Apr 30, 2008
Executives
Timothy Wadhams - President and CEO Donald DeMarie, Jr. - EVP, COO and President, Installation Services Group Richard A.
Manoogian - Executive Chairman
Analysts
Budd Bugatch - Raymond James Michael Rehaut - J.P. Morgan Peter Lisnic - Robert W.
Baird & Co., Inc. Dennis McGill - Zelman & Associates Nishu Sood - Deutsche Bank Securities David Goldberg - UBS Stephen East - Pali Research
Operator
Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2008 First Quarter Conference Call.
As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received the press release and supplemental information, they are available on Masco's website, under the Investor Relations section, at www.masco.com.
This discussion includes statements that reflect the company's views about its future performance. These statements constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995.
These views involve risks and uncertainties that are difficult to predict and accordingly, the company's results may differ materially from the results discussed in such forward-looking statements. For an explanation of various factors that may affect our performance, refer to our most recent Annual Report on Form 10-K, particularly the Risk Factors section and to any subsequent quarterly reports on Form 10-Q, all of which are on-file with the Securities and Exchange Commission.
The company undertakes no obligations to update any forward-looking statements, whether as a result of new information, future events or otherwise. The financial and statistical data referred to on this call is included in the investor packet distributed prior to the conference call and posted on the company's website.
In addition, we may refer in this call to non-GAAP financial measures, as defined by the SEC's Regulation G. Accordingly a reconciliation of the differences between such measures and the most directly comparable financial measures, calculated in accordance with GAAP, is included in the investor package.
The company believes that such non-GAAP performance measures and ratios used in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior period. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, the company's reported results under accounting principles generally accepted in the United States.
Additional information about the company is contained in the company's filings with the Securities and Exchange Commission, and is available on Masco's website. After a brief discussion by management, the call will be opened for analyst questions.
If we are unable to get through your questions 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.
Timothy Wadhams - President and Chief Executive Officer
Thank you, Marisi and thank you for joining us today for Masco Corporation's first quarter 2008 earnings call. With me are Richard Manoogian, our Executive Chairman and Donny DeMarie, our Executive Vice President and Chief Operating Officer.
This morning, we released our first quarter 2008 results. Needless to say, it was a very difficult quarter with sales in each of our product segments declining from first quarter 2007.
Net sales from continuing operations for the first quarter of 2008 declined 13% to $2.4 billion, compared with $2.8 billion in 2007. North American sales declined 16%, while international sales increased 1%.
In local currencies, international sales declined 8%. Income from continuing operations was $0.07 per common share and $0.35 per common share in the first quarters of 2008 and 2007, respectively.
The first quarter of 2008 results included non-cash impairment charges for financial investments of $26 million pre-tax or $0.05 per share after-tax; currency losses of $10 million pre-tax, $0.02 per common share after-tax, and an increase in our cash rate compared to the first quarter 2007, which decreased earnings by $0.03 per common share. These items in aggregate reduced first quarter earnings by $0.10 per common share.
Excluding these items, first quarter earnings would have been $0.17 per common share. The first quarter of 2007 results benefited from net gains related to financial investments of $22 million pre-tax or $0.04 per common share.
The company has been focused on the rationalization of its businesses, including sourcing programs, business combinations or consolidations, plant closures, headcount reductions and other initiatives. During the first quarter of 2008-2007, the company incurred costs and charges of $9 million pre-tax or $0.02 per common share, and $25 million pre-tax or $0.04 per common share respectively, related to these initiatives.
Segments sales for the quarter included cabinets, and related products were down 14%, largely as a result of lower sales in the new home construction market. Plumbing product sales declined 3%.
Strong international sales helped to offset a decline in North America. Installation and other services sales declined 24%, as a result of continuing softness in new home construction.
Decorative architectural products declined 10%. Builders hardware and paint sales declined as a result of lower than anticipated retail sales.
Other specialty product sales declined 22%. Window and door products continue to be down as a result of the difficult new home construction environment in the Western United States.
Key retailer sales from continuing operations declined 10% in the first quarter of 2008 compared with the decline of 2% in the first quarter of 2007 and a decline of 5% in the fourth quarter of 2007. During the month of March, across all segments of our repair-remodeling business from small to big ticket items, the consumer exhibited significantly less willingness to spend on basic repair and maintenance-type activities.
This trend has continued into April. Gross margins were 25.7% in the first quarter of 2008 compared with 26.3% in 2007.
Operating profit margins as reported were 6.5% in the first quarter of 2008 compared with 9% in the first quarter of 2007. SG&A expenses as a percent of sales including general corporate expense were 19.1% in the first quarter of 2008 compared with 17.3% in the first quarter 2007.
Higher SG&A expenses as a percent of sales in 2008 reflect lower sales volume and increased bad debt expense, principally related to new home construction. General corporate expense was 1.8% in both the first quarter of 2008 and 2007.
The company's reported tax rate on income from continuing operations was 53% in the first quarter of 2008 and 37% in the first quarter of 2007. The company anticipates that its tax rate on income from continuing operations for 2008 will approximate 48% to 49%.
The increase in the expected tax rate for 2008 is primarily due to U.S. taxes on anticipated dividend distributions of low-taxed foreign earnings.
These dividends are being distributed to utilize favorable provisions of the U.S. income tax law that are scheduled to expire at 12/31/2008.
