馬斯科 (MAS) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2009 third 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're 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 non-GAAP financial measures.

After a brief discussion by management, the call will be opened for analyst questions. If we are unable to get to your question during this call please call the Masco Corporation Investor Relations office at 313-792-5500.

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

Thank you, Mindy and thank all of you for joining us today for Masco's third quarter 2009 earnings call. Joining me today are Donny DeMarie, our Executive Vice President and Chief Operating Officer, John Sznewajs, our CFO, and Richard Manoogian, our Chairman.

If you would please move to slide number three. Third quarter was another difficult quarter for Masco, with sales off 17%, but having said that, both our top line and our earnings came in somewhat better than we anticipated when we talked back in late July. Sales were impacted by volume declines in new home construction and home improvement markets, both in North America and internationally, and we also had the negative impact of currency translation, which represented about 1.5% of the 17% sales decline, or $38 million. Income from continuing operations was $0.14 per common share, compared with $0.09 in the third quarter of last year and we'll talk more about EPS in just a second.

We did have a nice improvement in gross margins in the quarter. They were up 140 basis points to 27.2%. And that's pretty good performance we think, with sales off over $400 million. That's the second straight quarter that we've had gross margins in the 27% or better category. We have to go all the way back to the third quarter of 2007 in terms of gross margins at that level, and again, that reflects some of the work we're doing from a cost standpoint as well as the improvement in the relation in price and commodities.

Working capital continued to improve in the quarter. We improved 30 basis points in terms of receivables inventories less payables compared to last 12 month sales, and we ended the quarter in a very strong cash position with $1.2 billion in cash at September 30th, 2009.

If you flip to slide number four, I mentioned EPS as reported, $0.14 this quarter compared with $0.09 last year. I would point out that we did have rationalization charges in the quarter of $21 million this year, $15 million last year. That's $0.04 and $0.03 respectively. We also have a less than normal tax rate in this quarter as well as last year. If we were to apply a 30% tax rate to both quarters, our earnings would have been $0.12, approximately $0.12 this year, compared to $0.21 last year. Last year had an inflated tax rate for the full year of approximately 60%, and that reflected the repatriation of earnings from foreign businesses. I'm sorry, John?

36%.

I mentioned 30%. I meant to mention 36% in terms of the normalized tax rate if I misspoke there.

If you flip to slide number five, I mentioned that sales were down 17%, $417 million. And one point I would make is that our sales to key retailers were off only 4% in this quarter. That compares with 7% last quarter and in previous quarters, you probably remember we had double-digit declines in sales to key retail customers. So again, we saw a little bit of improvement there but again, the comp is a little bit easier.

Profits were down from 7.7% to 6.6% in terms of return on sales. That's a decline of $56 million in absolute dollars. Our decremental margin in the quarter was 13%. The decline in operating profits reflects the lower sales volume that I mentioned earlier. And the related underabsorption of fixed costs and again, we partially were able to offset that with the improvement in the relationship between price and commodity as well as benefits associated with some of the cost reduction actions that we've taken.

I would point out on the decremental margin that we've seen improvement every quarter this year. Last year our decremental margin on sales decline of $1.9 billion was approximately 34%. In the first quarter of this year, that was 27% on our sales decline in the second quarter was 17% and this quarter down to 13%, as I mentioned, for a year-to-date number of 20% and again, we're pleased with that and pleased with our ability to offset some of the volume decline.

If you flip to slide number six, this shows our North American operations. They were down 17% in the quarter, $345 million in terms of sales. Profit was down $70 million, and our margins went from 9.8% to 7.5%.

If you flip to slide number seven, our international operations -- and here obviously a very positive output or impact in terms of the quarter. Sales were down 13% or $72 million, and about $7 million of that relates to decline in local currencies. And even with that sales decline, our return on sales improved from 7.8% to 12.5%. So we had a really good performance by our international operations. A lot of that relates to some of the cost reduction activities that have been undertaken over the course of the last several quarters.

You might remember late last year in the fourth quarter, we had I think about $40 million of rationalization-related charges and a fair amount of those related to our European operation. And our faucet operation, our major faucet operation in Europe, Hansgrohe, continued to have a very excellent performance in a difficult environment and had a very good quarter. I also want to point out that we did dispose of one small international business in our plumbing segment. We received a fairly modest proceeds of approximately $2 million US.

This business was in a loss position. It had lost from an operating profit standpoint about $4 million in each of the first and second quarters of this year. And we did move this business from continuing operations to discontinued operations and that a positive impact on earnings per share from continuing operations. As a result, we have restated the first and second quarter of this year and obviously have restated prior period quarters to reflect this disposition, which is now part of discontinued ops and that did add $0.02 to the first half earnings. There's a schedule in the analyst package, or the information that we sent you earlier that gives you a reconciliation and really kind of restates the first and second quarter and hopefully that will be helpful in terms of some of your modeling.

