Apr 28, 2009
Executives
Timothy Wadhams - President, Chief Executive Officer, Director Donald J. DeMarie, Jr.
- Chief Operating Officer and Executive Vice President John G. Sznewajs - Chief Financial Officer, VP and Treasurer Richard A.
Manoogian - Executive Chairman of the Board
Analysts
Budd Bugatch - Raymond James Peter Lisnic - Robert W. Baird & Co., Inc.
Daniel Oppenheim - Credit Suisse Michael Rehaut - J.P. Morgan David Goldberg - UBS Kenneth Zener - Macquarie Research Equities
Operator
Good morning, ladies and gentlemen. Welcome to the Masco Corporation's 2009 first quarter conference call.
As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received a press release and supplemental information, they are available on Masco's website along with today's slide presentation under the Investor Relations section at www.Masco.com.
Before we begin management's presentation, the company wants to direct your attention to the current slide and the note at the end of the earnings release, which are cautionary reminders about statements that reflect the company's views about its future performance and about non-GAAP financial measures. After a brief discussion by management, the call will be opened for analysts' questions.
If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations Office at 3137925500. I would now like to turn the call over to Timothy Wadhams, President and Chief Executive Officer of Masco.
Mr. Wadhams, please go ahead, Sir.
Timothy Wadhams
Thank you, Bill. Good morning and thank all of you for joining us today for Masco's first quarter 2009 earnings call.
Joining me are Richard Manoogian, our Executive Chairman, Donny DeMarie, our Executive Vice President and Chief Operating Officer, and John Sznewajs, our CFO. I assume you all have the slide deck and if you could please flip to slide number 3.
Obviously, the quarter was another difficult one and I would remind folks that from my seasonal stand point, the first quarter is typically our weakest quarter of the year from our revenue stand point. We were down 26% in the quarter to $1.8 billion in sales and we continue to see significant volume declines in both new home construction and home improvement markets both in North America and internationally and also had negative foreign currency impact in terms of sales of about $85 million.
Earnings per share were a loss in the quarter of $0.23 compared to $0.04 of income in the prior year and we will talk about EPS in a minute. Working capital was a very significant positive for us.
We were able to reduce working capitals as a percent of sales defined as receivable plus inventories are less payable from 17.3% to 16% and we significantly enhanced our financial flexibility and I will move to the next slide. We did end the quarter with $800 million of cash and if you will move to Slide 4, we will talk about a couple of items that we had mentioned at our last call.
First and we previously announced this, we did reduce the dividends from a quarterly perspective to $.075 from $.235 and that will save the company on an annual basis $240 million. In addition, in April (actually, just last week), the Company's bank group at the Company's initiation amended our Five-Year Revolving Credit Facility.
In that process, we reduced the facility from $2 billion to $1.25 billion and you might remember that $2 billion was in place, several years ago, when we had a zero coupon, debt instrument outstanding and there was quit feature of that. So, we had some extra provision, if you will, in the bank agreement to cover that, lowering that from $2 billion to $1 and a quarter billion from our perspective was not a significant issue.
Debt to total capitalization has been increased in terms of the covenant from 60% to 65%. At 331, we came in at 58% and I would point out that we were in compliance with our covenants as of 331.
That would be the old covenants. In addition to the improvement from our perspective of the debt to total capitalization ratio, we also were able to put in place a basket of $500 million that would relate to any potential non-cash related charges or certain non-cash related charges primarily goodwill and/or other intangibles.
We are not anticipating any issues at this point in time but that does give us some extra cushion, if you will or if we should have a good will impairment charge like we did last year at the end of the year. Even all that, our current borrowing capacity is the entire line.
We do have the ability to draw the entire $1.25 billion that is a significant improvement from where we were at the end of the first quarter. You might remember as of the beginning of the year, we run a position where we can only draw $420 million and still comply with the covenant.
We have been able to effectively triple that and we feel like that is a very positive outcome for the company. One other item I would like to mention on the slide is that we did repurchase $2 million shares of stock in the quarter and I want to make sure that there is no confusion.
Our share repurchase program continues to be on-hold. The repurchase of these share is really an asset to shares issued for stock awards to our employees and I would remind, folks, as I mentioned, we did end the quarter with $800 million of cash and we continue to expect that we will end the year with approximately $1 billion of cash.
If you flip the Slide 5, I mentioned that we lost $.23 in the quarter and that included $.04 related to rationalization charges; $.01 related to the curtailment of defined-benefit plans, we are transitioning from defined benefit pension plans to defined contribution plans and that will be effecting, or freezing defined benefit plans effective January-01,2010 and I caught this about a penny and we also had impairment charges and currency transaction impact in total of about $5 million which in aggregate is about a penny. We also, even though we are in a loss position, did have $.02 of tax expense in the quarter as we mentioned when we provided guidance earlier this year.
Hopefully that gives you a little bit of perspective of what is in the earnings for the quarter. If you flip to Slide 6, from a consolidated basis, I mentioned we were down 26% in sales and again, that is obviously, significantly, driven by the decline in volume related to both new home construction and home improvement markets.
That comment will be one that I will not repeat going forward. It does apply to segment discussions as well as North America and international.
I would point out that our sales to key retailers in the quarter were down 11%. That compares with the fourth quarter decline of 14% and in a full-year 2008 decline of 12%.
