馬斯科 (MAS) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation First-Quarter 2012 Conference Call. My name is Christy, and I will be your operator for today's call. As a reminder, today's conference is being recorded for replay purposes.

(Operator Instructions)

I will now turn the call over to the Vice President of Investor Relations, Maria Duey. Maria, you may begin.

Thank you, Christy, and good morning to everyone. Welcome to Masco Corporation's First-Quarter 2012 Earnings Conference Call. Joining me on our call today are Tim Wadhams, President and CEO of Masco; and John Sznewajs, Masco's Vice President, Treasurer, and Chief Financial Officer.

Our first-quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion of our website. You will note that we have changed the format of our presentation and analyst package as we continue to work on improving our communication with the investment community. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we would appreciate it if you would limit yourself to one question with one follow-up. If we are unable to take your question during the call, please feel free to call me directly at (313)792-5500.

If you refer to slide 2 in the presentation, I'd like to remind you that today's presentation includes our views about Masco's future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties in our risk factors in our Form 10-K that we filed with the Securities and Exchange Commission. Today's presentation also includes non-GAAP financial measures. We've provided a reconciliation of these measurements on our website at www.Masco.com. With that, I'll now turn the call over to our President and Chief Executive Officer, Tim Wadhams. Tim?

Thank you, Maria, and thank all of you for joining us today. If you would please flip to slide number 4, we're pleased with our first-quarter results. Housing dynamics improved, helped a little bit by weather, but for us, a solid quarter. Top line was up 7%. We had very strong performance in our Decorative Architectural segment, where we have our paints and stains in builder's hardware. Our Installation segment was also strong in the quarter, and we had a pretty good top side in terms of our Plumbing-related businesses, impacted a little bit by foreign currency. Sales to key retailers were also strong, and you'll hear more about that as we work our way through the presentation.

Another area that was certainly pleasing to us were our margins in the quarter, which were the highest for any first quarter since 2008's first quarter. On an adjusted basis, our operating incremental margin was 44%, which is particularly pleasing, reflecting our operating leverage, the fact that we had price commodity relationships positive in the quarter, and also reflecting our ongoing focus on total cost and productivity. Earnings per share were a positive $0.05 on an adjusted basis again. That compares to a loss last year of $0.04, so we had a nice swing in terms of EPS. We'll get into the details as we work our way through the segments during the presentation, but off to a good start in 2012.

In addition to our financial results, we also made a lot of progress on the strategic initiatives that we're pursuing. If you would flip to slide number 5, these are the strategic initiatives that we communicated earlier this year that we're focusing on to drive improved performance and position us to outperform the housing recovery. Those strategies include extending our market leadership by leveraging our brands with innovative new products, cost reduction, improving our underperforming businesses, and strengthening our balance sheet. If you would please flip to slide number 6, we'll talk a little bit about how we performed against those strategies in the first quarter.

We feel like we continue to enhance our industry-leading brands and market positions across our product groups. We continue to win international project opportunities in plumbing, and our late fourth-quarter 2011 acquisition of a bolt-on, entry-level price point spa business has broadened our hot tub offerings and is going very well. Our Installation business, I mentioned earlier, was up significantly in the quarter, and a couple of the adjacent channels that we've been cultivating over the course of the last couple years had very strong performance. That would include retrofit and commercial.

We continue to expand our window offerings in the western US successfully into Canada -- western Canada, excuse me -- as well as Texas. Our new Behr paint product offerings that we talked about at the end of the fourth quarter have been launched very successfully at Home Depot, and our Pro Paint business continues to do well. Our focus on total cost and productivity generated over $40 million of gross profit improvements in the quarter, and we're well on our way to the $150 million that we mentioned in the firs- quarter earnings -- or the fourth-quarter earnings call for 2011, and again that's a gross number, the $150 million.

During our fourth-quarter 2011 earnings call, we talked about some of the -- in detail -- about some of our plans to improve our Installation and Cabinet segments, and we had very good performance, we believe, in the first quarter. In aggregate, we reduced losses by over $25 million, and certainly believe that we're well on our way and feel confident about the targets that we set in the fourth-quarter earnings call. We'll do a more in-depth update on those two segments as we get into and through the second quarter in July, but certainly feel like we're on track to deliver what we talked about back in the fourth-quarter call.

In terms of our balance sheet, we successfully issued some debt during the quarter. We've got $750 million of maturity due in July of this year. John will talk about that as he works his way through some of the detail here, and we ended the quarter with $1.8 billion of cash. At this point, if you'd flip to slide number 7, we'll turn the call over to John Sznewajs, our CFO, who will talk a little bit about some of our financial and operational detail.