If you flip to slide number eight, shows our working capital. And again, a very strong performance in the quarter, and I'd like to take a minute to just really compliment the management team across the Company for continuing to do a great job from a working capital management standpoint. We've continued to be at 50 days in receivables. We improved our inventory days by two. And improved our accounts payable days by eight, and so that improvement of 10 days, and again I think indicative of a lot of the good work that's going on you across our business unit.

If you flip to slide number nine, I'd like to make a couple quick comments about our operating segments. We'll start with cabinets. Sales in cabinets were down 26% or $150 million, and we went from a little bit of a profit last year to a modest loss this year, profits down $39 million. Our decremental margin was 26% which is pretty comparable to where we were in the second quarter. I would point out last year I think our decremental margin in the cabinet segment was pretty close to 50%, so we've seen a lot of improvement over the last several quarters. Sales were impacted by volume declines in new home construction and home improvement markets and we did have a negative foreign currency translation impact of $9 million in this particular segment.

If you flip to slide number ten, plumbing related products. Sales were down 13% or $100 million in this segment, and that reflects about $22 million impact from currency translation. But we did have an outstanding performance here from an operating profit standpoint. As you can see, we were up slightly, $1 million year-over-year, but more importantly, our margin improved from 11.7% to 13.5% and obviously very, very pleased with the performance in this particular segment, almost all of our business units pretty much across the board showed quarter-to-quarter improvement compared to the third quarter of last year. Again, Hansgrohe contributed very strongly as did some of of our European plumbing related businesses and these margins I think are the highest we've had in the plumbing sector from a quarterly perspective in some time. Again, a very solid performance in terms of plumbing.

If you flip to slide number 11, installation and other services. Sales in this segment were down 33%, about $160 million. But I would point out that and remind investors that this business is pretty much 100% new home construction. We do operate on about a one quarter lag related to housing starts and if you look at the housing starts from the fourth quarter of last year through the third quarter of this year, I think they're down about 47, 46%.

So we continue to believe that we're gaining some share, particularly from an installation standpoint. Profits were down $44 million in the quarter. That's a decremental margin of about 28%, but we did have an increase in terms of implementation-related costs for our ERP system of about $6 million in the quarter and without that the decremental margin would have been closer to 24% which is pretty consistent with what we've been experiencing over the last couple of quarters.

If you flip to slide 12, decorative architectural products. This segment was up 6% in terms of sales and we benefited from the increased sales of paints and stains which were very positive in the quarter. We did have lower sales at retail of builders hardware. Sales of paints and stains benefited from new product introductions as well as advertising and promotional-related activities. We also had a very nice increase in terms of operating margin in the quarter, improving from 21.1% last year to 25.7% this year.

And again, as I did last quarter, I'd like to remind investors that basically this segment is essentially just getting back to historical performance in terms of margin. This year on a year-to-date basis for 2009, the segment's at about 23%. That compares to 19.9% for the nine month year-to-date numbers last year, but it's pretty comparable to where we were in 2007 and 2006 at the end of nine months at 22.7 and 22.3% respectively. So again, very outstanding performance but performance that really is getting us closer to where we historically have been in this particular segment. Again, very pleased with the outcome.

If you flip to slide number 13, other specialty products, this segment sales were down 17% or $35 million, and that reflects lower sales volumes of windows in the Western United States. That's our Milgard operation. Lower sales related to staple gun, tackers and fastening tools. Currency was negative here by $6 million, but we had a nice increase in our UK window group in Europe from a positive perspective. They continue to take share as some smaller competitors fall by the wayside, so we had pretty good performance there. We had a very good performance from a profit perspective as you can see. Profits were flat year-over-year at $16 million but that results in a nice margin improvement from 8% to 9.6% in this particular segment.

So all in all, the fact that we were down 17% obviously continues to be a difficult operating environment, but for the most part, very pleased with the fact that we exceeded expectations both on the top line and in terms of profitability. I now want to turn the call over to our Executive Vice President and Chief Operating Officer, Donny DeMarie, who is going to give you a quick update on some of the operational activities that are occurring in terms of some of the new products we've launched, in addition, some of the actions we're taking to reposition some of our businesses. Donny?

Thank you, Tim. We should be on slide 14 and this is a slide we shared with you previously about what we're doing to operate within the current environment to really drive results.

If I could get you to flip to slide 15, the Masco Business System. We shared the Masco Business System or MBS with you at our investors conference. MBS emphasizes five core organizational capabilities. Customer focus, lean, innovation, talent and quality. I'd like to share with you some new innovative products which are driving our performance while building our brands and meeting the needs of our customers.