We had a lot of position from an operating profit stand point, as you can see, $7 million and again, that is related to the reduction in volume and the under absorption of fixed costs and also reflects the fact that we did $24 million of rationalization charges in the quarter as compared to $9 million in the prior year. If you flip to Slide 7, please, in North America we were down 24% and again, that is driven by volume in both of our major markets and obviously, in North America (as you can see in this slide) profits were down from 7.9% of sales to 1.3% of sales, again, reflecting the significant volume decline and the under-absorption of fixed cost.
If you flip to Slide 8, our international operations were off 31% and that included approximately $74 million or 13% of the decline related to the impact of foreign currency reflecting the strength of the US $ primarily against the Euro as well as the British Pound. Again, significant volume declines for our European businesses, particularly in the United Kingdom, profits were down from 9.7% of sales to 3.9% of sales, again, reflecting the volume decline and the under-absorption of fixed costs.
On Slide 9, this gives you a little bit of perspective in terms of the components of working capital. We talked about the percent of sales earlier and as you can see, we saw some improvement in both inventory and payables and certainly feels very, very good about the job that our folks are doing from an operating perspective to manage working capital.
In the environment wherein with the significant reduction in sales that we have seen in the fourth quarter of 24% and 26% down in the first quarter, our folks had really stepped up and I think are doing an excellent job of managing the working capital side of the business. If you flip to Slide 10, I want to walk through the segments really quick.
I will talk a little about cabinets. Cabinets were down 34% in the first quarter and again, similar situation as I mentioned earlier, significant volume declines in the major markets.
We also add currency impact here of about $18 million which would have contributed to that sales decline and certainly had underperformance, if you will or challenged performance in our European businesses. Profits went from 4.7% which was $28 million last year to a loss of $28 million in the quarter and we did have $9 million of rationalization charges in this segment versus $1 million in the prior year.
If you flip to Slide 11, in terms of plumbing, our sales were down 26% and again, significant volume declines both in North America and Europe and we did have approximately $57 million of negative currency impact related to our plumbing business which includes $11 million in North America. Profits were down in this segment from 12% to 5% of sales, again, reflecting the lower volumes and the under-absorptions of fixed cost primarily.
If you flip to Slide 12, our installation and other services businesses, this business is pretty much a hundred percent related to new home construction. The sales there were down at 35%, another significant drop in terms of this particular segment and you can see the decline in profit with small loss or modest loss last year down to $36 this year and a slight increase in system's implementation cost year over, over year as a part of that.
If you flip to Slide 13, on the brighter side of the business, this is our Decorative Architectural Products segments which includes paints and stains, as well as builders' hardware and sales here were up slightly at 2%. Margins and operating profit was relatively flat and that was driven by nice improvement in the builders' hardware side in the business even though we had lower sales there, we did have some reduced promotional and program related costs that helped the profitability of this particular segment.
If you flip to Slide 14, Other Specialty Products which includes our window offerings in both North America and in the United Kingdom, again, significant volume declines in both of those markets drove the 32 % decline in sales. Profits went from an $8 million profit last year to a $7 million loss in this segment.
There is a negative impact in terms of sales here of foreign currency of $10 million and again, this reflects lower volumes and the under-absorption of fixed costs. If you flip to Slide 15, this gives you a little bit of a summary of the actions that we have taken from our rationalization stand point over the course of the first quarter as well as on a total activity basis which goes back a couple of years and as you saw in the press release, we did incur about $24 million in the quarter, I mentioned that earlier.
That compares with $9 million last year in the first quarter. We did close two additional plants and overall, our headcount reduction now, at this point in time, is down 27,000 people which represent about 50% of our North American workforce if you go back a little over a couple of years.
We do have in the appendix, we included a breakdown of the restructuring cost in the first quarter by segment and we also have in there a summary of the 2007 and 2008 numbers. With that, if you would flip to Slide 16, before I turn this over to Donny, I have spent a lot of time talking about of some of things that we are doing to reposition our cost structure and I think we continue to make a lot of progress there, obviously, it is a challenging environment.
But, one of the things that we think that we think is important for investors to understand is also the investments that we are making at the same time in the business to position our business for a long term growth and value creation. With that, I would like Donny to pick up the presentation.
I will come back when Donny finishes and talk about guidance and then we will go to Q&A.
Donald J. DeMarie, Jr.
Thank you, Tim, and good morning. I would like to talk to you a little bit about what we are doing to really positions ourselves to win on a way out of this operating environment and really have focused our efforts in five areas.
The first is realigning our cost structure for what is a new paradigm related to demand and with doing that we also have to adjust our supply chains to be more efficient at of those lower volumes. We are investing in our leadership brands, we are driving innovation and we have a strong focus on cash.
Next slide, Slide 17, in our Cabinets and Related Products segment, there are key initiatives that have been around building our manufacturing capacity to be more flexible. Our North American Builder Businesses have now adopted a common architecture and we have completed the transformation of the first facility and our Merillat branded product is now on the common architecture and that now, I think, not only did we go to a common architecture for those products but we also have been able to increase the strength for that box.
We feel very good about that. We have a world class lean organization on the builder cabinet side.
We continue to invest in our leadership brands, Quality, Merillat, and KraftMaid and we are prepared for the future. We have a major ERP implementation on the Builder Cabinet Group and we have completed our first major milestone of that implementation with our first assembly plant which has been converted and we expect that project to complete the second quarter of 2010 on track.