Thanks, Tim, and good morning, everyone. I guess I'd ask you to flip to slide 8. As Tim mentioned, we delivered improved results in the first quarter. Revenue grew 7% due to increased demand across our key channels, particularly our retail channel, where sales to key retailers were up high single digits, and excluding product exits, were up low double digits. International sales were up 1% in the quarter, and 5% in local currencies. Adjusted gross margins expanded to 26.5% as a result of increased volume, profit improvements, and price increases. We did a better job of leveraging our SG&A in the quarter, as adjusted SG&A as a percent of sales dropped 180 basis points to 20.5%.

We're also very pleased with the bottom-line performance, as adjusted operating income increased 93% in the quarter to $112 million, with an adjusted operating margin of 6%. Our Company-wide incremental margin was 44% in the quarter, reflecting strong operating leverage in the business. Our adjusted EPS improved $0.09 in the quarter, from a loss of $0.04 last year to $0.05 positive in Q1 2012.

Turning to slide 9, we see the components of our operating income improvement in the first quarter. The $18 million improvement in net volume mix was principally being driven by our increased volume in our Installation, Plumbing, and Decorative Architectural segments, partially offset by the negative mix of approximately $14 million in our Plumbing segment, which largely relates to Hansgrohe, as they continue to penetrate new markets.

Net price commodity improved $22 million in the quarter, largely driven by our Plumbing segment, and reflects the benefit of our metals hedge, which was approximately $7 million positive in the quarter. While we anticipate raw material cost escalations in our Decorative Architectural segment, we continue to believe that we can, at a minimum, neutralize commodity costs Company-wide in 2012. The profit improvements of $14 million were principally driven by our two most challenged segments, Cabinets and Installation, as those Management teams continued to drive productivity and cost improvements into their businesses. As an example, enterprise-wide head count is down approximately 4% in the first quarter, compared to the first quarter of 2011.

Turning to slide 10, you can see our Plumbing segment grew 5% in the quarter, driven by International project growth and increased share in both the retail and wholesale channels in North America, with our wholesale channel sales up low double digits. Several of our most important North American faucet brands -- Delta, Peerless, and Brizo -- saw sales grow high single digits as they continue to gain share through new product launches. Sales were negatively impacted by $14 million, reducing segment sales by 2% due to foreign currency translation. Although our European outlook remains challenging, European sales in the segment were up 5% in local currency for the quarter due to International project growth.

Our Plumbing segment enjoyed 160 basis points of margin expansion in the quarter, driven principally by a favorable price commodity relationship of approximately $20 million, which includes the $7 million benefit from our metals hedge. I should mention that our European Plumbing operations accounted for the majority of the favorable price commodity relationship in the quarter. Margins in this segment were also negatively impacted by mix in the quarter of approximately $14 million -- again, principally from our Hansgrohe unit, as I mentioned earlier.

Turning to slide 11, you can see the revenue in our Decorative Architectural segment grew an impressive 16% in the quarter, driven by Behr's strong DIY paint sales, continued growth with a pro painting contractor, and price increases, the implementation of which was completed in early Q2. Paint volume was up mid-single digits in the quarter. The growth of Behr's DIY paint sales occurred amidst a competitive retail environment, and was aided by favorable weather in the quarter and new product introductions. We also saw nice revenue gains from our builders' hardware business in the quarter, as their results improved following a tough 2011.

The Behr product introductions we outlined on our fourth-quarter call -- the new and improved formulations for both Behr Premium Plus and the number-one-rated Behr Premium Plus Ultra Interior, the zero-VOC colorants, and the new merchandising for our exterior wood products -- are in all stores as planned, and are performing very well at retail. Our outreach to the professional paint contractors continues to grow. We saw increased growth in our Behr Pro program, which we continue to invest in heavily.

Sequential operating margin improvement was the result of increased volume, the timing of price increases, and profit-improvement initiatives. It was also aided by the performance of our builders' hardware business. This was partially offset by increased growth initiative spend for both international expansion in our pro growth, and load-in costs for the new programs. The price commodity relationship was neutral for the quarter. This said, we continue to expect further raw material pressures, especially in TIO2 in resins in 2012. Please turn to slide 12.

While the environment for cabinetry remains challenging, as our segment sales were down 3%, we had some positive developments in the segment during the quarter. If we exclude the sales related to the planned exit of our RTA products of $9 million, and exclude the $3 million negative impact of foreign currency translation, Cabinet segment sales were up 1% in the quarter. Breaking down the sales in a little bit more detail, we experienced solid growth with our countertop sales in both retail and with the big builders, and our direct-to-builder sales were up mid-teens percent.

We're the clear market share leader in the builder channel, and are well positioned to benefit from our relationships with many of the big builders, including DR Horton, Lennar, and Pulte. We're also beginning to see success from our multi-family initiatives. This growth was primarily offset by a decline in dealer channel sales, and was driven by our decision to pull back on our promotional activity. Competitive promotional activity remains elevated in both the dealer and home center channels, and we've responded with disciplined promotions to meet these competitive situations.