Next slide, the Delta slide. At Delta our diamond seal technology or DST is a big hit with consumers. DST combines a durable diamond coated valve with an innoflex waterway and pec C tubing for no leaks and a longer life. Once inside the faucet, water is not in contact with potential metal contaminants. Sales of like for like DST SKUs versus our existing brass SKUs are up double digits at retail. Clearly, the consumer is recognizing the value.

Also at Delta, our Touch 20 technology is launched with a bang. This intuitive technology enables the user to start or stop the flow of water with a simple tap anywhere on the handle or spout. In support of this product introduction, Delta faucets Messy Hands ad campaign was rated the most effective ad of Q3 2009 based on persuasiveness and watchability by Ace Metrics, an intelligence company for the advertising industry. Delta is investing in its brand and has achieved a significant increase in consumers unaided brand awareness.

Milgard is doing an outstanding job bringing innovation to its customers to meet the unique challenges of the current environment. Our most energy efficient window, or as we have positioned it in the market, 3D Max, combines high energy glass, energy efficient spacers and argon gas to drive improved thermal efficiencies. Consumers who purchase most of our 3D Max product qualify for the stimulus packages consumer tax credit. Our energy package offerings are driving new demand and a favorable product mix. Also at Milgard, we've introduced our Simplicity line by Milgard. This opening price endorsed product allows us to work with our existing builder customers as a fine way to value engineer their homes to meet the competition of lower price foreclosures. Sales of Simplicity have been largely incremental while protecting more favorable margins on our Milgard branded products.

Next slide, Behr. Premium Plus Ultra Interior, or PPUI, is our new paint and primer in one. PPUI has had a successful launch in both the United States and Canada, a launch of PPUI was supported by an aggressive advertising campaign. Sales of PPUI have exceeded our own expectations, driving higher sales and a more favorable product mix. In addition, our direct to pro initiatives has continued to gain momentum throughout the quarter. Behr continues to gain market share with the DIY consumer while making in roads with the pro painter.

Next slide, Hansgrohe. Hansgrohe. is our German luxury faucet manufacturer, where innovation is just who they are. Recognition for the performance and innovative power of Hansgrohe came in the form of 22 design and innovation awards in 2008. It therefore came as no surprise that the Schiltach-based fitting and shower specialist achieved the number one spot in the sanitation industry section of the International Forum Designs corporate ranking, published for the first time in 2008. Further consolidating the Company's reputation as a driving force and trend setter for the industry.

I'd like to update you on a couple of segments that we've updated you on previously. Installation and Other Services. We entered the recession as a leader in Installation Services, and we will exit the leader, as we are increasing our market share of our core installation products. While we have taken the necessary steps to get our costs in line, we have maintained our national footprint and still serve all of the top 50 MSAs. Looking at the core products of just Masco Contractor Services, six product families constitute in excess of 80% of our total sales. We will focus on growing our core products by leveraging our scale to drive attractive return.

Through Masco home services, we'll leverage our leadership position in energy efficiency to drive new growth opportunities in retrofit applications for existing homes. We have launched our two pilot locations in the third quarter. With housing starts at 1.5 million, segment profit margin should return to the low double digits. We are also pleased to report that Masco Corporation was recognized by Newsweek in their 2009 green ranking as one of the top 100 greenest big companies in America.

Next slide, cabinets. Before we go through this slide, I did want to mention that we had a small fire last week at our Kraftmaid facility in Ohio. Fortunately, no one was hurt. This will delay some delivery of orders that are already in production by approximately seven to 10 days. However, we do not expect any extended impact on incoming orders or future deliveries.

At our investor conference we announced the planned closure of a cabinet facility in Europe and indicated that there is more we could do to reduce our fixed costs, rationalize our SKUs and streamline our supply chain. To this end, we announced last Friday the planned closure of our Cedar Hill manufacturing facility as well as a workforce rationalization which will affect approximately 12% of our salaried workforce in the Builder Cabinet Group. This recent announcement will eventually result in an additional $10 million approximate reduction in our fixed costs above what we just shared with you last month at our investor conference. Our move toward common architecture has enabled us to reduce plant capacity realize fixed cost savings, as well as enhance the flexibility of our supply chain.

In addition to reducing costs, we are working to improve our quality. Kraftmaid recently won the JD Power award for customer satisfaction. With housing starts at 1.5 million a normalized repair, remodel environment, segment profit margins should return to the low to mid-teens. Before I turn the call back over to Tim, I did want to make one overall comment.

