馬斯科 (MAS) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Masco Corporation 2010 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, along with today's slide presentation, under the Investor Relations section at www.masco, m-a-s-c-o,.com.

Before we begin management's presentation, the Company wants to direct your attention to the current slide and the note at the end of the earnings release which are cautionary reminders about statements that reflect the Company's views about its future performance and about non-GAAP financial measures. After a brief discussion by management, the call will be open for analysts' questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at 313-792-5500.

I would now like to turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead, sir.

Thank you, Lauren, and thank all of you for joining us today for Masco's first quarter 2010 earnings call. I'm joined by Donny DeMarie, our Executive Vice President and Chief Operating Officer, and John Sznewajs, our CFO. And if you would please move to slide number three. We're very pleased that we had a positive sales comp in the first quarter of 2010. It's been a long run. It's been probably about three years since we've had a positive comp and we're very, very happy with that. Obviously our sales were up 3%. We started the quarter a little bit slow, but as weather improved, March and then into April, business has picked up. Certainly a tough environment for new home construction. But again, certainly pleased to have a positive comp. We did lose $0.02 a share in the first quarter. That compares with $0.24 a share loss in the first quarter of 2009. We also issued $500 million of 10-year notes and retired $300 million of notes that were due in March.

We also ended the quarter in a very strong cash position with $1.4 billion of cash at March 31st. If you would move to slide number four. We show our segment results here. And again, we had some very good performance from a segment standpoint. Four of our five segments were up in sales and improved in terms of operating profit. The one exception to that was our installation business, which as I think all of you know is pretty much 100% new home construction and that continued to be challenging. If you exclude the installation segment, our sales would have been up a pretty strong 7%. So we're very pleased with that. If you could move to slide number five. First quarter 2010 continued some of the positive trends that we experienced in 2009. Our gross profit was up 360 basis points to 26.6% and our sales to key retailers increased for the second quarter. They were up 2%.

And as I mentioned earlier, January and February, they started a little bit slow for us from a Companywide perspective. As the weather improved, March and April both showed high single-digit sales increases. Obviously April's not closed yet, but our best read right now is that we ought to be up high single-digits. So we're pleased with that from an overall Company standpoint. And certainly pleased that we had a second straight quarter of positive comps in terms of sales to key retail customers. Our incremental margin was strong in the quarter. We were up in sales $55 million and up in operating profit $80 million. And if you would please flip to slide number six. I mentioned EPS, a loss of $0.02 compared to a loss of $0.24 last year. We had $14 million of rationalization charges in the first quarter of 2010. That compares to $24 million last year.

And we also in both quarters had an unusual relationship between pretax income and tax expense. The first quarter of 2010 included $9 million of tax expense that's related to adjustments of previously established accruals for uncertain tax positions. And in the first quarter of 2009, although we had a pretax loss of $61 million, we had $17 million of tax expense. Now that $17 million relates or correlates to about $0.05 of earnings per share and the $9 million that we talked about for the first quarter of 2010 or that we incurred in the first quarter of 2010 represents about $0.03 a share. Excluding the $9 million, our full-year tax rate looks to be approximately 40%. We did have a subsequent event that we announced in terms of the cabinet restructuring that may have some implications to the tax rate on a full-year basis, but we'll communicate that as that develops. And I would remind folks that as we get back to more normal operating environment and performance that our ongoing tax rate for modeling purpose would be around 36%.

If you move to slide number seven, I mentioned that our sales were up 3%. We did benefit from currency, foreign currency translation contributed about $36 million. We saw some nice improvement in terms of margin. And I would point out that this slide and the slides that follow from an operating profit standpoint exclude rationalization charges. We have included the GAAP financial numbers for operating profit for the Company and the various segments in the box at the lower right-hand corner of the slides going forward, but we thought for comparative purposes it would be better to show operating profit without the restructuring charges. And you can see here that we had a very nice increase in terms of margin from just over 1% to 5% on that basis. If you move to slide number eight, our North American operations were essentially flat in terms of sales. We did have a little bit of benefit from currency.

We also showed very nice margin improvement in North America. Both our operating profit dollars and our operating profit percent as a percent of sales almost doubled during the -- in the comparative quarter. Rationalization charges in the first quarter of 2010 were $12 million compared to $20 million last year for North America. If we move to slide number nine, our international operations, very strong quarter. We were up 16%, had a $28 million benefit in terms of currency translation. But very importantly we were up 9% in local currencies. So a very strong quarter for our international-related businesses. Also the third straight quarter that we've had double digit or better margins in terms of operating profit. So again, real nice performance, real nice contribution from our international operations.