Next slide, Slide 18, we are very excited to tell you some of the awards we have won related to lean. We were one of the Ten Top Places to Work by iSixSigma, related to iSixSigma.
We have won a Shingo Prize in the past and most recently, the Masco Builder Cabinet Group President Karen Strauss has been named the Sixth Sigma CEO of the year by Global Six Sigma Award and Karen will be accepting that award on June 24th at the Summit in Chicago At Slide 19 you will some of our new campaigns that we have been running related to KraftMaid. We really are engaged in the consumer to understand that the design capability of KraftMaid and they can really personalize that experience to reflect their own personality.
Slide 20, in the Plumbing Products category, our key initiatives is in sourcing and supply chain has caught change and labor increases on outside of the United States. We really need to reexamine our entire cost position and we are doing that.
We continue to invest our Leadership Brands with Delta and Hansgrohe and Brizo but we are also focused on having an innovation in this space. I will run to talk a little bit more about Diamond Seal in the future slide and also innovation, from our point of view, can be, now limited the new products but different ways to effect a market.
Slide 21, see a couple of examples on Slide 21 of our Delta and see what Delta Can Do Campaign. This campaign was design to get the consumer to reengage with the Delta Brands to see what the new styles and functions that we have out there.
Slide 22, our Diamond Seal Technology which we have brought out in the Delta branded product is really, there are two major innovations here. We have a new ceramic cartridge where we have a carbon film between the discs and by doing that, we no longer have to have any lubricant inside of that cartridge so it expands the life of the cartridge.
We also have introduced a one-piece, we call InnoFlex water way where there is no connector house required but it also stops water from ever coming into contact with metal within the faucet. We are very excited about this innovation.
Slide 23, our Hansgrohe is not only a design leader in Europe but it is also a remarkable company and been aiming to expand globally and today, we now are showing the Hansgrohe product in more than 70 markets outside of North America. Slide 24, our Installation of the Services segment, we can see rationalize product portfolio focusing on the most profitable products.
We're driving innovation with the industry leading on green building program, our Environment for Living Program and we have partnered with GE to bring the Ecomagination Home Program for Life. We are also preparing for the future with the ERP implementation at Masco Contractor Services and we are in the middle of a full-blown roll out.
That ERP roll out will also complete about this time next year. We are emphasizing more repair and remodel through our network of installers and we continue to open new locations for service partners just like distribution business within the segment.
Decorative Architectural on Slide 25, the key initiatives are premium paints and stains that we brought out under the Nanoguard Technology. We brought out about a year ago our Premium Plus Ultra Exterior which is sold extremely well at retail and we have just introduced and are doing a launch into the Home Depot stores with our Premium Plus Ultra interior, a paint and primer in one and the picture on 25 is the new in cap display for that Premium Plus interior and we have a new website there to drive additional traffic to the brand and we have our new verve lighting control system.
On Slide 26, our Verve system changes the way people think about wiring in a home because there is no longer wiring required from switch to the fixture. The extra switch does not require any form of external energy.
The flipping of the switch creates enough energy that can be harvested as a radio signal to the control panel. We are very excited about this innovation.
We are think it will change the way homes are being built and we have now shipped their first orders and so this is an exciting time for us with this new product line. On Slide 27 in our Other Specialty Products, our key initiative here was really taking a look at our supply chain and how we serve the markets more efficiently.
We also have introduced a new opening price point product, our Simplicity Window under the low Nanoguard brand. We are excited about the opportunity this gives us as builders look to cope with competition from foreclosed homes and lower priced homes; we think this is the right product at the right time.
I am closing my segment of the presentation with Slide 28 and we firmly believe at Masco that innovation is the life blood of our company. We have a culture and a long stand of history being very innovative but 2008 was a very, very strong year for us with 30% of our sales coming from products that we have introduced in the prior three years.
So, it is a strong statement on our commitment to innovation and we hope that this will continue to go even higher from here. With that, I will return the call back to Tim Wadhams.
Timothy Wadhams
Thank you, Donny. I appreciate it.
If you could please flip to Slide 29, we will talk about our full-year guidance and I would remind everybody that in the environment we are in, providing guidance, forecasting business is extraordinarily challenging but we will update you as to where we see things at this point in time. We currently see our sales in terms of top line decline down approximately 20% to 25%.
That is an increase in the decrease that we are anticipating in sales. Previously in our guidance, we mentioned that we anticipated sales to be down middle to high and obviously down 26% in the first quarter, as we said earlier, expect the first half to be difficult.
We currently see how thing starts for the full year at approximately 550,000 and that is at the low end of the range that we provided back in February at 550,000 to 600,000. As a result, we currently anticipate that our loss will be in a range of negative $.15 to negative $.35 for the full year.
Previously, our range was approximate break even to a $.30 loss. We continue to believe that we will generate free cash flow of approximately $300 million and there is a slide in the appendix that provides some detail by the major components of free cash flow in a full-year basis.
Our EPS includes rationalization charges which we anticipate will be approximately $.13 of share. Now, that relates the programs that we are already committed to and as we said in the press release, we will continue to evaluate the business and that it is possible that there could increase rationalization related charges.
The $.13 is an increase from $.08 that we estimated back in the February call, an increase from $44 million to approximately $70 million for the full year. We continue to anticipate an increase in pension expense over the prior year.