Our cash generation continues to be outstanding. Primarily driven by reduction in working capital and capital expenditures. While maintaining this discipline, we continue to spend the capital necessary to invest in our leadership brands and drive innovative new products to market. With that, I'll turn the call back over to Tim.

Thank you, Donny.

If you would please flip to slide number 22, we'll take a quick peek at guidance and then we'll open up the lines for Q&A. I would remind all of us that forecasting continues to be challenging in the environment that we're in. Having said that, we continue to estimate that our sales will decline this year pretty substantially. We have improved that guidance from 18 to 22% to 18 to 20%, and if you go to the midpoint, that represents a 1% improvement, which correlates to about $100 million compared to last year's revenue.

Housing starts, we believe will approximate 550,000 units and again, I mentioned earlier that the important metric here for us is really lag housing starts which should be about 580,000 I believe if you go back to the fourth quarter of last year through the first three quarters of this year. We currently anticipate that our earnings per share will be in a range of a loss of $0.05 per share to income of $0.05 per share and that compares with a our previous guidance of a loss of $0.05 to a loss of $0.25 per common share. EPS includes rationalization charges which have -- our estimate is that those will be about $92 million or $0.17 a share, up from $85 million or $0.15 a share in our previous guidance.

In addition, I would mention to you that our previous guidance included an estimate of tax expense. Tax expense of a $0.05 per share. Tax expense when you're around breakeven is very difficult to forecast. If you look at our nine month numbers, we have about a dime of tax expense. We currently think that that number for the full year will be around $0.09. But again, very difficult to forecast at the operating levels that we're at.

We did mention earlier that we've increased our guidance for free cash flow. Free cash flow before dividends. We currently estimate that we'll be around $450 million. I think we've got a chance to do a little better than that. That increase is from our previous guidance of $360 million.

The impact is on the top line, if you will, in terms of the improvement in our earnings outlook, as well as the thought that we think we'll do a little better in working capital than we anticipated a few months ago and the fact that CapEx will be a little bit lower. There is a detailed schedule in the package of information that we sent out to you that shows the components of working capital or excuse me of cash flow and where we think those will end up for the full year.

So with that, we'll open up the lines for Q&A.

Thank you, Mr. Wadhams. (Operator Instructions). Your first question comes from Peter Lisnic from Robert W. Baird. Your line is open.

Good morning everyone.

Good morning, Pete.

Good morning, Pete.

I guess the first question I have is on cabinets. It looks like sequentially the margin or the operating income actually got worse but the top line grew so was wondering if maybe you could talk about the mix that may be causing that or just the promotional environment. Is there something going on with chair or pressure that's leading to that margin pressure.

This is Donny. It's been a difficult pricing environment, both at retail and at the builder and we have seen some mix change within price points. So where we've seen within a premium price point, we're seeing people tend to buy at the lower end of those price points. And we're seeing the same thing at the entry price point. So everything tends to be shifting down within segments of the price point, which creates a little bit of an issue for us with less favorable product mix.

And is that something that you can get out in front of as you implement your restructuring actions or is this just you need to live through the competitive landscape for now?

I think it's a little bit of both, Pete. What we're working on is really understanding what drives value from a consumer's point of view and making sure we don't have costs in the product that's unnecessary and a lot of our lean activity is focused on that. We also are doing more within the Cabinet Group to really coordinate amongst brands so a lot of work between both the retail Cabinet Group and the Builder Cabinet Group to understand how does Merillat, Quality, and Kraftmaid all work together in the marketplace with the right customer segmentation and focus and I've seen a lot of good work. Some of that will bear fruit here in the near future.

Do you think you're further along in one versus the other, i.e retail versus builder on those initiatives?

I'd say the builder is further along. We talked about the common architecture and we're starting now to see with really the announcement last week some of the potential benefits of that as we work towards a common chassis at both the Quality at Merillat with the end game being able to produce any brand in any plant. We're about halfway through that process. That's going well. So I think we're a little bit further along on the builder side. We really got pushed there a little bit sooner to think about how we look at our cost structure and our manufacturing footprint so we're a little further along on the builder side than we are on the retail side.

Okay. Thank you for the information.

Your next question comes from Budd Bugatch from Raymond James. Your line is open.

Good morning, guys.

Hi, Budd.

Last quarter you gave us an update on the pricing commodity mix. I think it was $220 million for the year. Is there any update on that?

Yes. Budd, we currently think that that number is probably going to be closer to $250 million. We mentioned on previous calls that the first quarter probably benefited somewhere between 20 and 30 and again, I'm talking price commodity as well as cost reduction. 20 to $30 million. It appears to us that the -- based on what we know right now, the second and third quarters would have been somewhere in the 70 to $80 million category, and we think that the fourth quarter will be pretty comparable to where we were in the second and third quarter. So we're looking at roughly $250 million. I would say that the last time we talked about this, we had $120 million of price commodity anticipation in terms of improvement and $100 million anticipated in terms of cost reduction. The increase here would be basically cost reduction and if anything, the price commodity at 120 might back off a little bit with a little more of the mix towards the cost side.