If you move to slide number ten, in terms of working capital, we continue to emphasize working capital management, we continue to perform well there. We did have a little bit of a blip up in inventory days from 50 to 53. We would consider that to be more of a temporary nature. That was offset in terms of payable days, which were also up three days. But again, a lot of good work continues to go on managing our working capital. If we move to slide number 11, I want to talk a little bit about our segments and start with cabinets. Cabinet sales were relatively flat, excluding the benefit of currency. We did show some nice improvements in terms of operating profit performance. We had a loss of $19 million last year first quarter, this year $4 million. And we benefited from cost reductions in this particular segment. Rationalization charges this year were $11 million compared to $9 million in the first quarter of 2009.

If you move to slide number 12, we did disclose in our press release a subsequent event, and that relates to the -- we announced the combination of our North American cabinet businesses, our retail cabinet group and our builder cabinet group, a couple of months ago. Donny will talk about that in a few minutes. But we did in our press release include a subsequent event note that indicated that we will discontinue certain cabinet lines. That includes ready-to-assemble cabinets, as well as non-core in-stock assembled cabinets. Those products we estimate contributed about $200 million of sales in 2009. And because these are integrated into the various other products that we produce, we can estimate in terms of operating profit an approximate breakeven for these businesses. And again, there's -- they're integrated into the rest of the operating structure, so it's a little hard to get exact numbers, but we estimate about a breakeven contribution from an operating standpoint in 2009.

We will incur an additional $115 million of charges related to the discontinuance of these product lines. We estimate that about $90 million of that will be noncash. And I would point out that this is incremental to what we have previously communicated. And if you remember back at the -- for the fourth quarter conference call in February, we mentioned at that point in time on a full-year basis we anticipated about $70 million of restructuring charges. If you move to slide number 13. Our plumbing businesses had another strong quarter. We were up 14%. Plumbing benefited from favorable currency translation, about $27 million. And we had another strong performance from an operating profit standpoint. Went from 6.5% last year at this point to 12.8%, benefiting from cost reductions as well as improvement in price commodity relationships, but more importantly in terms of increased volume.

If you move to slide number 14. Installation and other services, we mentioned earlier, continues to be a very, very tough environment. We tend to look at this business on a 90-day lag basis in terms of housing starts. On that basis, housing starts were down 20% compared to the first quarter of 2009. Again, on a lag basis. Our sales were off 14% and our profitability pretty much reflects the decline in volume in this particular segment. This year we had $2 million of rationalization charges in the first quarter and last year we had $8 million. If you move to slide number 15, decorative architectural products. Sales were up slightly for the quarter. We did have some nice improvement in terms of profitability. Again, another strong performance here benefiting from favorable product mix, as well as improved relationship between selling prices and commodities.

If you flip to slide number 16, other specialty products, sales here were up 8%. We saw some increased volume in both North America as well as the United Kingdom in terms of windows and we've seen some improvements in volume related to fastening tools. Loss for the quarter was comparable to last year, as you can see, and rationalization charges were fairly minor in both quarters, $1 million this year versus zero last year. At this point I'd like to turn the call over to Donny DeMarie, our Chief Operating Officer. And Donny's going to give us an update on some of the operational initiatives that we've shared with you in the past. Donny.

Okay, thank you, Tim. I thought I would open by reminding everyone that the Masco business system is our management framework to deliver consistent and reliable performance. Slide number 18. The Masco business system is built on excelling at five core capabilities -- customer focus, a deep understanding of the needs and wants of our customers; quality as measured as both a cost and as a level of customer satisfaction; innovation, which is what we view as our key differentiator; lean, a structured discipline to reduce waste and complexity in everything that we do; and underpinning the system is our integrated approach to talent management and succession planning. Slide number 19. I would like to update you on our cabinet integration, as well as how we are continuing to invest by pursuing new business opportunities, such as WellHome, exploring new channels for Behr through the Home Depot, and celebrating our brands and innovations at the recent Kitchen & Bath Show in Chicago.

Slide number 20. On our last quarter call, we announced the merger of our two cabinet platforms, the retail cabinet group and the builder cabinet group, to form a new, single Company, Masco Cabinetry. We have the number-one brand in retail with KraftMaid and the number-one builder brand in Merillat, with our kitchen at a time five day delivery model. Our quality brand is positioned at value price point and provides our customers with a tremendous value. Slide number 21. The combination of Masco Cabinetry has a portfolio of leading brands, scale advantage to fund innovation and brand building, and the ability to serve the unique needs of each channel. The combined organization will eliminate redundancy, improve productivity and aggressively target additional cost savings. Slide number 22. But make no mistake, this integration was about generating additional top-line growth and our three brands address the top three consumer purchase drivers in key industry price points.

This integration is on plan and the team has done a nice job of merging the two cultures and really creating an inspiring vision. Slide number 23. WellHome is our new comfort and home performance operating Company. WellHome provides comprehensive home assessments and home improvement services for existing homes and is able to actually guarantee the energy reduction. Masco has advantage in this space by leveraging its environment for living program, where over 100,000 new homes have been built and guaranteed. To aid in its rollout, WellHome is leveraging the capabilities of Masco Contractor Services, the largest installation contractor in North America. Slide number 24. We have seven existing locations and we're adding five more in May of 2010 for a total of 12 locations. We project to have 25 locations by year-end.