As we anticipated, we improved our operating loss in the quarter by $9 million. Much of this improvement was driven by the benefits from our prior profit-improvement initiatives. At this time, we still believe we are on track to realize that $40 million of profit improvement that we outlined on our fourth-quarter call. Flip to slide 13, please. Looking at our Installation segment, we are very pleased with the performance of this segment in the first quarter. Segment sales grew 18%, and were fueled by higher volumes and share gains across all four lines of business -- residential new construction, retrofit, commercial, and distribution. Sales were negatively impacted due to the closure of previously announced underperforming branch locations, and a mix shift to multi-family starts.

Our efforts over the last year to increase our participation in the multi-family segment have proved very successful, and our Installation business is now nicely positioned to take advantage of future growth opportunities within both the single-family and multi-family channels. We continue to focus on increasing our installation sales with the largest home builders, and we are well positioned to grow this business with the big builders.

In addition to strong top-line performance, Management's strong execution delivered solid bottom-line results, with operating profit improving by nearly 60%, and operating margins expanding by 900 basis points. This operating profit improvement was largely due to increased volume and strong cross-productivity. We expect this trend to continue throughout the year, and we believe we are on track to deliver, at a minimum, the $30 million of operating profit improvement that we detailed for you on our February call.

On slide 14, you can see our Other Specialty Products segment sales declined by 2% in the quarter. We experienced share gains in the UK new home construction market and at Milgard in the western US. We also saw increased sales of staple guns at retail in the quarter. These sales gains were offset due to the exit of select eastern US window markets in late last year. Excluding these market exits, segment sales would have been up 2%. Operating margins improved by 390 basis points, or more than 50%, due to the profit improvements resulting from the rationalization activities undertaken in the third and fourth quarters of last year. Also, improved price commodity relationships, including a decline in rebate activity, partially offset by inflation. Turn to slide 15 please.

As we announced in the first quarter, we issued $400 million of 10-year notes, with an interest rate of just below 6%. These notes were issued to pre-fund a portion of our July 2012 maturity of $745 million, and we intend to pay down the balance of this maturity with cash from the balance sheet. During the course of the quarter, we repurchased $46 million of the July 2012 maturity. We had interest rate swaps outstanding in anticipation of this debt issuance, and the termination of these swaps increased the effective interest rate on the debt to approximately 6.5%. The negative interest carry is approximately $0.02 per share for the full-year 2012. We approved working capital as a percent of sales in the quarter, defined as AR plus inventory less payables, from 15.5% to 14.7%. This is great work from everyone in operations on that metric.

Finally, we finished the quarter with $1.8 billion of cash on the balance sheet, which includes $400 million from the March debt issuance. I'll now turn the call back over to Tim to discuss our outlook.

Thank you, John. If you would please flip to slide number 17, these are the priorities that we identified earlier this year in support of our strategies. We won't go through -- we've talked about almost all of these as we've worked our way through the presentation, so I won't take a lot of time here, but we feel like we made significant progress in terms of accomplishing on our objectives against these priorities in the first quarter. As John mentioned, I'd like to thank our employees across the enterprise. Not only did we have a good quarter from a financial perspective, we also had a solid quarter in terms of the initiatives that are important to us from a strategic standpoint, and certainly against the priorities that we've identified. We'll continue to update the investment community against these priorities as we work our way through the rest of the year.

If you'd please flip to slide number18, a couple of comments before we go to the Q&A session. There still are some challenges out there, there's no question about that, some challenges and uncertainties, as we look out into the rest of 2012. European economies, big ticket remodel activity, commodities, mix, lack of job growth are all issues that are certainly on the radar screen. Having said that, we're encouraged. We're encouraged from a couple perspectives.

One, that housing dynamics, as we mentioned earlier, have continued to improve. The blue-chip consensus at this point in time for housing starts is at 740,000 units. That's up 20% plus over last year, but I think more important than that is the fact that over the course of the last six months or so, that average metric has gone up 10,000 units per month. That contrasts to last year at this point in time when it was going the other direction and pretty much the same magnitude, so we see that as a plus. Housing inventories are low in general, and very low in certain areas. Demand seems to be increasing, including from investors. Affordability remains attractive, and home prices appear to be stabilizing.

In addition to those encouraging signs, we're also encouraged that we got off to a good start in 2012 as it relates to a couple of areas. Importantly, our Cabinet and Installation businesses, we've seen some meaningful improvement in the first quarter. As John mentioned and I mentioned earlier, we feel like we're on track to drive the improvement that we communicated earlier this year. We're also encouraged that price commodity relationships have improved. We're still behind the curve after the last couple of years. I think all of the investors know that have followed us that we've been a little bit behind the eight ball, but getting to a positive relationship in the first quarter is certainly pleasing. As John mentioned, we certainly expect that, over the course of this year, we'll at least be able to neutralize price-commodity impact on our operations.