The company estimates that its tax rate on income from continuing operations for 2009 will approximate 35% to 36%. Working capital, defined as accounts receivables and inventories less accounts payable, at March 31, 2008 was 17.3% of sales compared to 17.4% a year earlier.
For the 12 months ended March 31, 2008-2007, return on invested capital as reported was 8.5% and 8.8% respectively. Return on invested capital as reconciled was 9.2% and 11.3% respectively.
Debt as a percent of total capitalization was 51% at both March 31, 2008 and 2007. At the end of the quarter, the company had a strong balance sheet with over $600 million of cash and cash equivalents and $2 billion in unused bank lines.
Business conditions remain difficult in a number of the company's markets. Obviously, the first quarter of 2008 was very difficult for Masco.
As we mentioned during our 2007 year-end conference call, low double-digit sales declines that we experienced in late 2007 continued into early 2008. In March, the decline in our sales accelerated and our sales were down high teens in terms of percent.
The company continues to estimate that 2008 current [ph] housing starts will decline an additional 25% to 33% to a range of 900,000 to 1 million units, compared to 1.3 million units in 2007. In the first quarter of 2008, housing starts declined 30%.
While the company's view on housing starts for 2008 has not changed since it developed its earnings guidance earlier this year, the company currently believes that consumer spending for home improvement products and demand for certain of the company's international products will be weaker than originally anticipated. As a result, the company currently estimates that its 2008 sales percentage decline will be at low double-digits to mid teens compared to 2007.
The company's previous guidance estimated that 2008 sales decline would be high single to low double digits. While forecasting future business conditions in the current uncertain economic environment remains very challenging, the company currently believes that 2008 earnings will be in a range of $0.50 to $0.65 per common share.
This compares to the company's previous guidance of $0.85 to $1.15 per common share. The company estimates that free cash flow, cash from operations, after capital expenditures and before dividends will continue to be strong and approximate $640 million compared to its previous estimate of approximately $700 million.
The company's revised guidance also reflects increasingly competitive market conditions for its services and products and increasing costs for freight and logistics and for certain commodities, including metals and commodities impacted by energy costs. The company's revised guidance estimates that its full year tax rate will approximate 48% to 49% as I mentioned earlier, which compared to the company's normalized tax rate of approximately 36%, will reduce earnings by approximately $0.17 per common share.
The company's previous guidance estimated that 2008 full year tax rate would approximate 42% to 43% and reduce earnings by $0.11 per common share compared to the company's normalized tax rate. The increase in the estimated 2008 tax rate reflects a decrease in the company's projected 2008 pre-tax income from continuing operations.
Again, the company estimates that its tax rate on income from continuing operations for 2009 will approximate 35% to 36%. The company's revised guidance includes the first quarter 2008 impairment charges for financial investments and currency losses, the impact of discontinued operations and the benefit of the first quarter 2008 share repurchases.
These items, together with the expected increase in the tax rate, decrease full year estimated earnings by approximately $0.27 per common share net. Relative to these items, the company's previous guidance reflected that earnings would be reduced by $0.11 per common share, based on the expectation that the full year tax rate would increase to 42% to 43%.
In thinking about our current guidance, which includes discontinued operations.... excuse me, which excludes discontinued operations, our current guidance of $0.50 to $0.65 per common share, if we exclude the impact of the financial asset impairment $0.05, the currency losses of $0.02 and the increase in the tax rate of $0.17, our guidance would have been in a range of $0.74 to $0.89 per common share.
During the first quarter of 2008, the company repurchased 5 million shares of company common stock. The company had approximately 36 million shares remaining at March 31, 2008 under its repurchased authorization.
We repurchased over 500,000 shares of our common stock in April, 2008. Given our revised guidance and the difficult market environment, I am sure that many of you have questions related to our strategy of returning cash to shareholders and the status of our dividend.
As we mentioned on our last call, management expects to recommend to our Board of Directors later this year that we increase Masco's dividend for the 50th consecutive year. This reflects our current expectation from a macro standpoint that the decline in new home construction and the home improvement products markets, will bottom in 2008 and at least modestly improve in 2009.
As I mentioned earlier, we expect free cash flow to approximate $640 million, which is almost twice our aggregate 2007 full year dividend. We have always said that over the long term, we believe that our ability to generate excess cash will allow us to return a billion dollars to shareholders on average annually.
And that there will be some years where we exceed that amount as we did the last five years and some years where we may be less than a billion dollars. Given the current operating environment, 2008 aggregate dividends and share repurchases may not total a billion dollars.
We continue to aggressively manage our cost structure and have worked hard over the past several quarters to offset the impacts of current market conditions on our businesses. As mentioned earlier, our gross margins were only down 60 basis points quarter-over-quarter, even though our sales were down 13%.
Obviously, we are pleased with that outcome. Since late 2006, we have closed 11 manufacturing facilities, and in our installation services business, we have closed over 65 facilities and reduced vehicles by more than 2500.
Company wide, we have reduced headcount by more than 15,000, reducing our North American headcount by an excess of 25%. While these actions have been difficult, we expected additional actions to address current marketing conditions will even...
will be even more challenging as we balance what we can do to mitigate the impact of current market conditions on our near-term results and the implications these actions may have on our long-term performance. Although the company expects market conditions in its industry over the next several quarters to be very challenging, the company is confident that the long-term fundamentals for new home construction and home improvement products markets are positive.