There are over 80 million existing homes built before moderate energy code and we hope to improve all of them. Although our services can be justified through reduced energy consumption and improved comfort, local state and utility Company rebates can provide an incentive for consumers. With this in mind, the pending Home Star Bill would create a significant opportunity for Masco and consumers, while creating much needed jobs in this tough economy. Slide number 25. This is a map of our current locations in blue and our future WellHome locations opening next month in green. Slide number 26. Behr is the leading do-it-yourself consumer brand and has committed to growing the Pro penetration with The Home Depot. Although the economic downturn has been tough on the Pro market, we believe the pending economic recovery will provide us with an excellent opportunity. Slide 27. We launched our Direct to Pro initiative in 2009, offering professionals a one-stop shopping experience, tiered pricing, and direct job site delivery.

Slide number 28. We have connected with thousands of Pro painters and by year-end every US Home Depot will offer Behr Pro Services. Our Premium Plus Ultra line of both interior and exterior paints, which feature our paint and primer in one, has resonated with the Pro as it has already been recognized by the consumer for saving time, reducing labor, and ultimately saving money. Slide 29. Our Masco team displayed new product, innovation, and celebrated our leading brand at the recent Kitchen & Bath Show in Chicago, where attendance was up significantly from last year. Slide 30. Delta was the hit of the show. Architects, consumers, and design professionals were lined up to try our new Touch 2-0 faucets and our new line of faucets featuring our proximity sensing technology. With proximity, there is no infrared or sensor required, it uses your body's own electromagnetic field to turn the faucet on when you are within three to six inches of the faucet.

Slide 31. Brizo, our North American premium plumbing line, introduced new styles and designs, as well as a new merchandising campaign to capture the essence of its brand. Slide number 32. Hansgrohe, which is our leading international faucet Company, was also on display and they featured their new PuraVida line. Slide 33. And Masco Cabinetry had its own coming out party, displaying our new three-brand strategy, as well as great new innovative products such as Virtual Design Center, our core guard think bay, and our new approach to corner cabinets. We left the show confident and energized. And with that I'll turn the call back over to Tim.

Thank you, Donny. If you please move to slide number 34. In terms of the -- our view of the macro economic environment, that hasn't changed since we were together back in February. We continue to believe that in North America housing starts will be in a range of 600,000 to 700,000 units. We continue to believe that repair/remodel activity in North America will show modest improvement. And we also continue to believe that European economies will show modest improvement. When we were together back in February, we talked a little bit about our view of price and commodity-related impacts on our business. And if we go back a little bit, I think all of us remember that we experienced a fair amount of commodity-related pressure in 2008. That continued through the first quarter of 2009. And starting the second quarter of 2009 continuing through the first quarter of this year, we've been experiencing improvements in the relationship between price/commodity.

Last year, 2009, our decremental margin was 14%, which compares to our contribution margin of 30%. And in addition to the price/commodity benefit, we also had some very strong impacts from cost reductions. Back in February we mentioned that heading into 2010 that we estimated that we had headwinds of $80 million to $100 million related to price/commodity relationships, principally related to metals, impacting plumbing, builders hardware, as well as petroleum derivatives for paint and windows. Obviously the environment has been pretty fluid. Recently wood, fuel costs have moved up a little bit, as well. We continue to work very hard to offset the impact of price and commodities, working with our suppliers, working with customers on price and on productivity to offset not just commodities but other inflationary impacts that our business and all other businesses are experiencing, healthcare for example, wages, etc.

Having said that, we currently estimate that price/commodity relationships represent a headwind, and again, this is our estimate, of about $60 million to $70 million in 2010. Again, we are confident that we will be able to address those one way or another and offset them. I think we have demonstrated that in the past. As we have mentioned a couple of times, there can be a lag here or there in terms of impact, but we do feel very comfortable that we will be able to work our way through that headwind throughout the rest of the year. And with that, Lauren, we will open up the lines for questions.

(Operator Instructions) Our first question comes from Ivy Zelman with Zelman and Associates. Please go ahead.

Good morning. Gentlemen, it was a great quarter in terms of improvement with the exception of the installation services and I know it's probably one where you're frustrated. Can you help us understand with the loss being sequentially greater, knowing that starts obviously were weak sequentially, where the long-term, I guess, goal is of getting back to breakeven. And then just on a very positive note, you mentioned, Tim, that sales in April were up in the high single-digits. Is that across segments? Can you give us a little breakdown between segments, especially within paint, because in North America maybe weather is part of why sales weren't as strong and maybe you've seen a rebound there. So thanks and congratulations on the quarter.

Thank you, Ivy. Yes, I'll take on the second part of the question in terms of April. Obviously we haven't closed the month yet. But generally speaking, sales were pretty good across the board. The one exception would continue to be the installation-related business. But other than that we had some pretty good improvements in just about every segment. And with that I'll ask Donny to address the, your question on the installation business.