A lot of good work going on in the cost structure. Operating leverage is one of the strong points of our enterprise, and the 44% margin that we generated in the first quarter certainly is pleasing. We understand that one quarter does not make a full year. We've got a long way to go, a lot of work to do against our objectives, but certainly feel that as we continue to focus on our strategies, continue to focus on the priorities that we've identified, that we'll -- in terms of strengthening our brands, improving our execution, reducing cost -- that we'll continue to drive value for our shareholders. With that, Christy, we'll open up the lines for questions.

(Operator Instructions)

Dennis McGill, Zelman and Associates.

One question on the install business, did you say that the guidance right now, or the goal right now, is to lessen the loss by $30 million?

Yes, that's what we communicated, Dennis, in the fourth quarter earnings call. We provided -- in fact, there's a slide in the Appendix, slide number 24, that is the same slide that we communicated back in the fourth quarter earnings call. I believe that that shows, again, improvement of about $30 million, in addition to the $6 million that relates to the branch closures. In essence, it's a $35-million or $36-million improvement versus the prior year.

So realizing--

We obviously got about 19 of that in the first quarter, and I think as John mentioned, we think we'll do at least as well as we work our way through the rest of the year.

Well, I guess Tim, why not update that realizing you're half way there and you're seeing the acceleration in volumes, and there's obviously some lag there, so you would expect that to continue through the year, What's the hesitancy with updating that now?

No real hesitancy, Dennis. I think what we decided to do on both cabs and installation is wait until we get through the second quarter, and then provide a little bit more detail. We certainly would anticipate if we continue to see the same level of activity, the same conversion that we saw in the first quarter, that we'll be able to improve on the installation number for sure, as we work our way through the rest of the year.

I guess separately, can you maybe go into a little more detail on volumes, and what you're seeing within your European business, both by product category, and maybe by your major regions there?

Yes, volumes as it relates to Europe?

Yes

Yes. We had a good first quarter. As John mentioned, we were up 5% in local currencies. Most of that was driven by Hansgrohe, which had a record March in terms of top line, so they continue to do very well. A lot of that, as you know, is emerging markets, as well as project work related to some international opportunities, so they continue to make good progress. United Kingdom continues to be relatively flat for us, Dennis.

We look at our cabinet business and our plumbing business, plumbing was -- I think both those were slightly down in the quarter. Our window business was up a little bit, so I think if you put all that together, we were probably flat. Certainly don't see any significant improvement in terms of the macro outlook for the UK, but feel like our businesses -- particularly the window business, we've talked about that in the past -- continues to take share, and has some nice growth opportunities, including a couple things they're looking at from a retail perspective that aren't fully developed yet, but will be a little later on, and we'll be able to talk about those.

Our Danish business saw a little bit of top-line improvement, but not real dramatic in terms of that particular business. Still have a lot of challenge there in terms of input costs with particle board, but feel like we're getting a little bit of traction. We're doing some things from a sales representation standpoint, sales staff standpoint that should give us some better opportunity for penetration going forward. In addition to that, our tub, shower surround business, Huppa, had an okay month -- or okay quarter.

I would say that things look like they're slowing down a little bit as we think about some of the challenges in Europe, so I would say that as we look ahead we're still cautious relative to Europe. I think that we're in a good position with Hansgrohe because of their diversification, but the economies, generally speaking on the continent, as everyone knows, I think look like they're going to be a little bit slower than last year.

Just to wrap up on that, is Hansgrohe growing in developed countries in Europe?

Yes, they are. Go ahead, John.

No, it is, Dennis. As they break out their sales, I think they're doing fairly well in the stronger economies, so central Europe, places like Germany, Austria, and Switzerland they're doing just fine. Northern Europe, Scandinavia is going okay for them. The experiencing some softness, particularly in southern Europe at this point in time. They're also experiencing actually some pretty good growth in eastern Europe, whether it's Russia, Poland, Czech Republic, they're doing quite well over there. Pretty good broad mix of strength across most of the regions of Europe, except of course the southern tier of countries.

And remember, Dennis, we do have mix -elated challenges with that business. We've talked about that in the past, as we continue to penetrate international markets at typically at a lower price point. We've also seen with some of our existing business, given some of the economic challenges that exist, a little bit of a trade down as well.

Okay, thank you.

Thank you, Dennis.

Peter Lisnic, Robert W. Baird.

First question I guess, can you maybe give us a little feel for what April's looked like across the business, particularly in paint and maybe if we could strip out some of the favorable weather that would be great.

Yes, tough to strip out weather, Dennis, that's for sure. Although in our area of the world, April has been a little bit more like March traditionally has been -- not real good from a weather perspective. We came out of March, we were up mid-single digits in terms of March, and it looks like April. We don't have the numbers in at this point in time, but it looks like April in North America will be up at least low single digits. At this point in time and kind of back to Dennis' question, it looks like Europe is going to be down a little bit in April, but--

Excuse me, Tim, I think actually April in Europe is flat in local currency.