The company believes that its current strategy of dividend increases and share repurchases, concentrating on organic growth, improving returns and generating superior cash flow, together with the leveraging of the combined market strength of its retail service, distribution and installation capabilities, brands and scale will allow Masco to continue to drive long-term growth and value for its shareholders. Now, I'd be happy to take questions or comments.
Joining me are Richard Manoogian, our Executive Chairman and Donny DeMarie, our Executive Vice President and Chief Operating Officer. Question And Answer
Operator
Thank you. The question-and-answer will be conducted electronically.
[Operator Instructions]. We'll go to our first question, Budd Bugatch with Raymond James.
Budd Bugatch - Raymond James
Good morning, Richard. Good morning, Don.
Can you make sure we understand how you are going from the 85 to... $0.85 - $0.15 to $0.50 - $0.65 in those?
Can you go over again, those items because I come up short on a couple of fronts. So I want to make sure I get that right.
Timothy Wadhams - President and Chief Executive Officer
What you've got Budd is basically an increase in the tax rate, which we estimate is going to be about $0.06 a share.
Budd Bugatch - Raymond James
Right.
Timothy Wadhams - President and Chief Executive Officer
The impartment charges that we had in the first quarter which is $0.05.
Budd Bugatch - Raymond James
Right.
Timothy Wadhams - President and Chief Executive Officer
The currency losses which were $0.02.
Budd Bugatch - Raymond James
Right.
Timothy Wadhams - President and Chief Executive Officer
And then the discontinued ops, we had about... in our original guidance, we had about $0.04 of discontinued operations included in the $0.85 to $1.15 for the businesses that we're going to dispose.
And if you take those items, that totals about $0.17. In addition to that, one of the other changes is the positive impact of share repurchases in the first quarter, which were made in the first quarter, which would have about a $0.01 impact on the full year.
So there is about $0.16 of items that I guess that we call or term may be non-operating if you will, or more of a one-time type situation.
Budd Bugatch - Raymond James
So that leaves you at $0.19 to $0.34 to account for from volume and commodity input costs. Right?
Timothy Wadhams - President and Chief Executive Officer
Yes, that would be right. There is about $0.19 as well as about $0.34, and that really reflects the drop in volume primarily, that we're anticipating or moving from high single to low double to mid-teens in terms of sales decline.
And most of that decline, if not all of it, is really related to the consumer side of the business as well as Europe.
Budd Bugatch - Raymond James
Now that gets me about $0.12 to $0.24, would kind of leaves me like $0.07 to $0.10 short which would be commodity, is that kind of a way to think about that and size it?
Timothy Wadhams - President and Chief Executive Officer
No, I'm not sure that I would look at it quite that we way Budd. I think it depends obviously on what sales decline number you are using and so, that gets to you to a certain extent and I am not sure what contribution margin you have.
But basically that fall off would be a combination that is mostly driven by volume decline. There would be a little bit of commodity-related cost in there as well.
Budd Bugatch - Raymond James
Well, I was using 2% to 4% as a difference from your original guidance and about $0.06 a share or 35% contribution margin per each 100... each 1% difference in that volume.
Is that not the way to think about it?
Timothy Wadhams - President and Chief Executive Officer
Yes,I'd be looking at a little bit higher change in sales.
Budd Bugatch - Raymond James
Little bit higher change in sales and what about the contribution margin?
Timothy Wadhams - President and Chief Executive Officer
You are right. Budd we need to be on the contribution margin.
Budd Bugatch - Raymond James
Alright, very good. Thank you very much.
I'll let some others ask questions.
Timothy Wadhams - President and Chief Executive Officer
Thank you, Budd.
Operator
We'll take our next question from Michael Rehaut with J.P. Morgan.
Michael Rehaut - J.P. Morgan
Yes. Hi, good morning.
How are you?
Timothy Wadhams - President and Chief Executive Officer
Hi Mike.
Michael Rehaut - J.P. Morgan
First question is just on a couple of the different segment margins. You were well below what I was looking for in cabinets and actually have a positive surprise on the plumbing?
Timothy Wadhams - President and Chief Executive Officer
Right.
Michael Rehaut - J.P. Morgan
And I was wondering if you could just kind of go through the drivers of what was this quarter kind of like the surprise on the downside, if I am thinking perhaps freight or energy for cabinets or if there were things that kind a went your away on plumbing, if that was all international currency or what were the drivers there?
Timothy Wadhams - President and Chief Executive Officer
Sure. On cabinets Mike we will start off there.
We have got about $95 million drop in sales and I think about $50 million drop in profit, year-over-year and obviously that's a bit beyond contribution margin. We did have some significant inefficiencies in manufacturing in the first quarter.
In fact, we did have one of our major plants closed, literally closed for I think about a week early in the quarter. We also, as you probably remember, have a couple of new plants that we're bringing up in the Western part of the United States and obviously, we launched those early last year and those continued to be pretty inefficient and in fact, from a capacity utilization standpoint across that segment, we're pretty inefficient relative to current volumes.
As we've mentioned in the past on the builder side particularly, we have an interrelationship if you will among your plants with component plants that supply assembly plants and finishing plants and that type of thing. We are running that one shift in a lot of those locations.
So, at this point, we're not real efficient but we don't really have a whole lot of choice in terms of the interrelationship of the manufacturing footprint. We also had significant decline in performance in Europe.
Particularly, in our Moore's operation which is in the UK, which not only builds but also installs cabinets, and I think you're aware of the climate in the UK relative to new home construction. Couple other things there; we had some incremental customer-related expenses in the first quarter versus last year, and I think the other item that I guess I would mention too is mix.