That estimate now is about $.05. I think previously, we suggested it might be $.06 and we continue to believe that we will have a tax expense notwithstanding the fact that we are anticipating the loss for the year somewhere around $.04 to $.06 this year.
I would remind everyone that estimating taxes in the environment when you are around break even or slight loss is relatively difficult, the tax expense relates to jurisdictions that would include states and/or foreign locations where we have income where we are anticipating the heavy loss that would offset the tax expense. I will give you a little summary in terms of where we see our guidance and with that, Bill; I think we can open up the lines for Q&A.
Operator
(Operator Instructions) Your first question comes from Budd Bugatch - Raymond James.
Analyst for Budd Bugatch - Raymond James
Good morning, everyone. This is Chad filling in for Budd.
First question, in regards to the reduction and the revenue outlook, we took things down from mid to high teens to down 20 to 25 and housing starts, you are assuming are at the low-end of the previous range and key retailers' sales in the quarter were actually pretty consistent with what you had talked about for the full-year run rate last quarter. Obviously, Q1 sales, I would assume that they were below the internal expectation for the quarter but I guess what really drove their reduction?
Are you assuming if Europe weakening worsens, is there an expectation for a retail to get worse in the United States or are you just adding some more conservatism?
Tim Wadhams
No. I would not fairly say conservatism.
This is basic, we build up our forecast from the bottom up and one thing that I would point out is that we currently estimate that foreign translation will cost us about $300 million for the full year and that we add about $85 million in the first quarter. We are anticipating that we will have, probably, the rest of that will be evidenced in the second and third and third quarter.
Now, we had a pretty good hit in the fourth quarter of last year as the dollar started to strengthen. So, I think, Chad, it reflects that, it reflects, just in general, I think, a little bit more slowing.
Our first quarter came in. A couple of percentage points lower than we anticipated when we talked to folks back in February and that was really kind of across the board if you will.
I think that when we think about the additional sales decline really is pretty much across all the businesses both international as well as repair, remodel, and new home construction.
Analyst for Budd Bugatch - Raymond James
Okay. Given that reduction to the revenue outlook, I would have anticipated a bigger hit to the EPS outlook.
Could you kind of maybe walk us through or help quantify some of the incremental benefits that you expect will offset deleverage?
Timothy Wadhams
Yes. Actually, (that is a very good question, Chad), as we talked in the first quarter when we provide the guidance, we anticipated that at that point in time that we would achieve about $120 million of cost-structure improvement over last year.
That broke down about $60 million related to savings from some of the actions that we have taken. The other $60 million was related to the relationship between price and commodities and that is total $120 million roughly.
We currently believe that that number is going to be closer to $200 million. We currently believe that with some of the actions that we took in the first quarter including a headcount reduction at the corporate, another plant closure in the Cabinet business, that the savings that we are expecting year should approximate $80 million and I would point out everybody that we have taken a lot of charges and we have talked about the benefits related to those charges but the other thing that I think is important for folks to know is that we have had an on-going focus on productivity of profitability improvement, if you will.
Donny talked a little bit about lean principles in the cabinet group. So, there are a lot of other actions that take place within the Company whether it is material appliance related or in a variety of various where we obviously attempt to improve our operations on a day in, day out basis.
We are currently anticipating about $80 million in terms of saving and we currently anticipate that the relationship between price and commodities will generate about $120 million in terms of improvement over the prior year. I would point out that from a price stand point that is not anticipating any significant additional improvement in price across the board.
Most of the price increases that we have been pursuing are in place, there are a few that we will continue to pursue and again, we do not get specific by customer or by product line there. But I would say that a lot of it relates to the anniversary of price and also the expectation that will see commodity prices decline and the price commodity relationship does have implications to all of our segments.
Just to give you a little perspective of where we see those benefits resulting, we would guess out of the $200 million that about 35% to 40% of that would relate to our plumbing segment and most of that is related to the relationship between price and commodity. We also expect in that segment to see some savings from a cost-reduction stand point in the back half of the year and a lot of it relates to our European operations.
We might remember that we did have, after a number of charges late last year related to Europe. We also think that about 20% to 25% of the $200 million would relate to our installation business.
Again, most of that would relate to savings action which would affect the back half of the year. Obviously, you are aware, we have closed the number of branches and have significant headcount reductions in that business and we would expect to see the benefits of that flow through the latter part of this year.
In addition, in terms of savings, Cabinets, the corporate office, our Other Specialty segment would represent about 10% of the $200 million each and that would be the same for our decorative architectural products group. The savings, the Cabinet corporate and other more of on a saving side as opposed to the price commodity relationship and a little of both in terms of our decorative architectural products.
The commodities we are talking about include energy, natural gas, brass petroleum based products including resins for windows as well as glass and in the first quarter, we estimate, we might see in about $20 to $30 million of benefit from activity in the first quarter. I am giving a kind of a long answer here, Chad, but I think, hopefully this is hopeful to others.
We have seen some positive signs in the numbers. Our SG&A spending has been down, now pretty significantly the last two quarters.
We were down $64 million in the fourth quarter of 2008. Down another $60 million in the first quarter of 2009 in terms of total SG&A spend and I think you probably saw that our general corporate number was down from $43 million in the first quarter last year to $33 this year.
The other thing that I would point out is that we did see an improvement in our detrimental margin or detrimental margin decline in the first quarter versus the fourth quarter. You might remember, last year, we ran a detrimental margin for the full year at about 34%.