Yes, because we're seeing a little bit of reflation in some of the copper and zinc. Is that impacting you?

Well, they certainly do impact us, yeah, and in fact, copper, zinc are up. So yeah there is some increase relative to that particular commodity.

Okay. But you're seeing more cost improvement?

Yes, the guys are doing a great job, Budd, across the Company. We did introduce obviously the Masco Business System at the investor conference, what, five, six weeks ago. As we mentioned, they're one of the major tenets of that is the focus on lean principles and our guys have really embraced that concept and continue to really drive process improvement and take cost out. So we continue to see some very positive actions there.

Was there something, Tim, going on in general corporate to cause that to go up $4 million year-over-year with all the cost take out you've done?

Basically, Budd, we've said a couple times previously, we had some accrual adjustments that impacted the third quarter. We think we'll end the year probably somewhere between $125 million and $130 million in terms of general corp expense. That would compare to $144 million last year, $181 million the year before and $200 million the year before that, 203, I believe. And so we've made and continue to make some very good progress, even though we did have a little bit of an adjustment in that particular quarter.

So then the last question would be the persistence of the cost reductions, what can we look for going forward as being permanent and how should we think about next year margins and that kind of -- ?

Well, we mentioned at the conference, Budd, that if you thing about our fixed cost structure, what we indicated there, that if you go back to 2000 -- the end of 2006, that we estimated that our cost structure from a fixed standpoint will have been reduced by about $400 million on a growth basis. We think the net number is around $300 million. Now, the actions that Donny just talked about would take that number up probably about $10 million, plus or minus. But I think if you were to think about us going into next year with $300 million of fixed cost reduction over that period of time, that would be probably the way I would think about that with probably -- and I'm not sure if we parsed that out by year, but more of that would be taking place in the current environment as opposed to, say, 2007 and 2008.

In the current environment being 2009.

Well current year. I'm sorry.

Current year being 2009?

Yes.

Thank you very much.

Thank you, Budd.

Your next question is from Dan Oppenheim from Credit Suisse.

Good morning, guys. This is actually Mike Dahl on for Dan. Just wanted to start out by just asking about if we think about your comments on the installation business getting back to breakeven, around 700 to 800,000 starts, when you're doing your five-year forecast, what are you thinking about in terms of years like when do we get the 7 to 800,000? And then when do we get back to a more normalized number like 1.5 million or so?

Mike, it's a little bit early or premature to sort of predict when we get back to those kind of levels. When we get to February and our fourth quarter earnings call, we'll give you some update in terms of what we think the market dynamics look like next year. We did mention at the conference that we do expect housing starts to be up next year. We haven't necessarily finalized our thoughts around what that number might be but we do think it will be a little bit stronger but we would be getting ahead of ourselves I think if we tried to predict the strength of the housing recovery in terms of trying to nail the starts number.

Okay. And then just thinking about you guys have certainly done a very good job driving cash flow and improving working capital. What's the potential for further improvements, just based on reducing inventory levels further here? Is it only possible with lower sales volume or is there still some more improvement that you can get?

No, I think that that will be an area that we will be looking at from a continuous improvement opportunity. No matter how good you're doing, you can always do a little bit better and I think we demonstrated that over the course of the year. We did mention at the beginning of the year, we would put particular emphasis on inventory as well as accounts payable. We've made good progress there. I certainly think there are things that we can do to improve our processes across the Company in terms of how we manage receivables and certainly payables from just an administrative standpoint and I think there's continued opportunities that we can certainly improve in inventory.

But having said that, it will be more of an incremental nature. If you go back, we've made substantial progress over the course of the last four or five years. Our working capital as a percent of sales, for example, was in the 22 to 24% range back in -- well, about four or five years ago, and we brought that down into an approximate 15% kind of range. But there's no question, we can continue to improve going forward. But again, I wouldn't -- I would call it more incremental than dramatic if you will.

Okay. Great. Thanks, guys.

Your next question is from Michael Rehaut of JPMorgan.

Good morning everyone. First question, just on decorative architectural and the results there continue to be a huge benefit to you guys and now at I guess excluding $1 million of charges, you're near 26%. I mean, that actually is as far as I can tell a record for that segment. I was wondering if you could just kind of give a sense of on the slide you mentioned that there was some benefit from cost, I'm sorry price/commodity mix and also to the extent that any favorable products, also the new perhaps PPUI benefited from that, and what type of level -- I mean, are we looking at a couple hundred basis points higher now or what's the future hold for that segment?