We've seen a shift in mix. We've talked about this now for a number of quarters, away from high-end cabinets, which typically have a higher margin to some lower-end products.
So I think Mike, those would... that's a lot of different items, but I think that pretty much covers the landscape relative to cabinets.
In terms of plumbing, we were up... excuse me, we were down about $20 million in sales and up about $19 million or so in profit.
And I think a couple of things there; number one, we continue to do very well in Europe with Hansgrohe operation. That business continues to perform quite well and as...
I know you are aware they have a very nice globalization strategy that they are following. So, we had very good performance there.
We also had... even though sales were down in North America.
We had good performance some continuing improvement, if you will, relative to our North American operations. As you know, we've had some leadership changes on a couple of key situations there and have been working to really rationalize the supply chain in terms of some of the outsourced product that we have been working on over the last couple of years and we are starting to see some of those benefits show up.
And I think that's a continuation of what you saw during 2007. I would tell you having said that, and we are very pleased with the first quarter performance in that segment.
You may be aware that copper prices are starting to tick-up a little bit and commodities are probably going to be a little more challenging going forward. Obviously we'll do every thing we can to offset that but, we are real pleased with the performance in plumbing in the first quarter.
Michael Rehaut - J.P. Morgan
I appreciate that detail, Tim. That was that was very helpful.
I guess just a follow-up. On the cabinets, you had mentioned a bunch of things and I guess it would seem like the inefficiencies that you had mentioned off the bat are really coming to bear a fuller brunt on the margins and so, you had mentioned that you have some obligations there, that you have some partnerships.
But are we to expect kind of a depressed margin for a year or two, given the...if we were to expect more depressed level in housing starts or are there things that you can do, because I would assume otherwise, if you'd have to run these plants, you might be stuck in a mid-single digit margin for a year or two.
Timothy Wadhams - President and Chief Executive Officer
Well, one thing Mike real quick, you mentioned partnerships; I didn't mean to imply that. What we have really are, these are all facilities that we own that in terms of our supply chain, we've got some plants that make only components, for example that do not assemble and will ship components to our assembly plant.
So, it's not like we can take out just the plants that... plans aren't doing all of what needs to be done to make a cabinet.
So, we got that interrelationship issue. In terms of things we can do, I think obviously, when you look at the headcount reductions and you might remember that when we talked just in mid-February, we have reduced headcount by 11,000 people from that late 2006 timeframe.
That number currently is at 15,000. So that means we've been obviously pretty active over the course of the last couple of months in addressing the downturn.
And I think as we said before and as we saw late last year, I think both of our cabinet operations in North America have done a very good job of trying to right size to the market conditions. So, I think...
are there things we can do? sure, there are things we will be doing, there are things that were on top off.
But having said that I think in terms of the volume levels we're at to-date, and again with the mix change that we're seeing, it's going to be a little bit of time before things start to pick up and before we start to see a volume return.
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Michael, this is Donny. Let me jump in here.
There are some things we can do that we're working on. One of them is looking at our common architecture in all of our boxes and that we can make any box at any plant.
In this thing we are working on is really are spending money in the factories and investing some capital payable to order to finish in all of our facilities. So, if we can get that done during this year, that certainly gives us some more ability to get after the costs without impacting our ability to perform on the way back up with the market.
Timothy Wadhams - President and Chief Executive Officer
Hey, Mike one other thing to that. Forgot to point out is, keep in mind that the first quarter seasonally is a low quarter.
Just in terms of volume, the first and the fourth tend to be our lowest, from our company perspective and that would certainly be true in the cabinet segment.
Michael Rehaut - J.P. Morgan
Great, I appreciate it. And just one more if I can squeeze it in.
Just on the installation Donny, I appreciate the incremental comments on cabinets. But I guess turning to you on your core bread and butter.
Obviously, that kind of turned a little negative in terms of operating profit, extreme depressed volume but at the same time we have always understood this to be a highly variable cost business. So I was wondering if you can kind of review with us A) the fixed versus variable cost structure and if there are some kind of structural improvements that you can make to boost the margins over the next couple of years, even within a depressed-volume environment?
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Sure, I'll be happy to talk about it. Michael, we don't give out the breakdown between fixed and variable, but let's talk a little bit about what's going on in that segment to address the changes.
We clearly have been trying to play catch up. There is a lag between the point at which we can take the cost out of the business and the reduction in the housing starts.
And as that segment has worked very, very hard to continue to reduce costs, they are constantly having to reevaluate their position relative to a new housing start number. And so they play catch up now for the last 18 to 24 months with constantly a moving target related to the housing starts.
There is more we can do. We continue to look at our cost structure, we look at our facilities, we look at our people, we look at our vehicles, all of which tend to be variable in nature and we continue to cut a way out of it.
There are things we can do to grow certain product lines, where our direct margins are still doing well and we are looking at that as well. But at the end of the day, services is about being to perform in a market that's going to be a little bit more robust, of 900,000 units.
So we got to be careful not to take out the facilities that we'll need in the major metropolitan areas and the product lines and capabilities will need on the way back up. So it's a balancing act.
I think the Group has done a very, very good job. I think if you look at their performance versus the peer group, I think it's been outstanding.
And I think if you look at their performance really relative to the sales declines faced against their contribution margin, you'll see they have done a really good job in taking costs out of the business. So, we'll continue to get after it, there is more we can do, but it's going to be challenging, it's going to be a challenging year for that segment.