Yes, in local currency it's flat, but I think we've got some foreign currency translation that's impacting us. From a local currency standpoint, Europe looks like it will be flat, but down a little bit because of currency. At this point, Peter, from our perspective, our sense is that there's probably a little bit of inventory balancing going on in April with some of our customers. Our POS has been relatively strong in April, so we're encouraged by that. At this point, it looks like up in North America, say mid-single digits or low-single digits, excuse me.

Okay, that's helpful. Just on the -- Tim, you mentioned the productivity improvement, I guess, or the cost saves running at, or targeted at $150 million, and you've got over $40 million in the first quarter. If I look at that waterfall chart on operating income, there's only a $14 million benefit that I see there. What were the offsets, or am I not reading that chart correctly?

No, you're reading it correct, Peter. The $40 million is a gross number, and as we've mentioned in the past, typically we have inflation that is offset against that. We could have growth initiatives spend for example, in a couple different segments. What we try to do is net that down to the amount that ultimately drops to the bottom line. In the first quarter, we had obviously, some offsets to that. I think that if you go back and look at last year, we were probably neutral, as I recall, even though we did generate about $140 million to $145 million of gross cost reductions or profit improvements. We ended up the year in effectively kind of a neutral situation again, given some of the growth initiative spend that we had last year.

Okay, that is helpful. I'll jump back in queue, thank you.

Okay, thanks, Pete.

Mike Wood, Macquarie Capital.

In the paint segment, are you planning additional price increases to offset the higher IO2 that you'd mentioned?

Well, yes. Just to give -- roll the tape back a little bit, Mike, we did announce in our fourth quarter earnings call that we were in the process of implementing price increases related to paint. That started early February, and was completed in early April. We did implement across all of our products price increases at that point in time. Now, that took into account, as we mentioned, what was currently reflected in some of the cost inputs that we were addressing.

Okay, and you provided the point-of-sale detail for April. Can you give it to us for the first quarter, to give us a sense of whether or not there was actually restocking in the quarter, or if you can give us any color on where inventory levels stand?

Yes, POS I think was pretty solid in the first quarter, Mike. Our sense is that we were up pretty strong in plumbing for example, in trade. There could have been a little bit of inventory build there, but we did have some load in as it relates to paint. We talked about that with the three new product launches, but it would be kind of difficult for me to comment on that. I don't think that there was an excessive amount of inventory build that would have helped our product. There could have been a little bit in a couple different channels, but not anything that would have significantly moved the needle.

Okay, thank you.

Thank you.

Michael Rehaut, JP Morgan.

First question. I was hoping to get a little better granularity with the $40 million and the $150 million, which you and the details is very helpful. We appreciate it, and of course always ask for more detail as a result, but just trying to understand kind of the mass in terms of what falls to the bottom line. If you could go through what the $40 million going down to $14 million on the quarter, what were the offsets there? On the full year, maybe just to extrapolate what you might think would also kind of ultimately flow through?

Wouldn't necessarily, Mike, want to give a full-year estimate at this point. That can be affected by a lot of different things, but basically, as John mentioned, most of the drop to the bottom line was in the cabinet and installation-related segments. Both of those were pretty healthy in terms of the gross amount, cabs around $10 million, install just a little bit below that. We also had a pretty significant number in plumbing, around $15 million in the quarter.

Most of that was offset by inflation and about $5 million of growth initiative spend related to our international business, some expansion we're doing in western Canada with a tub manufacturer, one of our tub manufacturers. That offset that for the most part. We also had cost savings in the other three segments, or the other two segments, excuse me, decorative arch and other. Other contributed to the profit turnaround that John talked about as well.

As we look at a full year on a full-year basis, on a gross basis, we would look for cabs and plumbing to be somewhere around $40 million to 45 million, installation around $25 million to $30 million, decorative arch somewhere in the $10 million to $15 million range, and other around $20 million to $25 million, which gets us pretty close to that $150 million. Again, that's a gross number.

The way we look at that, we look at that as providing currency to help us fund some of the growth initiatives that we're pursuing, as well as offset inflationary impacts that range from everything from health care to just normal inflation that's outside of the commodity area. We try to provide the investment community with price commodity relationship information that is outside of the profit improvement offset, if you will.

Great. I appreciate it. Second question on decorative. Great top line, but it didn't come through on the bottom line, given the still lag on the price increase that you've noted set to go through early this second quarter. Now with the higher TIO2 prices flowing through on top of that, could you give us a sense of if for the second quarter, third quarter, do you expect the price increases to get you back where you can match a year ago in terms of the margins, or even exceed that? How do you think about where you are from a bigger picture? Let me ask you -- I'll just let you answer this first and then I'll just finish off on the question.