That number was closer to 26% in the first quarter of 2009. I think that is certainly evidence that we are seeing some improvement and we also, we are only down 190 basis points in gross margin in the first quarter compared to last year's first quarter, the fourth quarter, we were down 400 basis points and if you compare first quarter gross margin with fourth quarter, we are actually up 190 basis points.
I think that gives you a little bit of perspective in terms of where we see that $200 million showing up over the course of the year and again, I would point out that much of that is anticipated in the second half of the year.
Analyst for Budd Bugatch - Raymond James
That is very helpful. Thank you very much and good luck on the year.
Timothy Wadhams
Thank you.
Operator
Your next question comes from Peter Lisnic - Robert W. Baird & Co., Inc.
Peter Lisnic - Robert W. Baird & Co., Inc.
First question is if Donny, maybe you could talk a little about the plumbing supply chain initiatives. I am just trying to get an understanding of maybe the breadth and the scope there which is kind of gone from looking at the supply chain and looking overseas in low cost countries and now it sounds like the labor equation has changed.
So, just trying to figure out how significant is the work that you have to do there relative to the undertaking that you have in Cabinets for example?
Donald J. DeMarie, Jr.
Yes, Pete, I would be happy to make a few comments. Right now, we are in the process of two things going on in the plumbing supply chain and primarily talking about our North American operation.
One is we have a significant conversion to our Diamond Seal Technology which the supply change dramatically because we are going from my ball valve to a ceramic cartridge and we are going from really a metal body and a connector hose to a one-piece InnoFlex water way. So, that changes the supply chain dramatically as we convert more and more the Delta product to Diamond Seal Technology (DST) which is the internal for Diamond Seal Technology (DST).
The second thing we are looking at on the Delta is really more along our opening price point product and exactly, what is the right supply chain to do that in a way that it drive s the lowest total cost and does not impact the quality or the ability to proliferate that brand aiming for the appropriate retailers here in North America. We started that work, Pete.
It is not complete. Hopefully we, I am going to talk a little bit about the next conference we got later in the year.
Hopefully we can update you at that point. I will tell you that our opinion that price cost changes have been pretty dramatic and we think that you will see some pretty significant changes in a way under which we source those products.
Tim Wadhams
Definitely one thing, the good point out there that Donny alluded to is that we have got the flexibility to really take advantage of whatever the most cost effective approach is with some of the capabilities that we have in the Far East. So, it gives us the opportunity to manufacture here or there defending on things like freight, labor cost et cetera.
Peter Lisnic - Robert W. Baird & Co., Inc.
Okay. Great!
This is the second time I sort of heard migration to open price points window business and now plumbing. Is there broader strategic shift or if that just have been under penetrating opportunity for you as you kind of look across the portfolio business?
Timothy Wadhams
I think it is both, Pete. If we look across with our view of what happens on our way back out is that we think for a very significant period of time that if you look at new home construction, we are going to be competing with the lower home prices which will for surely our Builder customers to the content.
We also have consumers who, we believe, coming out of this are going to be more conservative in a way that they purchase and we look at some of our opening price point products especially on the window side with no guard has really been positioned as amid the high branded product. We really did not have a way to penetrate that market without discounting a product that we did not believe was appropriate to discount.
So, Simplicity for us does two things. It is an opening price point on the no-guard product but also protects our no-guard branded product from further discounting.
On the plumbing side, we really have a wonderful opportunity with a fare list product to continue to penetrate that opening price point and so you will see, I was getting more aggressive with really trying to use that to attack the opening price point.
Peter Lisnic - Robert W. Baird & Co., Inc.
Excellent! That is very helpful.
Thank you.
Operator
Your next question comes from Daniel Oppenheim of Credit Suisse.
Daniel Oppenheim - Credit Suisse
Thank you very much. It is a similar question there is a lot of talk about terms of investing leadership brands, but also lots of favorable product mix impacting the profits.
Can you tell me how much the margins were impacted with the trading down as you are investing in, and the cost for the investing for leadership grants, how much is going there versus the new product and everything about sells in 2010? How much will we see coming from investments products that are coming out now in business with a low price point?
Timothy Wadhams
Well, I think, the first part of your question, Dan, related to where we have seen mix related issues in the quarter and that will include in cabinets where we have seen a migration to lower price points and then with certain offerings in Europe and a little bit lower mix in terms of just channel if you will. In addition, in plumbing, we had a little less rich mix primarily because some of the project work that Hansgrohe has been able to win in the Middle East had slowed down in the first quarter.
We do understand that that is peaking up in terms of opportunity for us going forward. We are encouraged by that but we did have a little less exposure there.
In the other specialty segments, I think on the window side, I do not know that we had a mix issue related to that but I think you will probably be primarily in the cabinets and plumbing. Donny, is there any other any other segment that you are aware of where we had any trade down maybe?
Donald J. DeMarie, Jr.
No. I think we just have to be careful that that mix can be more than just trade down.
For example, if you look at installation services where the average home size has come down dramatically, that also creates some unfavorable mix and as housing starts to come down and then they become smaller, it impacts really our take per unit as well. So, I think we are just seeing the overall less demands, smaller homes; opening price point product has just become a bigger issue for them.
Timothy Wadhams
Yes. The other thing, Dan, too, that we should mention is on our distribution business.