Well, we don't typically predict margins going forward, Mike, but I think in our commentary basically we described the fact that even though that was a very strong quarter, it's still, when you think -- when you put it in perspective relative to year-to-date, it just basically gets us back to historical levels. So again, the contribution from higher volume is very important in that particular segment. Obviously, we've introduced new products and as we've commented in the past, sometimes that gives you a little bit of a pricing opportunity. Those products have been very well received at retail. So there's a lot going on there that's been very positive. There's been a lot of emphasis on promotional activity and advertising so again, it really wraps around a lot of different factors that go into making that a very positive outcome.

Okay. And if we could just also kind of focus on plumbing products, maybe to kind of break down a little bit how you're seeing that improvement there. I mean, you mentioned more favorable product mix and also price versus commodity costs and perhaps also if you give us a sense of which were the bigger drivers there as well as you mentioned the international, Hansgrohe being a big contributor, maybe to give us a sense of how much the North American margins improved as well as and again, mix, versus price commodity, what were the -- how big were the levers there as well?

Well, price commodity is a big player in that particular segment. If you go back, Mike, to the first quarter, we mentioned when we talked about price commodity as well as cost, that we thought that plumbing would be the one sector where we -- I think we estimated about 35 to 40% of the then $200 million would relate to plumbing and that has pretty much held true. We've seen a lot of benefit, both from the price commodity as well as the cost reduction side. So there has been a lot of help from that standpoint. But when we look at the quarter, virtually every business that we have, and we've got some small businesses, we've got some large businesses, but almost every business we have in that particular segment did well.

I'll let Donny talk about mix in just a second, but just to give you an example, we had a pretty good quarter from a hot tub standpoint which is a large discretionary purchase but we've seen a lot of smaller competitors fall by the wayside and we've been able to pick up significant share and showed a lot of really solid improvement quarter-over-quarter. Again, I wouldn't isolate to any one particular area. You asked about international versus domestic. We don't break margins down.

But you did see the international margins in total and again, plumbing's a pretty big part of our international related operations but I'll let Donny comment a little bit on the mix related issues you asked about.

Hi, Mike. Really as Tim mentioned, we're seeing strength across the board in plumbing. We mentioned Hansgrohe had an outstanding month but so did Delta, outstanding quarter. Really, the hot tub business had a fantastic quarter. Masco bath gained share with some of their introductions in the tub and shower surround business. It was across the board that we saw some significant market share gain.

We also had some good product launches here where we had the Hansgrohe introduced the Pure Vitae product. Delta's DSC which I commented on and the Touch2O. Really was a good quarter across the board.

Great. Thanks.

Thank you, Michael.

Your next question is from Megan McGrath of Barclays Capital.

Hi, good morning.

Hi, Megan.

Hi. Wanted to follow up on the first question that was asked, get a little bit more detail. In your answer around the manufacturing changes in cabinets, realizing that it's a bit of a work in progress and you're responding to the market as you go along, but can you give us an overall sense of where you think you are inning-wise or percentage-wise in terms of the changes you're making overall in your cabinet manufacturing.

Thanks, Megan. It's Donny. On the cabinet side, again, we're talking about adopting a common architecture on the builder's side of our Cabinet Group which is our quality and Merillat brands and as we stated previously, we expect to have that done around the end of the first quarter next year, beginning -- end of first quarter, maybe middle of next year, where we would have the common architecture throughout the facility, take a little bit longer to really on the finished order component of that but we'll have the common architecture at the facilities by then. So you can put your own inning on it. But we're pretty far along.

Okay. That's great. And then just to follow up on balance sheet and cash flow. Obviously your cash generation's been pretty strong. You've got the $300 million due in the first quarter but could you give us a sense of how comfortable you feel -- would feel now in putting some of that cash to work and your thoughts around the $850 million due in 2012, why not take advantage of the debt markets now and potentially term that out or what are your thoughts around that?

Well, we do have significant cash on the balance sheet. We expect to end the year in a very strong cash position as well, Megan. Currently we've got the $300 million due in March. Our anticipation is right now that if we could refinance that, we would certainly consider that. But we want to have enough fire power to be able to pay that down in terms of cash on the balance sheet, if in fact we need to do that. Having said that, we'll consider different alternatives to address the $850 million that's due in 2012. We don't generally get into speculation on whether we would do a financing or issue some bonds but that's certainly among the possibilities that we would consider but we feel really fortunate that we're in a very strong cash position right now and certainly expect to be in a very strong cash position at the end of the year as well.

That's great. Thanks. And just one really quick modeling follow-up. Realizing you probably don't want to give actual guidance but any sort of early thoughts on the 2010 pricing versus commodities relationship?