Yes, the question basically is in terms of TIO2 going forward. There has been an announced industry cost increase of $0.10 a pound that is supposed to be effective on April 1, and that would not have been included in our pricing discussion that we mentioned earlier, relative to what we started to implement in early February, and completed in early April, so we'll have to work, either in terms of working on productivity, working with our suppliers, or in terms of prices to offset that. Having said that, your question was generally, do we anticipate that our pricing puts us in a position to accomplish or achieve the same margin level that we had last year. At this point, we would anticipate having some additional pressure in terms of commodity- related costs. As I mentioned we've got to do some work to offset what happened in April.

Having said that, one of the things I think, Mike, that we should benefit from are increased volumes as we look at the second and third quarter. My sense would be that we'll get a volume lift if things continue to move in the direction that they've been moving, and obviously we've got pretty good incremental margins there, so that should help us. I'd rather not get into trying to predict margins going forward. We did say at the beginning of the year in that fourth quarter earnings call that we expected a little bit of pressure in terms of commodities on margin in paint. Our sense is that we'll get a little bit of lift in terms of volume as we continue to work through the year that will help offset that, but I'd rather not get into trying to predict what those margins might be at this point in time.

Okay, just the second part of that was just bigger picture, or longer term, when you look at decorative architectural. 2011 ex-charges is around 17% margin this year, it might be a little bit less depending on what you can do in terms of the incremental inflation. When you look at sort of the great years of 2006 to 2010 when you were in that low 20%s, generally, low 20%s type range, is that something that you think you can get back to, or given the fact that over the last couple of years there's been more product innovation pressure, people matching, certainly that's kind of an ongoing exercise, but do you see impediments to getting back to that low 20s type of profitability, or are we in more of this mid- to high-teens range for the near to medium term?

Yes, I think -- good question, Mike. I think that we got similar question when we had our fourth quarter earnings call. What we mentioned there is that as we continue to grow the business, and grow the business through the Pro Paint initiative, grow the business through opportunities that might be -- that we're developing and looking at internationally, that we probably would see some negative impact, if you will, on margin. Getting back to the levels that you cited, given that we're diversifying our product offerings, diversifying the markets that we go after, really trying to focus on growth.

Again, growth is very important to our channel partner, The Home Depot, as well -- that there probably will be a little bit of pressure on margin as we go after those different categories. I would see us probably not getting back to those kind of levels, but having said that, I would expect that we would generate a nice return on assets. We've got a very efficient operation, and to the extent that we can grow our business, generate absolute growth in operating profit, and manage our asset base, and do that with a positive return, a return in excess of our cost of capital, which we feel very comfortable that we can do, we'll continue to create value that way.

Great, thank you.

Thank you, Mike.

Dan Oppenheim, Credit Suisse.

Thanks very much. Was wondering if you can talk about the cabinet business, still obviously going to be more late cycle, a very competitive environment out there. What would you need to see in terms of just -- are you willing to step away from business at this point? What do you think we need to see in terms of cabinets overall to see a slightly more margin-friendly environment?

Well certainly, Dan, in terms of margin, a little bit more on the macro side from a top-line standpoint. We continue to see a lot of reluctance for folks that want to take on a major remodeling job, and a kitchen or a bathroom is certainly a big ticket, and that still is very slow. As job growth continues, as confidence picks up, that dynamic, I would anticipate, would change over time. The environment is still very competitive. I mean there's no question about that.

One of the dynamics for us is that we were promoting in January, sort of turned that off the latter part of February, and saw some decline, especially in the dealer channel, and a little bit of a fall back in the big box channel for March. From our standpoint, there still is a lot of emphasis on promotions. We will ramp that back up, and we will be judicious as to where we put those dollars. Certainly from a return standpoint, we're not going to chase every bit of business, but we do think that this year, notwithstanding the fact that we were hopeful earlier that it would be a little bit more disciplined from a promotional standpoint, looks like it's going to be a period that where active promotions are going to be important for folks to continue.

We tend to see ourselves or have seen ourselves over the last several quarters, if you will, at those periods when we're heavily promoting, we tend to do better, and when we pull back a little bit, things tend to go in a different direction. We'll be as thoughtful as we can as we manage our way through that, but it's still going to be a pretty competitive situation, particularly as consumers, although they're looking a little bit more as we understand it, are still somewhat hesitant to want to pull the trigger on a bigger-ticket remodel opportunity.

Great, thanks. Second question, just wondering or thinking about the investment of the business, CapEx ticking up slightly this year. As we see the overall housing environment improve over time, how much capacity do you think you have there? How much will CapEx move higher in the next several years?

CapEx, Dan, we generally guide people to focus on about 2% of sales as an appropriate number. It may take a -- we're showing a tick up from in 2012 versus 2011 of about $20 million or so. That said, we were spending only $25 million in the first quarter, which is actually down a little bit compared to the first quarter of last year. In terms of your question as it relates to capacity, we're in a great position from a capacity standpoint. As the markets come back, we don't see any need for any significant bricks and mortar until we get back to a fairly robust recovery, that being million, million and a half housing starts and a commensurate return in the repair remodel end of our business. We feel like we're in really good shape from a capacity standpoint here.