Yes, good morning, Ivy. As we look at installation, obviously we have the 90-day lag, so we knew coming into the first quarter it was going to be pretty challenged based upon the housing starts that we would have available to work on. And we also had that impact compounded with weather. So we're really seeing almost kind of the perfect storm here. We had bad weather, we had low starts to begin with. There's been pricing pressure in this segment, probably greater than any of our other segments. And I'm not sure year-over-year, but we still see the builders de-contenting and the home sizes would appear to us from a mixed basis to be smaller.

So a lot of negatives in this segment. Now we would expect some of that to reverse on the way back out, but it's going to be some pretty tough sledding. With that in mind, we did reduce in the first quarter of 2010 approximately 300 people from this segment. We also have continued to reduce our headcounts in April. And so we're taking pretty aggressive whacks at trying to reduce our costs, but it's going to be challenging for us. We've said earlier that we see our breakeven point between 750,000 and 800,000 housing starts. That hasn't changed much because although we have continued to address our cost position, margins have been impacted by some lower selling prices. So we're still in that neighborhood and we're going to continue to get after it. But we feel it's important strategically to maintain our footprint to be able to perform on the way back up.

Great. Thanks, guys.

Thank you.

Our next question comes from Michael Rehaut with JPMorgan. Please go ahead.

Hi, thanks. Good morning, everyone.

Good morning, Mike.

A couple questions on the cabinet actions. First, I was wondering and maybe I didn't hear this, but did you review any expected savings from the different actions of combining the companies or divisions and taking out some of the manufacturing capacity?

No. We didn't give an update on that at this point, Mike. But there's no question there will be some fixed cost reduction, basically as we work our way through that. Now, there's an outside chance and we will try to sell that business if we can. We'd like to be able to make that happen if that's possible, obviously for the employees. If it's not, we're probably looking at a couple of plant closures. And my guess is there will be some pretty significant savings from a fixed cost stand point, but at this point don't have an estimate for you.

Okay. And I -- I appreciate that. That was one of my other questions, if you did consider selling it. But -- and I apologize. I had to get off the call earlier. But just a question on the thought process, looking on slide 20 and talking about the rationale for combining. Earlier when you kind of created these two divisions, I believe I recall the rationale was more that they were different end markets, different customer segments and different go-to-market strategies. So what's changed and do you think that in combining some of the core functions do you change, actually have, given that there are still different end markets and different customer sets, how do you manage that?

Yes. Mike, I'll take that. Really, as we looked at RTA and in-stock assembled, we really felt it was not core to our long-term strategy. It was -- it was an unbranded category with very little differentiation. And really was a distraction which was pulling attention and assets from our value price products, i.e. our branded products with Kraftmaid and Merillat and Quality. And as the team looked at really crafting a strategy both for the retail dealer and new construction segmentation, we felt that we were really creating a strategy where we were advantaged to win. It was really around our three strong brands and that this in-stock, unbranded or store-branded category was just not contributing anything from a profitability point of view. So tough actions to take, but the reality is we needed to have our focus where we were really felt we had an advantage to win. And so really, it's not any different than when we put this group together. These were actions that are consistent with us. They've begun to formulate their strategy on a going forward basis. They just believe these were a distraction more than a value to them going forward.

And one last question if I could. The plumbing products, margins continued to be very strong. How do you see that going forward in terms of incremental leverage to sales? Is that something where you view it as a 30% incremental margin, I think, as you view the entire business. Or are there Company or, I'm sorry, unit specific or division specific differences either or raw material cost challenges? I mean, what could we expect for there over the next year or two?

Mike, I would suggest to you that from an incremental standpoint I think we can do a little bit north of 30%. And one of the reasons for that is we've come out with a lot of innovative new products. And some of those are at some very attractive price points. They're a really great value for consumers and I think as we continue to drive innovation -- Delta's doing a great job in that segment. Hansgrohe continues to perform very well. We're doing some things with the Delta brand on shower enclosures. So our feeling would be that as we continue to gain share, continue to introduce new products that I would hope that we would be able to convert at a little bit north of that 30% level. So then that's above the corporate average you're saying? Yes. That would be a little bit above the corporate average, yes.

Thank you.

Okay, thank you, Mike.

Thanks, Mike.

Our next question comes from Budd Bugatch with Raymond James. Please go ahead.

Good morning, Tim, good morning, Donny.

Good morning, Budd.

A couple of questions. One, on the $55 million worth of carryover savings, how much did you [get] to realize in the first quarter and what's left for the year?

That would have been -- Budd, now again, what we're talking about here is the savings from restructuring-related actions and expenses that we incurred in prior years. The impact on 2010 we estimate it at $50 million to $60 million. And our estimate in the first quarter would have been that that would have been about 25, $20 million to $25 million. And a big piece of that, Budd, would have been in cabinets. And then we would have had some improvement in installation and plumbing and a little bit in the other two segments, as well. But most of it would have been in cabinets.