No, I don't think that we would want to get into that discussion at this point in time. Obviously, things are continuing to develop there. We did talk a little earlier about the fact that both copper and zinc, which are components of brass, have increased substantially but I think we demonstrated over time that although commodities at least over the last couple three years, although commodities may impact us from time to time in a quarter, we've done a pretty good job of offsetting commodity costs with either pricing or productivity or working with our suppliers. So we feel pretty confident that even though there may be an occasional blip here and there relative to performance, that we'll be able to offset those going forward to a large degree.

Great. Thank you very much.

Thank you.

Your next question is from Ken Zener of Macquarie.

Wonder if you could talk about international, which fell 7% year-over-year versus 17% in 2Q. Could you highlight the regional demands you're seeing, UK, Germany, how much of that is really related to market share versus end market.

I think we mentioned in the United Kingdom our window business is doing quite well. We had a very nice performance there. Sales were up in the quarter, even though that economy continues to be pretty difficult. So those would be essentially share gains. We also had pretty good performance in our plumbing related business in the United Kingdom.

From a continent standpoint, we had very good strength in Germany, Austria, which were very strong in the quarter. We're starting to see a little bit of a pickup in terms of project work related to Hansgrohe, which has been a real plus for us over the last couple of years. So I think it's fairly broad-based and again, a lot of that, Ken, as I mentioned earlier, we took a fair number of charges last year to improve and drive some of the operating improvement into our international related businesses. I think we're starting to see the benefit of some of the cost structure reductions coming through in this particular quarter but it was really nice performance even though the top line was off.

So a bit more share gains in the UK as opposed to actual stabilization or a little better demand?

Yes, I'd say there's probably, yeah, more emphasis on share gains than necessarily stabilization and more emphasis on internal improvement in terms of execution.

Okay. And then my second question is given the strength that we've seen in plumbing which are quite solid, --

We lost you there.

Given how strong paint and plumbing were, if you focus on select segments, do you think those businesses can be better and higher return versus the past because you've taken cost out? And what would kind of be the offsets there? Do you think it's just competition will keep margins in a historical range or can you actually do better than you did in the past?

Well, I think that in paint, I would suggest to you there that from a paint standpoint, getting back to the historical performance that we've enjoyed over time at that 22, 23% range that I talked about in terms of the nine month number, I wouldn't necessarily see us -- I mean, obviously that's pretty darn good and so I don't know that I would necessarily see us improving the return on sales. I do think we have some very nice top line opportunities, though, in that particular category as we continue to bring out new products, as we continue to penetrate on the pro side, so I think from a top line perspective, which would drive some pretty nice incremental margins, I think we've got some really nice opportunity. That's a great partnership that we have on the paint side with Home Depot. And our other customers.

Having said that, I think from a plumbing perspective, there may be some continued opportunity for us to see improvement there. We don't want to get ahead of ourselves, but that's an area where we've had a lot of change in leadership over the course of the last couple of years. We've done some things to improve process in those businesses. A lot of emphasis on cost reduction, lean, quality, new product introductions again and so I -- again, don't want to get ahead of ourselves and don't necessarily want to get into predicting margins but I think we certainly have the opportunity there to continue to take share, continue to perform on the top line.

Hansgrohe has done a really good job of global expansion and I think those opportunities, they continue to penetrate new locations. In fact, we just opened up in South Africa I think three or four months ago. So I think there's opportunities to continue to drive the top line there. And potential for margin expansion.

Thank you. Congratulations.

Thanks, Ken.

Your next question is from Ivy Zelman of Zelman & Associates.

Good morning, guys. Congratulations on a good quarter.

Good morning, Ivy. Thank you.

You guys are a really good read on what's going on with the consumer as well as really what's happening in the home building business, so really just my question thinking about first on the builder side, on the installation services, kind of curious how many customers you've seen go out of business, if you have any numbers would suggest it's a very tough environment for private home builders and although you said you're gaining share in that segment, just in absolute terms how challenging it is for your customers on the private side and do you see a lot more blood coming in 2010 with capital not available to them?

And then just secondly, Tim, the cabinet business, you talked about the mix issues. Are people spending less money, $25,000 on average for a kitchen today, versus what used to be $50,000, just kind of sort of understanding. It's funny to hear you talk about the Jacuzzi business, hot tub business doing well but understanding that a lot of the unemployment concerns and just consumers' discretionary spending has been so weak so just kind of help shape us on what consumer's doing out there. Are they moving down price point and that kind of commentary will be very helpful, I think.