We have seen a shift to a lot more roofing related material which tends to a little bit lower margin as well. There are some examples that are kind of sprinkled throughout the business.
Dan, could you kind of repeat the other part of your question, please?
Daniel Oppenheim of Credit Suisse
Just wondering, just a few things about the margins; first, how much is good to get that clarity and how much is the margin or what you think was coming from that…
Timothy Wadhams
That would be tough for us to go on to find, Dan. I would say that when you look at our numbers and you look at the significant declines in those groups, we are down to 30% or 35 % in a couple of them.
Most of the margin decline is tied to the significant volume reductions. That is not to say there is not some impact from mix but again, I think that the different terms of thinking about it, I think more about the volume side of the business.
Daniel Oppenheim of Credit Suisse
Great! The second; I just wondering if we look out to 2000 and we are just thinking about where you are now, what percentage of your sale that you would say that your leadership brand and where do you see that shifting?
How much of the shift you are expecting there?
Timothy Wadhams
We have a very strong brands across almost every one of our segments and I would think that in next year that we would continue, I am anticipating, next year is going to be better than this year and so I would expect that we ought to see some improvement across the board whether it is KraftMaid, Merillot, the Quality Brands and our Cabinet Group, Hansgrohe, Delta Faucets as well as [Baird] which continues to take share and [Mill Guard]. I would expect all of those to continue to do well next year.
Operator
Your next question comes from Michael Rehaut - J.P. Morgan.
Michael Rehaut - J.P. Morgan
I appreciate the detail on some of the benefits by segment that was very helpful. First question on the free casual forecast that you provided later, I think in page 38.
I just wanted to know. You may have other non-cash of $145.
I was wondering if you could go on a little more detail on that and also if you are considering perhaps taking another shot at the dividends to lower that and if there are any other areas of potential upside either at through asset sales or the like to both of that cash generation this year or next? Certainly perhaps to make things more increase some flexibility in front of the 2012 maturity.
Timothy Wadhams
In the other non-cash, Mike, what we have in there is we have stock based compensation. We also have minority interest as well as deferred income taxes make up the $145.
There is also probably a little bit of non-cash charges that would flow through that line item. That is what comprises that.
Your second question on the dividend, no. At this point in time we are not thinking about or considering any reduction in the dividend.
We did that very thoughtfully I think back in the early part of this year and as we mentioned we certainly feel like on an annual basis, $105 million is something that we can handle given that we continue to anticipate having good cash generation capability. In terms of upside to the free cash flow forecast, I do think there is a little of upsize here.
There is a possibility that CapEx could come in a little bit below. What we are looking at here at a $170 million.
There is also certainly the possibility that we will do a little better on the working capital side. We have incentives in place across the Company, from a working capital management standpoint, balance sheet management standpoint and as you can tell form the first quarter I think this is one of the first times we have had a significant reduction in the first quarter versus prior year.
Typically those have run pretty consistently so you can see from that but the guys are getting after it so I would say that we have got a little bit of upside here. I would guess that it might be $29 million to $25 million max.
Michael Rehaut - J.P. Morgan
Okay I appreciate that. The second question is just on going back to some of the restructuring actions over the past 12 months, in particular talking about the cabinets.
One of the thoughts given out was that you do not want cut too much so that once you get out of the down part of the cycle you will be able to capture all the upside potential but there was talk of keeping overall capacity to potential housing start number of, I remember hearing it like $1.8 million type of upside scenario. Given that probably pretty far out at this point, where is your cabinet capacity in terms of total upside there or that up cycle start number capacity and given that we are distraught you might be at this depressed level for an extended period of time.
What further actions are or how you are thinking about that business in terms of taking more aggressive right size.
Donald J. DeMarie, Jr.
On the cabinet side, I think it is important to think about cabinets as being a very integrative system supply chain and to really attack that [Inaudible/Distortion] you have to delayer the interdependency so that you can get further after it. We started that by really understanding what those interdependencies were and then what did we have to do so we could eliminate some of those relationships so we can continue to drive further cost out.
We have done that on the builder cabinet side related to the common architecture and as it was rolled out that give us further options. We also have talked about a more normal housing market and integrate our manufacturing capability to serve a housing market in the 1.2 to 1.8 range.
We believe that we could optimize our cost position within that range of housing starts. Today obviously that appears to be further out.
We still have confidence that the housing market will return to that kind of range given the demographics and the demand drivers but we are looking at cost. If you look at what we did, we mothballed two of our facilities, our West Jordan facility and [Inaudible] facility because we felt both those would be needed in a more normal market.
We have continued to take a cost out and we will do so and as we continue to complete to ERP implementations and some of the things that we do on a common architecture it really gives us further ability to continue t drive cost out of the business.
Timothy Wadhams
One thing I would mention Mike, Donny mentioned mothballing two plants so that currently cost us about $14 million to $15 million on an annual basis. I think it was about 12 of that is depreciation so most of it is non-cash.
We certainly think that makes sense for the longer haul as Donny indicated.
Michael Rehaut - J.P. Morgan
One last one if I could, just on the installation services. Last quarter excluding the charges, you had a slight profit, this quarter you slipped back probably to base negative number to date.
Any thoughts in terms of maybe more drastic action, I understood that earlier you were trying to reduce some of the product portfolio and get out some of the ‘money losers’, so to speak. What shall we expect from that segment over the next few quarters?