Okay. And you talked about the price commodity relationship now being $60 million to $70 million. Is that the balance of 2010 or how much of -- ?

That would be the rest of the year, Budd.

That's the rest of the year is this $60 million to $70 million. Okay. A couple of other quick questions if I could. On the RTA, you were justifying, I think Donny was justifying the exit of RTA based upon the distraction factor, not on the economics of the savings factor but just on the effectiveness of the rest of the group. Is that what I understand?

Yes, Budd. As we looked at it and we looked at where we felt we could win and where we had a advantage position to win in the marketplace, we really saw that on a value product.

Is that only the domestic RTA side? That is not the international side.

Yes. And as you know Budd, that's a product that has been declining over the course of the last several years.

But the $200 million kind of surprised me. I thought -- do I remember that at the peak that was like $700 million to $800 million of -- ?

Yes. I believe if you went back several years, you would have been looking at a number like that. But that predates I think all of us. Well, it doesn't predate us. I mean in terms of our current responsibilities.

Yes, sir. But that was about -- that was the Mills Pride segment, right?

Yes, that would -- yes, Mills Pride would have been the RTA piece of that, yes.

Okay. Just one other quick one on plumbing. Terrific job. $5 million of incremental operating margin sequentially despite an $8 million sequential decline in the face of some inflation in the segment. So kind of help us through what was driving that. Is that all savings and restructuring-related stuff or is it mix? Can you kind of segment some of that for us?

No, I think there's certainly are some cost savings in there. We're a lot more efficient and effective in a lot of our operating businesses. But again, I think it gets back to a lot of the new products that we've introduced recently. When you look at Hansgrohe and the job they're doing with product introductions and some of the project work they've been able to win, they're just doing a phenomenal job. Delta, we talked about, Donny talked about the touch 2-0, some of the Brizo products. So it's really about the brand strengthening that we've done. We've invested in promotion, as you know. But really I think it's more about the innovation.

But we've had -- I think normalized it looks like the contribution margin just challenged about 60% in that segment for the quarter.

Well, I think you're looking at the incremental margin. Yes, it was very strong in the quarter, but again we had a little bit of benefit in terms of price commodity as well in that segment.

And that's going to go against us in the next three quarters?

Well, there is a headwind for the next three quarters and we are working very hard to address that.

Any comment as to how you're addressing it? Was it with pricing or with -- ?

He said we kind of bucket that in three different places. We work with our suppliers. We mentioned, I think, a while back that we did add a supply chain executive to our team, just about four, five months ago. So we're getting after the supply chain. We're also certainly working with customers on price and working on productivity. So I would -- and I feel really good about the progress we're making in all those areas.

Okay. Thank you very much.

Thank you, Budd.

Our next question comes from Joshua Pollard with Goldman Sachs.

Hi, good morning. Thanks.

Hello, Josh.

Could you talk just for a moment about WellHome. And importantly can you talk about sort of what percent of home inspections are turning it to installation work. What percent of that installation work is going to MTS versus competitors. And give us a sense of what the growth platform is for that business. I was a little surprised to see California not on your immediate plans.

Yes, Josh. I'll take that. We have not given out conversion rates. And with the two beta sites and the five new locations, which really just started in March, I think it would be really too early to start talking about conversion rates. I will tell you that the majority of the people who have an assessment do ultimately convert to work. And I think it's too early to tell what type of trend we'll have. Hopefully when we get the additional locations that we're launching next month into the pipe here, we'll get a little better data that we would feel comfortable sharing. So we feel really confident with that. California was not on the list initially. Most of the locations we went to were evaluated on a whole bunch of criteria, but number one criteria was age of housing stock. And then number two was the availability of local and state and utility company rebates. So as we looked at those criteria, we really developed a list of markets to attack in a sequential order. And the California markets will be attacked, but just not in the first pass.

Okay. Great. Then the follow-up is a two parter. Within installation, housing starts in the first quarter up 17%, all in up 46% on a single family basis. Are you seeing that as you guys look out into the second quarter? And then on cabinets, I think someone asked the question earlier, what was the ultimate cost saving on your subsequent event actions. But I think one of the other ways to look at it is, what were the losses on that $200 million in sales that you guys are looking to shed? Thank you.

I'll take that last part and Donny can take the first part. But what we mentioned, Josh, on the $200 million is that our estimate is that we were around breakeven. So, again, don't have any more definitive data than that from a product line standpoint. We'll peel that back in terms of cost savings as we work our way through that. But as I mentioned, maybe you didn't hear the question with Budd or one of the previous questions, maybe it was with Mike. Our hope would be that we can sell that business if there's an opportunity. We certainly will want to entertain that. If not we will be looking at the closure of a couple of facilities. And my sense is that there will be some, obviously some fixed cost savings there. But again, to give you perspective, our estimate is that was at about a breakeven in 2009. Donny.