Yes, I think that's very true, Dan. As you look at our business, we added a lot of brick and mortar back in the early 2000s. We've got some idle facilities as it relates to cabinets that we can bring back on. The only area that I would maybe modify a little bit in terms of John's comment is that from a brick and mortar standpoint, we have made some expenditures to support Hansgrohe in both Germany and China, again, given their significant growth. John's exactly right. We don't anticipate a need for a lot of brick and mortar as we work our way back into more healthy top-line demand.

Thanks very much.

Thank you.

Keith Hughes, SunTrust.

Thank you. Two questions. Within cabinets, we've been rolling through some of the products that you've got out of -- I think it's specifically in the big box. Are we now through that, and do you anticipate any more actions like that in the future?

We are just about through that, Keith. It will be $1 million or so, $2 million of RTA sales in Q2 that we'll have to anniversary in Q2 of this year, but beyond that then we'd would be done with that aspect of it. In terms of your second half of your question, is there anything else that we're looking at along those lines, and the answer to that is no.

Quickly on the installation segment, there's been yet more attempts here at price increases from the installation producers for the second quarter. What is your view of those? Do you plan to pass those along into the channel?

Yes, we have always been able to manage our way through that, Keith, generally by passing those costs into the channel, and/or offsetting them with productivity or other means working with our suppliers. If you go back over the course of the last several quarters, we've had pretty good success on and our ability to pass those on, and generally, on a fairly timely basis.

Thank you.

Joshua Pollard, Goldman Sachs.

My question is about the overall business, and the pattern of growth over a year. If I've got all my numbers right, it looks like January was up mid-single, low-double for February, mid-singles for March, and now in North America looking like low-single digits. What's going on in the business that's causing that level of volatility? Are you seeing it get back from weather? Are you seeing a slow-down in any of the core pieces of your business? I'm really just trying to understand the slow-down in growth rates from January through to April?

Well, I think I wouldn't necessarily put too much stock on the individual months, Josh. I think that if you went back to last year, our January and February were pretty weak in terms of 2011. We did have some pretty good bump this year, but I think the dynamics in terms of housing really drove that. We've had an increase in terms of housing-related activity on the build side, and there's also been a little bit of a pick-up in repair/remodel-related activity. A lot of that has been driven by the weather. For example, our comps in exterior paint were very strong in the first quarter, again, we think driven in large part by the weather. I think the weather helped us a little bit. I think that as I mentioned, as we look at April, we're not overly concerned, our POS continues to be very strong in April.

As I said, it's very possible that some of our customers may be balancing inventories in that month, but I don't necessarily see anything that is of concern at this point. We talked a little bit about Europe, obviously as we, as John mentioned, our sense is right now -- and again, we don't have the numbers in -- but our sense is that Europe looks like on a local currency, from a local-currency standpoint it will be flat with a little bit of negative impact in terms of translation, but would not necessarily see anything that's concerning. As I mentioned, POS is strong in paint, its been strong in plumbing in April, so we're tending to look forward a little bit more optimistically than we might have been three, four months ago.

Understood. Do you mind giving some of the numbers, actually, for some of the things you mentioned? I'd love to know what the POS is on April, and I'd also love to know what your comps were in exterior paint versus interior.

No, I'm not sure that our channel partner would want us to give that level of detail out, Josh, in terms of those comparative numbers, and I think that's something that we would probably want to avoid.

Okay, understood, if you don't mind me sneaking one more in. Fortune brands mentioned that they were a loser on the Lowe's line review in faucets, but a winner in cabinets. I'm wondering whether or not Masco was on the other side of both of those. Have you guys won some business? Maybe if you could just characterize your winnings and losings in the Lowe's line review, I know you guys were a part of the advisory board there.

Yes. To date, Josh, I think we've had four line reviews and we lost one. That was a source-and-sell utility tub that wasn't overly profitable, and it was a very small piece of business, I think less than $20 million on an annual basis, so that was the only issue that we've had. The other three we were successful, so we've come out okay in terms of that process. Obviously there still are some ongoing line reviews that will take place over the course of the rest of the year, but we tend to feel that if you're coming in there with strong brands, with good product offerings, good merchandising displays, the kinds of things that we put a lot of emphasis on, then you should do okay. We think the better suppliers will continue to do well in terms of that dynamic.

Okay, and I'll just ask one more--

Josh, I think we need to move on. Thank you. We'll talk to you a little later on.

Sounds good.

Sam Darkatsh, Raymond James.

One question regarding cabinets and then just a housekeeping, modeling question. If we back out the expected change in depreciation and amortization in cabinets on a year-on-year basis, which if my math holds is I guess about $25 million to $30 million, I'm looking at the expected incremental margins from there. At least on slide 23, I think it looks like you're looking at that 30% to 35% range, excluding the change in depreciation. Should that be what we assume, or because of input inflation, diesel fuel costs, promotional environment, that the actual realized incremental margins might be lower than that this year?