Donald J. DeMarie, Jr.
I think we are doing all the right things there. Hey continue to address their cost.
There are some additional ERP related charges in the quarter versus last year but they are really doing all the right things. If you look at their decline in revenue versus the decline in profit you will see how aggressive they have been and be able to get after their cost structure.
In trying to deal with a market where permits were down again year over year or quarter over quarter north of 40%, with a revenue decline of only 30% to 35% you also could make a strong argument that the gain in share because within that number we are also exiting some products that we no longer believe are profitable and we are dealing with smaller home sizes. So the key for me in that segment is to continue to take the cost spaces down.
Continue to minimize our operating losses because on the way back up, I think we are going to be in a much stronger cost position as well as a stronger share position to really capitalize on the way back up. We are excited about the opportunity within that segment and continue the things that we are doing.
We also mentioned that we have challenged that group, the leadership team to get more active in the retrofit market and we have been very active with the understanding how the money is going to roll out into those segment and with our basis in building science and environments for living we think that that is great play, I also think if you will see a little bit of our commitment to that segment with the 2 new Greenfield locations that we have opened as service partners to continue to expand our distribution base. Although a challenging environment for installation services at this level housing starts we think there is a pretty bright future.
Richard A. Manoogian
Mike this is Richard A. Manoogian, if I can make one comment too on your question of excess capacity.
As you know this cycle and I have been through cycles over 50 years and has been worst than any of the ones we have seen both in the sense of depths of the decline, unprecedented levels out as well as the scope of the decline affecting home improvement new construction. A lot of things which often were countersignals of one another but historically Masco has gained market share more rapidly during economic declines than in normal economic environments.
One other thing that I think is going to be different in this cycle is in this cycle, unlike other ones, in previous cycle we saw very little change n the competitive environment across the board among our competitors. I think in this cycle because of the depths and the severity of the cycle we are going to see competitors go out of business.
Capacity be reduced s that I will be surprised if we do not gain even more market share in this cycle than we have in past cycles which is another reason why having that excess capacity might well be a competitive advantage to us down the road.
Operator
Your next question comes from David Goldberg - UBS
David Goldberg – UBS
The first question is I want to get little bit deeper into some of the changes in MCS and specifically the move towards maybe taking on small repair of model at work and the question is really how it affects the operating leverage in the business and what kind of margin you can generate on repair model activity relative to new home construction where you might be doing multiple steps in the process.
Donald J. DeMarie, Jr.
We really focus on that product portfolio to those products that we think that we have the greatest scale to be able to generate the highest level of profits. The other thing that is really important with MCS as we went through the ERP roll out implementation but eliminating that and those number of products reduces the variability and the complexity which drives a tremendous amount of cost out for that organization as a whole.
We started looking at those 40 different products. There really was not a velocity and the majority of those products to create any type of scale that are efficiencies and it what it was doing was really create a lot of cost and complexity throughout the organization.
Do we think that we will be a stronger and a more profitable with fewer products and we will go after a higher share of those products that were remaining? On the retrofit side we really have created a separate organization called Masco Home Services to really become the front end of consumer and that organization will do the lead generation or the interaction with the consumer and Masco Contractor Services will become a subcontractor to Masco Home Services.
We understand very well as Masco Contractor Services does things and scale but do not interface with consumers so we created a separate organization to do the consumer interface and also to then interact with both the local and state governments in accessing the incentive funds that are available for retrofit application. So we feel really good about that and I would mention that the environment for a living program is also a part of the Masco Home Services so as that as we o continue to expand our industry leading building program that same building science that we are using to make more homes, new homes more efficient is the exact the same tool that we need to improve the performance of existing homes.
Those employees that have been going on new home to make them more efficient for our builder customers are now going on existing homes and creating a list of those types of activities that need to take place to make the existing home more efficient and so we think we have the right plan to go to market. We think it leverages our cost structure very well but also provide what we think is a tremendous experience for the consumers to interact with an organization that is focused 100% on delivering quality experience for them.
David Goldberg - UBS
Donny, help me understand though the MCS business now have 12 products in the construction process, right? So 12 products or how I would think about it, I would guess the Masco Home Services will be lot fewer products and maybe one at a time since it is a direct retrofit business and I guess what I am trying to understand is what is the profitability of doing that in a one off basis versus when we are installing multiple products at the same time.
Donald J. DeMarie, Jr.
Right, I think what you have to realize is on the MCS side event though it is multiple products going in the same home they all happen within a construction schedule. Meaning they happen on a day under which the schedule will occur so although we may do 4 or 5 products they may not be sequential in nature and their dependency is based on the product that occurs before them being completed until the next one occurs.
The scale for MCS is really, really the strength of that organization is by being able to do so many homes and being able to leverage that purchasing power to then deliver across more than any one builder or any one community or multiple communities but to really take in the total demand on those products. On the Masco Home Services side, you are right, a lot of that work is going to be weather stripping, air filling, filling of ducts, re-insulation and where we will create that scale is really leveraging MCS to do the retrofit insulation where we already have the equipment, the machinery and the products and the inventory.
The actual consumer interface where we will be doing the testing, caulking and the weather stripping will be done by the folks that are currently doing the work for the builder community and the Environments for Living Program. So you have got to do the energy audit.