Yes. And on the housing start question, Josh, we're -- our second quarter is really the housing starts in the first quarter of 2010, which are going to show just a modest improvement over the fourth quarter of 2009. So the bigger increase for us is really projected to occur in the third and fourth quarter in that segment. I will tell you that what we're seeing is spotty. The south and the mid-atlantic tend to -- are tending to be stronger than what we're seeing in the midwest and west. There are some oil-producing states which have tended to have some pretty good activity in Oklahoma and Texas. And we're seeing some signs of life in Arizona and southern California. So starting to see things get into the pipeline, starting to see things come back, but very, very spotty at this point and very modest. Hopefully at the end of the second quarter, we can give you a little bit better update on what we're seeing, but we're not expecting any type of significant lift for another quarter or two yet.

Thank you.

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

Good morning, everyone.

Good morning, Pete.

I guess I may have missed this, Tim. But if you could maybe just run through what the pricing dynamics look like among the businesses from a competitive standpoint more than just from a commodity cost basis.

Sure. Well, pricing is very competitive, always is very competitive. I would say right now pretty acute in terms of the installation business, as well as the window business in North America. Pricing is very competitive in those two areas. Cabinets, we're probably seeing both price and promotional activities. And on the plumbing side, obviously, we've come out with some new products there which give us an opportunity to price our products competitively, but certainly give us some opportunity with some of the new features. And again, those have been very well received, the Touch 2-0, for example. But pricing is always competitive in that segment, both here and internationally. And I would say on the -- as you work your way through the decorative architectural segment, I'm not aware that price -- Donny, if you've got any perspective there in terms of price.

Well, we've got significant pricing pressure there with our acrylic resins, really going -- .

He was more concerned, I think, on the competitive side as opposed to the commodities.

Yes, I think on the competitive side it's nothing more unusual.

About the same, Yes.

Okay.

But, probably, Pete, the two areas for us that are the most acute would be installation and windows.

Okay. And a quick follow-up on that. Are you effectively then having to walk away from any businesses in either of those two segments? And then as you look forward, I think one of the things that you've tried to do is maybe go after some of the broader price value spectrum if you will. Can you maybe talk about success on that front or is that where, maybe where on the lower, mid-end, is that where you're seeing more of this competitive price pressure?

Well, there certainly has been a move to value products in terms of pricing. I mean, we've seen that and have talked about that from a mix perspective. That's affected us in cabinets and windows for sure. So in addition to price pressure or competitive price environment, the mix has shifted to a certain degree. Donny also talked a little bit about on the install side, smaller homes, less square feet, you're seeing less cabinets. For example if a home, and again, more of a hypothetical, but certainly directional. If a home had 21 or 22 boxes in it from a cabinet standpoint, we're seeing that decrease to maybe 17, 18. So you are seeing some downsizing, as well.

Okay. That is very helpful. Thank you very much.

Thanks, Pete.

Our next question comes from David Goldberg with UBS. Please go ahead.

Thanks, good morning, guys.

Good morning, David.

First question I kind of wanted to jump back onto WellHome a little bit and maybe ask Josh's question a little bit differently. What I'm trying to figure out is for the new branches that you guys are opening, how much traffic or how many clients do you think you need to pull in kind of on a per branch basis to cover the cost of expanding the business? And just trying to get an idea of incrementally how that business builds up a little bit?

Yes, Dave, again, hopefully we can give you a little more color as we move forward. We have budgeted conversion rates. We have budgeted takes. We have models built, but I just, I think it's too early to comment on that until we get a little bit more experience. We've only had the two locations that have their opening month and two additional months to really base that on and then the five we just added. So I think it's just too early to get into a lot of detail here.

Okay. Fair enough. Just a quick follow-up question. Last couple of quarters you guys have given some free cash flow information in the appendix. I noticed it wasn't in the appendix this time around. Is there any change kind of in the free cash flow estimates as you look at 2010?

No. I think the information is in the appendix that we provided last time, David. Or it certainly is supposed to be. And there really -- I think the only change is probably to interest, John?

Yes. Dave, the only change really that we have had is interest expense given the $500 million that we issued in March of this year. So our interest expense probably up, I think, $30 million, $25 million, $30 million from the last number that we gave you in February.

Okay, great.

Yes, we did -- I'm looking at it right now, David. General corp has not changed but there is, slide number 38 has that information. And to John's point, I think the only change would be in the interest expense. But I would remind you on the rationalization charges, this slide is not updated for the subsequent event information that we shared with you earlier.

Got it. Thanks.

Thank you.

Our next question comes from David MacGregor with Longbow Research. Please go ahead.

Yes, good morning, everyone. Good morning, David. On the cabinet business, and I may have missed this earlier, and I'm speaking with respect to the combination of retail and builder as opposed to the exit from the RTA business. But you had originally provided some savings guidance of about $30 million, $10 million of which I think you were expecting in 2010. Have you updated that number?