Michael Rehaut - J.P. Morgan
I appreciate it, Donny.
Operator
We'll take your next question from Pete Lisnic with Robert Baird.
Peter Lisnic - Robert W. Baird & Co., Inc.
Good morning, everyone.
Timothy Wadhams - President and Chief Executive Officer
Good morning, Pete.
Peter Lisnic - Robert W. Baird & Co., Inc.
Hey Tim, just on the... thanks for the capital allocation color.
I am just wondering if you look at the leverage situation, is there going to be a point in time here when we start to talk may be de-leveraging the balance sheet, instead of buying back shares a bit. If you look at...
well, I don't know our preliminary model, you've got net debt to EBITDA starting to approach three times I guess on a forward basis. Where do you get concerned or when do we start talking about de-leveraging?
Timothy Wadhams - President and Chief Executive Officer
Well, Mike... Pete, we have $100 million due this year, and I think its either September or October, and we are planning to repay that with internally generated cash.
But as we look out into the future, the only significant debt we have due, I think we have got $300 million due in 2010, which is a floater, which at this point I don't really have a feel of whether we'll refinance that or pay it down. But then, you really have to out to 2012 before there is any significant debt payable.
And so, from that perspective, there is no major issue at this point in time. We have very attractive interest rates.
We believe we were fortunate enough to time some of our financing over the course of the last three, four years to affect some pretty good interest rates. So, I am not concerned about our leverage at this point in time.
I don't have that concern. I mean...
as you know, we generate an awful lot of cash. Even in difficult times, we generate good cash and certainly, when the markets recover and we get back on upward trajectory, we should be in a very good position from a cash standpoint.
Peter Lisnic - Robert W. Baird & Co., Inc.
Okay, thank you for that. And then, I guess second question, and I may have missed this in the opening commentary.
But, in terms of the competitive landscape, can you maybe touch on higher faring competitively in the various businesses relative to your competitors in terms of share? Are there particular businesses that are under significant competitive pressure relative to others or just some commentary on that front?
Timothy Wadhams - President and Chief Executive Officer
Well, I think in this environment Pete, just about all of our businesses are in a very competitive environment if you will. As I mentioned, from a share perspective, I think my feeling is they were holding our loan.
It doesn't mean there aren't certain situations where we will walk away from an opportunity if prices are not attractive and we will do that and we have done that. I would say in cabinets, couple of points there.
I mentioned a shift in mix that we talked about little earlier from sort of into more of a value kind of concept if you will from high end. We've also in the past mentioned from a cabinet perspective that a lot of our activity on the builder side was with some of the larger builders.
And as know, they are down any where around 40% plus, with some of the smaller local regional guys may be down well, previously may be 15% now may be more like 25%. So in terms of them having a little bit more difficulty, if you will, in this environment we are in, that's impacted some of the builder cabinet side.
But beyond that, as I said I think we are holding our own. I mean this is a very difficult marketplace to really assess share one way or another really.
But I'll let Donny comment a little bit but, I don't think we've got any concerns at any place I am aware of. Donny?
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
No, we've seen that we are doing well. We do have that mix so both on the builder side and the retail side in cabinets, with the builders really de-contenting or moving down to more value product lines.
And you are also having retail, where we've seen the special order premium products. Sales have been soft now for several quarters and...
but the in-stock assembled cabinet really seems to be doing reasonably well. I mean I would mention that one bright spot is that we believe that Bear continues to take market share, and in spite of the sales decline in the quarter in decorative, that the Bear relative to its competitive peer group, appears to be taking share and we are very proud of their efforts.
Peter Lisnic - Robert W. Baird & Co., Inc.
Okay, that's it for me. Thanks for the color, guys.
Timothy Wadhams - President and Chief Executive Officer
Thanks, Pete.
Operator
We'll take our next question from Dennis McGill with Zelman & Associates.
Dennis McGill - Zelman & Associates
Hello, guys.
Timothy Wadhams - President and Chief Executive Officer
Hi, Den how are you doing?
Dennis McGill - Zelman & Associates
Fine. First question, I guess for either for Richard or Tim, and you guys have talked about in the past the typical counter-cyclicality of the home improvement market and the idea the our consumers more apt to tune [ph] that in the current house if there is not a lot of turnover on the new side and that certainly seems to be kind of going against the traditional trend.
I was wondering if you could just talk about what's your opinions are about the risk of that segment deteriorate even further. It seems like any risk to the earnings will be more on the consumer side and the DIY side and on the new construction started at this point, but just thought you could address that relative to some prior comments that you guys have made?
Timothy Wadhams - President and Chief Executive Officer
Yes, Dennis, I'll take the shot at it and Richard can weigh in and give a little bit of his economic view but. No, I think that's right.
I think that on the consumer side at this point in time, I think I heard just a couple of days ago that the University of Michigan consumer confidence index fell from I think 69-ish to now to 62 for the... I guess, what is the third or fourth straight month; and I think with energy prices where they are right now...
energy affects us from an operational standpoint. It affects us from a raw material standpoint.
But it also affects us from a consumer standpoint, particularly for lower-end items. And when people are paying the kind of prices they are paying at the gas station, there is a lot less left.
And so we even saw a bit of slowing for lower ticket items. And I think the other thing that we have experienced that we have talked about in the past is that, if you go back three or four years and look at the equity extraction that took place and the investment of some of that in repair-remodel, obviously that's not going on now.