The margins on that side of the business are actually really good because what you have is the opportunity to create that experience. We also have significant payback because if you look at how inefficient the homes are we are able to do work in these homes to improve the efficiency of the home so the consumer has the compelling value for them and given some of the incentives ops to really invest in their home and get a significant payback on their future utility cost.
David Goldberg – UBS
A quick follow-up question. I was wondering when you talk about the sensitivity of your cash flow estimates to do the starts number and what I am really trying to understand is let us say that, I know everybody thinks that this downturn is going to last a bit longer and certainly it ill but let us say that starts maybe start to accelerate a little bit, can you keep the working capital reduction down to the point that you can generate more free cash flow because starts is going up and because the business is getting better or does it require you to start building the working capital again.
Donald J. DeMarie, Jr.
David if the business starts to take off which obviously we anticipate at some point here. We will have to replenish working capital.
There is no question about that now. The question is how much will have to do and with our folks as focused as they have been, I think we can do a very good job in managing that.
One of the big challenges for us is as we try to win principals and continuous improvement into the business can we eliminate some capital expenditures. Can we improve our processes?
We are doing some guys work around process improvement as well as shop force stuff. So we think that there will be opportunities to do a better job but there is no question that as we come back out of this we will have to put more money into working capital.
Operator
Kenneth Zener - Macquarie Research Equities
I just wanted to go back to the change in the forecast in their earnings that you have laid out. The change in sales, with FX and $200 million, that is what you have got in January and it is roughly $300 set to go up at 1%.
It looks like all the changes basically related to remodeling, is that correct?
Donald J. DeMarie, Jr.
No, I think there is some impact related to international operations beyond foreign exchange as well as on the new home site.
Kenneth Zener - Macquarie Research Equities
Over in Europe is what you are saying?
Donald J. DeMarie, Jr.
Yes, but the new homes are in North America as well.
Kenneth Zener - Macquarie Research Equities
Right it seems like you only take it from the 550 to 600 range that is why I am focusing n the remodeling dropping off some…
Donald J. DeMarie, Jr.
There will be a slight drop, yes there is no question but there are still some implications there.
Kenneth Zener - Macquarie Research Equities
Relative to the decline obviously in the remodeling demand, how do you think inventories are at the retail level?
Donald J. DeMarie, Jr.
I am not aware of any significant issues, if anything maybe a little on our lower side. They have been managing inventory but we have not necessarily seen any issues in our product lines that have been neither helpful nor hurtful.
Kenneth Zener - Macquarie Research Equities
Your expected savings now. You have talked about this $120 number moving up to about $200 million so an $80 million change and $60 of that was related to pricing commodities, Is that correct?
Donald J. DeMarie, Jr.
Yes
Kenneth Zener - Macquarie Research Equities
With the cost savings, I get it, is you are obviously restructuring bur since the majority of that majority of that was really tied to commodities that were beyond your control. How do you think about the risk of that benefit being mitigated in terms of pricing as other manufacturers will also get that benefit?
Donald J. DeMarie, Jr.
I think there are certainly some risks to those numbers but I would like to think that those are positive situations if in fact we are in a situation where we trade price for volume. You have to make those decisions on the fly and there will be discussions like that but I think what we are really reflecting there is probably a little lower corporate discount to our business units anticipated a little earlier in the year.
So we have got more visibility now than we did six weeks in mid February and do feel comfortable that we should be able to deliver those numbers late this year.
Kenneth Zener - Macquarie Research Equities
So when you are talking pricing, you are talking about in terms of discounts that are actually discounts that you would have expected to give to the customers?
Donald J. DeMarie, Jr.
No we are talking about price commodity relationship, what we are talking about is the relationship going forward compared to where we were last year where we had I think three segments, Cabinets, decorative architectural as well as I believe other specialty and a little bit in plumbing where material cost was up. As I have mentioned there has been some price increases implemented that will anniversary this year.
Operator I think we will cut it off there in terms of questions and as the operator mentioned earlier we can certainly handle any calls that you might want to send it later on we will be available all day. I would like to have you move to Slide 31 if you would please in your deck, and I would like to thank all of you for joining us today.
We continue to aggressively manage our cost structure and have worked every hard over the last several quarters to offset the impact of the current economic environment on our business. Although we expect market conditions in the near term to be very challenging we continue to be confident that the long term fundamental for the new home construction and home improvement markets are positive.
That confidence is buoyed by the dedication and energy of the Masco Team. We believe we have made significant progress transforming models to enhance manufacturing flexibility, better understanding of our customer and ultimate end consumer’s total experience with our products.
We are working to enhance the quality and sustainability of our products and services. Driving continuous improvement in lean principle in everything we do, insuring that our pipeline for innovative new products and services is robust and continuing to invest in the development and opportunities of our employees worldwide that are making all of these happen.
While forecasting is fraught with risks we are also encouraged, maybe cautiously optimistic is a better term that we are seeing positive signs in the economy. Government and stimulus and liquidity programs are in place and seem to be working.
Mortgage rates are at an all time lows. Refinancing activity has increased.
Affordability has improved and importantly consumer confidence has picked up. We believe that we are seeing signs that housing and home improvement markets appear to be bottoming or at least they are not getting worst at this point and time.
There is a lot of energy in Masco and we will share with you this fall in our Investor Conference on September 17. Please hold that date and we will review how we are repositioning Masco to win.
Thank you very much.
Operator
That does conclude today’s conference call. Thank you for your participation.