No. That number would still be applicable and, again, that's before the discontinuance of the product lines.

Right.

But that number's still -- that was basically us, $40 million of charges and $30 million of savings with $10 million of that in the latter part of this year.

Okay. And then I guess with respect to the product offering, I know we've talked about this before, but is there any progress in terms of developing an opening price point presence on the retail side? You bring the quality brand as part of this three-brand positioning strategy over to retail and try and pick up some share there?

Yes, the group has -- is working through that with our retail customers. And certainly the -- one of the main drivers for combining the organizations we felt both the quality and the Merillat brands had a place at retail. Both Merillat and the ability to quick ship, I would call it, but to have a five to seven-day delivery off a special order and the Quality brand from being able to address those opening price points. So that is a right in the bull's eye of what the group's working on and they're working with our retail partners now to talk about the right assortment of products in the various channels.

Okay, thanks. And then just quick question on the plumbing side. Can you just talk about the channel mix home centers versus independence and plumbing supply houses. Thank you.

No real change in terms of distribution, Donny, that I'm aware of.

No.

I think -- we obviously go through all those channels.

Right.

Or all those customers, but I don't know of any change.

No. No. It's pretty much the same.

Yes.

So channel shares are fairly stable there?

Yes.

Yes.

Okay. Thanks very much.

Thank you.

Our next question comes from Stephen East with Ticonderoga Securities. Please go ahead.

Good morning, guys.

Good morning, Steve.

If we look at installation really quickly, Donny, down -- sales down 14%, could you split that out between volume and price. And then whether you expect the dynamic between those two to change as you go through the year.

Steve, price had been an issue there. There's no question. I think if you look at the fact that starts are down 20% on a lag basis, we're only down 14%. So that would suggest to you that we're doing a pretty good job on share. And we continue to believe, although it is a little bit difficult in the environment we're in, that we're gaining some share. And we have particularly focused on insulation installation. But pricing has been a negative issue. Wouldn't necessarily want to try to quantify that at this point.

And we haven't seen that change, Steve. It's been tough and continues to be tough.

And then just a cluster of questions around the home centers and Home Depot. On the home centers in general, one, are you seeing them rebuild inventories? And then on the Home Depot side related to paint, are you seeing a shelf space change with the Martha Stewart brand being rolled out? And then are you seeing contractor business pick up yet in that channel?

In terms of inventory build at the home centers, as we've mentioned in the past, that doesn't necessarily impact us that much. Cabinets are shipped direct to the end consumer. We've got 99% plus fill rates with paint. And we manage that category in terms of our sales force with the Home Depot associates. So we're very actively involved in that. But generally speaking, if a home center reduces or increases inventory levels, the implications to us aren't what they are with -- with other folks. We may have a little bit of impact quarter to quarter, but generally speaking it's not -- doesn't move the needle much. In terms of the paint display with Martha Stewart there, we have not lost any shelf space. Obviously the color center is a very predominant part of the paint offering. And so no, I don't think there's any significant change to us, Donny, that I'm aware of.

No. There's been no impact on our shelf space or share at this point and we think anything that drives traffic for Home Depot into the paint aisle is a good thing for Behr. And we'll get, we'll do a nice job converting those into sales for Behr. So we think that's good. And on the Pro side we have continued to gain traction with the Pro business. So we continue to see those sales increase at a very nice rate. And so we continue to add outside sales reps and continue to pursue it very aggressively.

Did the actual contractor business itself pick up or just market share gain for you all?

I think it's a little bit of both. As we look at it there does appear to be more going on. I think as weather improved, you're start seeing a lift in the exterior business as well as the interior business. And so there -- there appears to be both. We definitely have gained share because we didn't have any in this segment a little over a year and a half ago. And every week we seem to do a little bit better than the week before. So everything's going well here.

Okay. And if I could sneak in just one last question on your cabinet business. You've had a lot of restructurings there. That seems to be the most problematic as you've gone through this downturn. Do you think you're done there and, if so, sort of what gives you the confidence that you are?

Well, Stephen, I would say, and we've been really consistent with this from our investor conference last year that I know you attended, but we have said all along that we were going to continue to attack this segment until we felt we had the right product offerings, the right branded strategy, and the right supply chain to serve it efficiently. And I would say that we're certainly have done a nice job so far. We believe there's more we can do. And we're going to aggressively attack it from a cost point of view to continue to drive costs out so that we can compete successfully in the future as we have in the past.

Yes, thanks.

Thanks, Steve.

Our next question comes from Megan McGrath with Barclays Capital. Please go ahead.

Hi, it's actually Matt Lamden on for Megan. Good morning.

Hi, Matt.

I was hoping we could dig a little deeper into the international business, which is clearly a big driver of top-line growth this quarter. Can you walk us through various opportunities you're seeing there and whether or not you see the sort of growth rate, at least in a 9% in local currency, being sustainable in future quarters.