Now, those things can be deferred for a while, but we certainly believe that when this comes back that there will be a pent-up demand in terms of repair-remodeling and the hope would be that that would include obviously the products that we certainly manufacture, the sweet spot where we are in the kitchen and bath.
Richard A. Manoogian - Executive Chairman
Yes, this is Richard. Just to reinforce what Tim has said, I've been through a lot of cycles over 50 years and this is only the second one in which home improvement products went down at the same time as home building.
The only other time that happened previously was back in the 1970s, when interest rates or in the teens and consumers weren't buying anything to speak of. And as Tim mentioned, the one that change here is that we have had equity extraction in the last few years.
It's hard to determine how much business might have been pulled forward into the previous few years. And secondly, this is a consumer recession and consumers are cutting back where they can and in fairness they are uncertain as to the value of their homes.
And until home prices bottom out, I think there is a lot of reluctance for people to put thousand of dollars of additional investment in their home in high cost kitchen and bathroom expansion. So, I think all that just takes time to work out.
But our experience has been that ultimately if anything, a slowdown in housing stimulates renovation and repair and remodeling of people staying in their homes. And if it takes on an extended period of time for that to work out, you might even get some deferred demand down the road in two or three years.
So, I think it's an unusual situation. I think it's temporary.
The difficulty is it's very hard to say what the bottom is and how long it might last before we get back to normal economic trends.
Dennis McGill - Zelman & Associates
Given what you touched on there, it sounds like you think we are in a recession and given how deep this has turned out to be on the housing side relative your experience, do you think that expectations are too high for the second half of the year that this could be a quick turn off?
Richard A. Manoogian - Executive Chairman
Well it depends on whose expectations. We've been saying for some time that we're seeing a consumer recession.
And I think you're beginning to hear that in more places. It wouldn't surprise me if you get some static and counter reports over the next few months, if the stimulus packages go out and get spent.
But my own feeling is I think that's temporary, I think the consumer is stretched, I think their balance sheets are hurting and home equity financing is down, the value of their home is down. I think you will see an increase in unemployment therefore, I think the consumer recession is going to get worse before it gets better.
And part of that is factored into why we've been... we hope more conservative in our projections for the next nine months that that trend is going to be in the negative side.
Dennis McGill - Zelman & Associates
All very positive stuff Richard.
Richard A. Manoogian - Executive Chairman
Well we are sorry to think that way, but if you don't plan for that, it's a lot easier to plan for things getting better than it is for things getting worse if you don't plan ahead.
Dennis McGill - Zelman & Associates
Yes, we completely agree. And just one other quick one.
Donny, can you remind us on the install business; on the labor side, all those would be employees of the company. Is that correct?
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Yes, that's correct. We'd sub-contract labor in just a few markets but, small related to the business model but it's really a small percentage of the total labor force.
Dennis McGill - Zelman & Associates
Okay, great. And Tim, the forecast for home improvement spending for this year; I think last quarter, you guys were saying in a low single-digit type number, would you have an update on that?
Timothy Wadhams - President and Chief Executive Officer
Yes, what we said Dennis last time was that we expected in the U.S. that we could be flat or maybe down 3%, and we'd be more in a range now in the U.S.
of probably 3% to 5% down for our products. And again that would be for...
as we think about sales in that... into that segment.
The other thing I would mention too is Europe. We talked last time about Europe and you might remember that we were cautious about it.
It looks now like Europe is even going to be a little weaker than what we anticipated; just a reminder that we were down 8% in local currencies. We do have a favorable translation there and we think that ought to offset, but we expect Europe to continue to be pretty soft as well.
Dennis McGill - Zelman & Associates
Okay. Alright.
Thank you guys.
Timothy Wadhams - President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Nishu Sood with Deutsche Bank.
Nishu Sood - Deutsche Bank Securities
Thanks. I just wanted to follow-up there.
Tim, you were talking about the European operations. The color you gave was that certain items had...
certain product lines had weaker sales than others. I imagine Hansgrohe was one of the stronger ones.
So I was wondering if you could maybe give us some color on the product lines and distribution channels where there was greater weakness.
Timothy Wadhams - President and Chief Executive Officer
Grohe again is a global entity. They are headquartered in Germany, but a predominant amount of their sales are to export markets.
So that insulates them a little bit. But we did not have any strength in Europe, outside of the Grohe organization.
As I mentioned, the UK was very, very challenging. We have got three businesses there; a window business, a cabinet manufacturer/installer as well as a plumbing distribution-related business and all of them showed significant declines in the first quarter.
In addition, relative to our ready-to-assemble operation there, another... in the cabinet segment which is a large operation, they had a very difficult quarter as well.
If you might remember a couple of years ago, we had some trouble there operationally and particularly with particle board related prices. The operational problems have been addressed but there is a significant decline in demand from several of their major customers during the first quarter.
Richard A. Manoogian - Executive Chairman
We might remind everybody too that Easter was in the first quarter this year, unlike last year when it was in the second quarter. And in retail and home improvement, Easter tends to be more of a negative than a positive, and I think particularly, in Europe where they have even greater Easter holidays than we do here, that probably pushed some business from first quarter into second quarter.
Nishu Sood - Deutsche Bank Securities
Okay, great. And the second, you mentioned particle cost, commodity costs.
Donny if you could just update us on the quantification that you have given over the past few quarters on commodity costs. I can imagine you mentioned incremental costs of metals and energy, there is probably been some offset from wood-based products and in insulation.