I think, Sam, the question is do we feel like the $30 million and the $10 million that basically is about 33% incremental margin. Your question is do we still feel comfortable with the incremental margin?

Well, you have $30 million in revenue opportunities with a $10 million incremental operating profit on that. That would be, call it 30% to 35% incremental margin. The $30 million, if my math holds, I think is largely just a change in the D&A on a year-on-year basis, because of the structural improvements you've made?

No, that is not the change in D&A, Sam. That would have been backed out. The change in D&A was mostly driven by rationalization charges, so when we adjust our numbers for the two quarters, that tends to go away. This $30 million here would be all profit improvement initiatives that we've got good line of sight to, and talked about in the fourth quarter earnings call, so that is not the elimination of that accelerated depreciation that took place last year. No, we do feel very comfortable. Our contribution margins in that segment in North America on volume in the first quarter were right around that 33% to 35% level. We believe we can maintain that going forward.

Got you. Thank you for the clarification on that. Just a couple modeling questions real quickly. The $7 million in the favorable hedge impact, do you have an estimate as to how that translates to the rest of the year? Also in the general corporate expense, John, I think it came in below the average run rate for the year at $140 million over the course of the year. What does the cadence look like for GCE over the next few quarters, is it level or does it ramp as the year progresses?

Yes, Sam, in terms of your first question, as it relates to the metals hedge, we're not giving guidance as to our metals positions at this point in what we think will benefit from -- part of it's hard to predict just given the volatility in the copper and zinc market. We don't try to go out too far on a limb on that one. In terms of general corporate expense, yes we did have a favorable quarter in Q1 compared to both our guidance.

One of the things I think we called out in the fourth-quarter call was that we kind of load up general corporate expense at the beginning of the year, and over the course of time kind of re-guide the community as we understand how experience comes in. You may recall that we had some favorable activities the last year in 2011 as it relates to insurance experience. Unfortunately for several people, negative incentive comp, that kind of stuff. As we go for full -- as we look at 2012, we fully go back to standards on things like that, and so as we understand what our experiences may be over the course of 2012, we'll give updated guidance on that component.

Yes, Sam, that's one of the areas that has been with us, and you guys have tended to drill in there a little bit, and I think John's comment is right on point. We tend to normalize certain of the accruals at the beginning of the year for a variety of things like profit-sharing, incentive comp, medical. To the extent that we do a little better than that over the course of the year, we adjust that up and down, but tend to start fairly conservative.

Thank you much.

Christy we've got time for one more questioner.

Eric Bosshard, Cleveland Research.

A clarification on a question. Just in terms of clarification, can you sort of help not have any confusion. In terms of POS, did April POS slow materially from 1Q POS?

No, I do not have that impression, Eric. Again, we haven't gotten into the depth of April at this point in time, but the impression that we have is that it has stayed relatively strong.

Okay, and then--

Again, we'll have more information as we work our way through the quarter, through our financial reviews, and that type of thing. The numbers aren't in yet, and we haven't seen all of the data, but based on what we've heard from our folks in the field, and their discussions with customers, our sense is that it has stayed relatively strong.

Great, and then in the packet I think you commented that sequentially paint margins improved in 1Q versus 4Q. In install, I think install lost more in 1Q versus 4Q. Within install, can you get a little bit of color of what's going on with pricing in that business, and how you feel about the sort of profitability opportunity in that segment?

Yes, sequentially, Eric, I think a couple things drove that. One is, we had some favorable experience in the fourth quarter of last year in things like insurance. That kind of flipped on us in the first quarter, too, kind of the same comment on our general corporate expense. When you start off the year, you've got higher things like payroll-related taxes, and things like that, that you have to account for, so that drives the negative comp there on a sequential basis.

Yes, I think in terms of pricing, Eric, in that business I think that we are certainly competitive. We have done a lot of things to provide some additional training to our salespeople. We've got some pretty neat programs on lead generation and that type of thing. From that standpoint, as we think about that business, think about what it's been through, think about the full implementation of the ERP system last year and mid-year, we're starting to see some benefits from that.

We're starting to see benefits from the relationship with Owens Corning in terms of supply chain. Our feeling is that if anything, we're as competitive as we've ever been in that channel at this point in time and certainly feel like we've got an excellent opportunity, particularly as it relates to some of the bigger builders. We've got some great relationships there, and the expectation is as the recovery continues, that they'll continue to take share.

Okay, thank you.

Okay, thanks Eric. Christy that finalizes our comments, and we appreciate everybody taking part, and we'll look forward to talking to you at the end of our second quarter. Thank you.

Ladies and gentlemen, this does conclude today's Masco Corporation First Quarter 2012 Conference Call. Thank you for your participation, You may disconnect at this time.