late last year and have continued to do that on a monthly basis, and the nice thing about our exposure in this area is that no one customer is really significant in size. Although we have some customers with larger exposure than others, we're a pretty diversified customer group. We're not seeing any trends that would say that credit-related issues are concentrated on the big builder or small builder. It really is more related to an individual, so we've seen some large and regional builders have some credit-related issues and we certainly have seen some small builders have issues. But we're very, very focused on that. I think we've done a nice job as far as reviewing our portfolio and staying on top of it and we don't believe that -- although the trend will be a higher bad debt expense for the first quarter this year, we think on a full-year basis it'll be somewhat similar to what we saw last year.

So no change in reserving patterns?

I don't know if I'd go that fa because I think we're getting into the difference between reserves and expenses, but I think we won't expense the -- the expense we are planning to have in 2008 will be similar to what we had in 2007.

Okay, great. Thanks.

Marece, I think we've got time for one more question.

We will go next to Stephen East with [Paley Capital].

Thank you, good morning.

Morning, Steve.

On your key retailers the big drop quarter over quarter, as you all look at that can you tell how much of that is destocking by the key retailers versus pure take away?

Steve, I don't think that destocking for our products is really a major issue. It's really pretty small. As you might remember, cabinets generally when we sell those through our key retail partners are shipped directly to the end consumer so there is no inventory there. In terms of Behr, Behr has been able to achieve pretty much 99.9% fill rates with Depot from an inventory management standpoint. They've got a really extensive distribution and logistics network that allows them to do that. Generally speaking, we don't have that kind of situation like others in the space might have from time to time. That's not to say there might not be a little bit of movement quarter to quarter, but for us it doesn't move the needle much.

Okay, and just two last questions. One is what foreign currency exchange charge was, and the second one was, Donny, if you look at your sales declines, is this -- on installation business -- I'm sorry -- is this all volume or is there price/volume mix going on there and could you elaborate if there is?

On the currency, the $0.02, Steve, that we had in the quarter?

Right.

Yes, what that relates to is a couple different things. One is that from a tax planning standpoint, we have loans from Europe to North America that are denominated in Euros and on our books in North America we have to adjust that each quarter so that you have the dollar equivalent. That adjustment tends to -- it flows through the P&L and there's no offsetting in terms of intercompany activity, so that was a big piece of that. And we've had those over the past, Steve. From time to time there might be a penny or two in a quarter. In addition to that part of the explanation, the other part is just simply transactions that get settled in a quarter or during a month where you've got a currency that may move, whether it's sale in one country and a lot of that would be driven by foreign operations.

Okay.

And then, Donny, why don't you go ahead with the --

Sure. On the price/volume mix, Stephen, there's a component of the sales decline in the installation and service that is related to more competitive pricing and part of it is volume and part of it is price. I will say that the group has done a really good job offsetting their selling price reductions with reductions in their input costs and have done a nice job holding their direct margin consistent.

Okay. If I looked at roughly 24% down, what percentage would you say is volume related versus price?

We really don't give that out, Stephen. I think that the key part here is that you know what the market's down, you know the competition has been fierce out there, and I think given what the peer group's reporting you can make an assumption about how well they're doing. I will tell you again, I'd like to reiterate that from a material cost point of view they've done a really good job passing those decreases and what we have to sell for to their supply base and have done a nice job holding their gross margin.

Okay, that's fair enough. Hang in there, guys..

All right, Steve, thank you.

Thanks, Stephen.

Okay, in wrapping up again I'd like to thank all of you for joining us today. With sales down 13%, first quarter 2008 was certainly a tough one for Masco, but even with that 13% sales decline and increasingly competitive market conditions, our gross margins were only down 60 basis points from first quarter 2007. As we pointed out on our last call, 2007 full year gross margins were only down 30 basis points compared to 2006 with sales off 7%. We're pleased that we've been able to limit the decline in gross margins and very much appreciate the efforts of our team worldwide and their actions to address difficult market conditions. We're proud of our people and their focus on driving solutions for our customers and value for our shareholders.

There's no question the next few quarters are going to be challenging. While we will continually look for ways to improve our process 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 innovative new products, improve the business systems within our operating divisions and rationalize our plants and facilities. We believe that the industry will eventually rebound and when that happens we expect Masco to be well positioned to leverage our strengths and market conditions. Thank you.

Thank you for your participation. That will close today's conference, you may now, disconnect.