So I was wondering if you could just give us an update on the numbers there.
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Well what I would tell you there Nishu, is that if you go back and as we've said many times, we really started getting hit with the wave of commodity cost increases in late 2005 and probably didn't react as quickly as we should have. We are behind the eight point.
I think at point our estimate was about $150 million of commodity-related costs that we had not offset by pricing. Since that point in time, we have been much more aggressive in working to offset commodity costs, whether it's through pricing productivity or sourcing.
So we've been very active and my feeling is that at this point in time, absent that negative carry if you will from the first onslaught of commodity cost increases, we're in pretty good shape in terms of commodity cost versus our ability to offset it. Again with pricing or productivity, and I think you can tell that relative to our gross margins.
If you go back to 2007, we were only down 30 basis points in gross margins at a 7% sales declines, and as I mentioned in our prepared remarks a few minutes ago we only dropped 60 basis points in gross margin in the first quarter of '08 compared to the first quarter of '07, even with a 13% decline in sales, which is really more like a 15% decline in terms of volume because of foreign currency. So having said that, I think that we're in pretty good shape at this point in time.
I mean we have seen copper which is a major component for brass, tick up a little bit here lately. We have also seen the petroleum-based costs for some of our other manufacturing units in terms raisins for a windows components for a paint tick up relative to the energy costs that have gone up.
On the other hand, to the part of your question we have seen some reduction in other commodities like for example insulation, for obvious reasons given the decline in new homes start. So I think right now we're in pretty good shape and I also believe that we've got good discipline and focus in terms of being very reactive and proactive, if you will in terms of doing that we can do to offset commodities.
And I feel pretty good about that going forward. I mean that's not to say we might have an issue here or there from time-to-time at a product group.
But our guys are on top of that and doing the best they can to make sure that we deal with those on a timely basis.
Nishu Sood - Deutsche Bank Securities
Does that mean that you push through more price increases in the first quarter, to recover. I think you'd last time $150 million as you mentioned $200 million in un-recovered costs as of the end of 4Q.
So I was just wondering, if since then you've pushed there any additional price increase to recover some more of that?
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
There would be some price increases in different areas, different product groups in the first quarter.
Nishu Sood - Deutsche Bank Securities
Okay, thanks a lot.
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Thank you.
Operator
We'll go next to David Goldberg with UBS.
David Goldberg - UBS
Good afternoon.
Timothy Wadhams - President and Chief Executive Officer
Good afternoon, David.
David Goldberg - UBS
I wonder if you could give us... if you can kind of talk about MCS and the numbers you guys drop there with the total opportunity of the 20,000 and kind of where you are now and what you think in a slower demand environment, starts are kind of down in the range where you are now for some extended period of time.
What you guys can do to gain greater market share, maybe try some operating leverage in the business?
Timothy Wadhams - President and Chief Executive Officer
David, explain to me what do you mean by 20,000?
David Goldberg - UBS
The total opportunity in the house, the total opportunity for...
Richard A. Manoogian - Executive Chairman
20,000 that we'll take, yes.
Timothy Wadhams - President and Chief Executive Officer
David, what we have done there is... I do think there is opportunity to continue to hack away at the MCS cost structure.
But I do believe it's important that we maintain our location. So, and it takes a certain number of people to maintain to location.
So, what that really forces us to do is take a look at each of the individual product lines and really look at opportunities within those product lines to grow those products where the direct margin is still attractive or creative to the overall earnings. And that's what the Group has really been focused on.
So, it really rationalizes the product base in growing those products where we think will have a positive impact on earnings. The other thing we have been focused heavenly on as we have continued to lead the home...
the new home construction market in Green and we brought environments for live into the building community in 2001. We partnered with GE on ecomagination and we believe that that creates tremendous opportunity to really increase our take per unit along energy efficiency, which is highly attractive from a direct margin point of view.
It's really the core capability of that group. So, anything we can do to increase inflation values or take per unit has a big impact on our profitability.
So, we are really focused on rationalizing the product lines, continuing to take costs out but really trying not to impact the footprint too dramatically, so that on the way back-up we really have the number of locations to serve the demand.
David Goldberg - UBS
I am wondering that may be Donny, give us some more detail on the green and the environment for living-type products?
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Sure, possibly there is.
David Goldberg - UBS
Better, can you give us an idea, are consumers going to pay more for it. What's the adoption been like among consumers and how do you think that trends over time.
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Yes, well, I think trends over time, I think its kind of a generational issue and I think it becomes more important with the younger generation. So as you get younger home buyers coming in and first movers, you clearly see that trend green and sustainability to be more important with those consumers.
Our revenue related to environments for living is that those homes are high-performance homes, which means they have to work, and we drive a lot of different revenue sources but part of it is in home testing, so we test these homes, we also have plan review where we work and design in engineered specifications. We also have higher inflation values in the homes so it raise to take per unit.
Obviously we are very excited about the partnership with GE and those homes and their ability to market them under the ecomagination brand. So a lot of good things in this space, we think lot opportunities for us to drive some profits.
David Goldberg - UBS
And then I would like to just get a quick follow-up, I guess along the same lines. Are you seeing any...
can you give us kind of an update on the financial health of your home builder customers, and maybe if you are seeing any differences in the health of maybe some of the larger public versus kind of a smaller private guys or more...