Well, wouldn't necessarily want to predict growth rates going forward. Obviously the economies in Europe are still fairly challenged. But we're really pleased pretty much across the board. We saw some nice improvements in plumbing, both in Hansgrohe as well as Bristan, which is located in the United Kingdom. Our plumbing business continues to do well. Our window business continues to take share. They've done a nice job. And again, that's a United Kingdom-based business. So it's really -- we've been successful pretty much across the board. Hansgrohe has done a nice job, as we've said in the past, with global expansion moving into additional countries and also pursuing project work in the Middle East and the far east. And they've been successful there. So any of those new product developments that have helped. So pretty much across the board we've seen improvement. A lot of that has been driven by efficiencies in productivity. We had some restructuring charges in Europe that were fairly significant, I think, in the fourth quarter of 2008. And about mid-year last year, we started to see a lot of the benefit from some of those cost-out actions.

So we've got some good leadership in Europe, both at the group level, the business unit level, and wouldn't necessarily say there's anything overly unique or remarkable, if you will. There is a lot of singles and doubles and a lot of blocking and tackling going on.

And the only thing I would add is that we are seeing the economies outside of central Europe beginning to recover. And they have recovered a little bit faster than we have or have begun to recover here in the states. So we're seeing that project business come back. We're seeing our sales into some of the emerging markets have really come back nicely, as well as the project work.

Okay. Great. And then just getting back to paint a little bit. You mentioned that the strong operating margins in that segment were driven by favorable product mix of paints and stains. And I'm assuming that's mainly the new product introduction, such as Behr Premium Plus Ultra, Behr Direct to Pro Businesses and I was wondering what percentage of sales in that segment are coming from Behr Pro, what kind of margins you are getting specifically with that business, and if you have a target in mind in terms of Pro Paint proportional share sales going forward?

We don't break that information out, Matt, in terms of parsing it that way. But as Donny mentioned earlier, we've got some really good traction on the Pro side. And that business continues to grow on a weekly basis, monthly basis. And we've got a lot of focus on it at this point in time. So we think we can continue to gain share there, but wouldn't want to necessarily comment on where we see margins, vis-a-vis the rest of the segment.

Thought I'd give it a shot. Thanks a lot.

Okay. Lauren, I think we have time for one more question.

Thank you, sir. Our final question comes from Keith Hughes with SunTrust. Please go ahead.

Yes, just make this one real quick. The $60 million, $70 million commodity headwinds for the rest of the year, if we put in what happened in the first quarter, will that will get us back to $80 million to $100 million for the full year 2010?

Yes. I would say, Keith, if anything if we rolled the tape back with lumber, wood up a little bit, with fuel up a little bit, that $80 million to $100 million was probably more 120ish, 110, 120ish kind of number.

I think you also have to consider acrylics really have just skyrocketed honestly as its related to paint, and copper continues to go up, too. So we -- I would say if we were going to give that number that we gave in the first quarter again today it would probably be up significantly.

And the inflation for the rest of the year, are you taking prices where they are right now and making your assumptions of inflation or deflation from here?

We're assuming that -- it's different. It's different by commodity, Keith. I would tell you that we're trying to look at each commodity. It's hard to predict the metals market, but we think they probably still have a little bit to run left in them. Acrylic, given the shortages and the reduction in capacity, we think that that situation is going to continue to get worse. As a matter of fact, there are discussions about allocation. We're not on allocation and we think, given our scale and our ability to work with our vendors, that we'll be able to get our engineered resins. But we've got to be careful here that we also are working with them to offset some of their cost pressures. And on the lumber side, I think lumber's had a nice run here. There clearly is some more to go on the lumber side. So I would say overall each of these are -- we have commodity teams which are really focused on each of these areas of our business, but I would say overall that we're expecting things to run up a little bit and we've included that in our guidance that we've given today.

All right. Thank you.

That concludes the question-and-answer session today. At this time, Mr. Wadhams, I'll turn the conference back over to you for any additional or closing remarks, sir.

Okay. Thank you very much, Lauren. And thank all of you again for joining us today. And special thanks to the worldwide Masco team. We're off to a good start in 2010 and we're pleased with our first quarter results. Our comparative quarterly sales were up for the first time in almost three years and we continue to achieve improvements in profitability. The discipline of the Masco business system continues to drive improved execution across Masco, as we implement lean principles and quality initiatives in all aspects of our business. Our focus on our customers, innovation, and talent were on display at the recent Kitchen & Bath Show in Chicago. The display of many of our leadership brands and the energy and passion of our team impressed our customers and was a source of pride for our employees and shareholders. It's great to be part of a winning team. Masco was the buzz of the show.

We ended 2009 on a high note, generated solid results in the first quarter and entered the second quarter of 2010 with momentum with both March and April sales up high single-digits. We continually expect business conditions in 2010 to be modestly improved over 2009. Longer term, we continue to believe that the fundamentals for our markets are positive and we're very excited about Masco's future opportunities. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.