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Sure, John Sznewajs and I started monitoring really the top 100 builder receivables on late last year and it continued to do that on a monthly basis. And on the nice thing about, really our exposure in this area is that no one customer is really significant in size, although we have some customers with larger exposures than others, we are a pretty diversified customers group.
We are not seeing any trends I would say that credit-related issues are concentrated on the big builder or small builder. Yes, it really is more related to an individual.
So, we are seeing some large and regional builders have some credit-related issues and we certainly are seeing some small builders have issues. So...
but we are very, very focused on that. I think we have done a nice job as far as reviewing our portfolio and staying on top, and we don't believe that although the trend would be higher bad debt expense for the first quarter this year, we think on a full year basis it will somewhat, somewhere what we see last year.
David Goldberg - UBS
So no change in reserving patterns?
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
I don't know if I can go that far, because I think we are getting into difference between reserves and expenses. But I think we won't expand the...
expense we are planning to have in 08 will be similar to what we had in 07.
David Goldberg - UBS
Okay, great. Thanks.
Timothy Wadhams - President and Chief Executive Officer
Marisi, I think we have got time for one more question?
Operator
We'll go next to Stephen East of Pali Capital.
Stephen East - Pali Research
Thank you. Good morning.
Timothy Wadhams - President and Chief Executive Officer
Good morning Steve.
Stephen East - Pali Research
On your key retailers, the big drop quarter-over-quarter; as you all look at that, can tell how much of that is de-stocking by key retailers versus pure takeaway?
Timothy Wadhams - President and Chief Executive Officer
Steve, I don't think that de-stocking for our products is really a major issue. It's really pretty small.
As you might remember, cabinets generally when we sell those through our key retail partners, are shipped directly to the end consumer. So there is no inventory there.
And in terms of Behr, Behr has been able to achieve pretty much 99.9% fill rate with Depot from an inventory management standpoint. They've got a really extensive distribution in logistics network that allows them to do.
So generally speaking, we don't have that kind of situation like others in this space might have from time-to-time. That's not to say there might not be a little bit of movement at quarter-to-quarter but for us it's really doesn't move the needle much.
Stephen East - Pali Research
Okay. And just two last questions.
One is what the foreign currency exchange charge was and the second was, Donny if you look at your sales declines, is this on installation business I am sorry, is this all volume or is there a price volume mix going on there and could you elaborate if there is?
Timothy Wadhams - President and Chief Executive Officer
Yes. On the currency, the $0.02 Steve that we had in the quarter?
Stephen East - Pali Research
Right.
Timothy Wadhams - President and Chief Executive Officer
Yes. What that relates to is a couple of different things.
One is that from a tax planning standpoint, we have loans from Europe to North America that are denominated in euros and our books in North America, we have to adjust that each quarter, so that you have dollar equivalent. That adjustment tends to stay...
flows through the P&L and there is no offset in terms of inter-company activity. So that was a big piece of that and we've had those over the past, Steve.
From time-to-time, there might be a penny or two in a quarter. In addition to that part of the explanation, the other part is just simply transactions that get settled in a quarter or during a month, where you've got a currency that may move, whether it's a sale in one country, and a lot of that would be driven by our foreign operations.
Stephen East - Pali Research
Okay.
Timothy Wadhams - President and Chief Executive Officer
And then, Donny why don't you...
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Sure. On the price volume mix Stephen, there is a component of the sales decline in the installation of service that is related to more competitive pricing.
And part of it is volume and part of it is price. I will say that the Group has done a really good job offsetting their selling price reductions with reductions in their input costs, and have done a nice job holding the direct margin consistent.
Stephen East - Pali Research
Okay. If I looked at roughly 24% down, what percentage would you say is volume-related versus price?
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Yes.We really don't give that out Stephen. I think that the key part here is that you know where the market is down, you know the competition has been fierce out there and I think given what the peer group is reporting; you can make your assumptions about how well they are doing.
I will tell you again, I would like to reiterate that from a material cost point of view, have done really good job of passing those decreases in what we have to sell for to their supply base and have done a nice job holding their gross margins.
Stephen East - Pali Research
Okay, that's fair enough. Hang in there guys.
Donald DeMarie, Jr. - Executive Vice President, Chief Operating Officer and President, Installation Services Group
Thanks Steve.
Timothy Wadhams - President and Chief Executive Officer
Thank you. Okay.
And in wrapping up, again I would like to thank all of you for joining us today. With sales down 13%, first quarter 2008 was certainly a tough one for Masco.
But even with that 13% sales decline and increasingly competitive market conditions, our gross margins were only down 60 basis points from first quarter 2007. As we pointed out on our last call, 2007 full year gross margins were only down 30 basis points compared to 2006, with sales off 7%.
We are pleased that we've been able to limit the decline in gross margins and very much appreciate the efforts of our team worldwide and their actions to address difficult market conditions. We are proud of our people and are focused on driving solutions for our customers and value for our shareholders.
There is no question the next few quarters are going to be challenging. While we will continuingly look for ways to improve our process efficiency and cut costs, our primary must remain on managing for the long-term growth and profitability of the company.
We need to be careful not to hurt the company's future growth by eliminating investments that will differentiate our future products and services. Rather we will continue to invest in innovated new products, improve the business systems within our operating divisions and rationalize our plants and facilities.
We believe that the industry will eventually rebound, and when that happens, we expect Masco to be well positioned to leverage our strengths and market conditions. Thank you.
Operator
Thank you for your participation. This concludes today's conference.
You may now disconnect.