I'll take a quick comment on the cabinet side and then Donny can talk about the MCS side. We certainly continue to see a slowness for big ticket items. I don't think there's any question about that. Consumer confidence, job loss, those kinds of things continue to play in. We see more focus on entry level homes, with generally maybe going from, say, 18 cabinets to 17 or 16, which obviously has some impact. So I would say from a consumer perspective, we don't necessarily see robust consumer spending, but at lower ticket items, that has been relatively strong. As you can see from our paint sales.

Having said that, I think one of the biggest issues out there continues to be access to credit. Hopefully we see that loosen up a little bit going forward. Our hope would be that for bigger ticket items there might be some pent -up demand but at this point that continues to be a fairly large purchase and to your comment on hot tubs, we were surprised as well but I think there for us really, even though industry volumes are way down, I think we've got a very good product, very good product line, if you will, at different price points, very well-run business and with other competitors falling by the wayside, it's really given us an opportunity to pick up some nice share. So I'm not necessarily -- I wouldn't necessarily want to imply that industry demand is up for hot tubs but I think we're just doing better because of our financial strength, the scale that we've got and the position that we've got in the market and Donny, maybe you could address the MCS side or the installation side of the question.

Yes, thanks, Ivy. On the installation side, we're seeing probably what you would anticipate. We're seeing a very difficult operating environment for both the big builder and the small builder. The private builders are really struggling to find financing. We have seen a number of them just cease to operate where they complete their last job and just not be able to really finance the next one. So we've seen a lot of that market consolidate, and really see a lot of the small fragmented builders just leave the industry in total. We're not seeing any signs of life there.

It's really about the same as it was, haven't seen any real change. There was a little bit of pickup I think related to the tax -- home buyer tax credit that we're hoping gets extended and hopefully expanded. I think that brought some buyers forward, certainly some entry level buyers and think that will probably be beneficial if they could extend that and maybe increase it. But right now, it's kind of the same, Ivy. We're seeing a very, very difficult environment at about the same levels we've seen over the past 90, 120 days.

One thing I would add to that is, one thing that's somewhat encouraging for us is that we haven't really seen a significant tick-up in any collection or bad debt related issues and in fact, I think we might come in a little bit better than we anticipated earlier this year from a bad debt standpoint. So again, that has not been an issue, at least -- again, it's a problem, but it's not a big issue.

Okay. That was helpful. Just on the windows, when does the tax credit for windows go away that Milgard's been benefiting from?

2010.

Do you know when in 2010?

I think it's the end of 2010.

I think it's the end, yes.

Okay. All right. Guys, thanks a lot.

Thank you.

Operator, we have time for one more question.

All right. Your last question comes from David Goldberg of UBS.

Thanks. Good morning, guys. Nice quarter.

David, thank you.

First question, I know you don't want to talk about a starts forecast and necessarily talk about when we could ramp up starts, but you did mention that you thought starts were going to be up year over year-over-year and I would imagine you positioned the business to kind of have growing starts as we look into 2010. Just trying to get an idea of what kind of ramp you might be assuming and how you're positioning the business and what kind of costs might be there to take out still if the ramp in starts is slower than what you guys have forecasted?

Well, again, David, we mentioned we'll talk about our view on starts when we get to our February call for the fourth quarter. I would point out, if you look at the blue chip consensus, I think that number is close to 800,000, 750,000 to 800,000 in terms of starts. Might be a little bit optimistic but again, we'll give you a better feel when we get to February as to what we think the reality is. And again, we would remind you that typically starts impact us on a one quarter lag. So if things get robust later in the year next year, we won't necessarily benefit from that but we'll certainly benefit from it going forward. In addition, the other part of your question was on the cost side and hey, while we will continue to get after cost irrespective of how quickly we ramp up or you how slowly we ramp up, as we continue to focus on quality, lean principles, there certainly are opportunities for us to improve process. We've talked about rationalizing products so definitely that will be an ongoing focus for us and certainly something that will be part of the culture going forward.

And then just a quick follow-up question. I guess this is a little bit of follow-up to Ivy's question in terms of the tax credit, the credit expiring for windows, I'm wondering how you thing about whether demand will pull forward for that business. From a window perspective, energy efficiency perspective, what that would do for margins and if you have any way to kind of think about how to quantify if demand was pulled forward, how you would think about that.

David, it's Donny, on the windows side of the business, we've not seen demand -- we don't believe we've seen a significant amount of demand pulled forward. What we've seen is the customer trade up. So where we've had people in the market to replace their windows who may have gone with one of our mid-price point replacement windows, they're willing to trade up to get -- take advantage of that tax credit to get a more efficient window. So we're seeing more of a trade up than necessarily a pull forward because it's still a relatively large purchase and we're talking a credit that would offset the amount of the trade up. But certainly not offset the expense to replace the windows.

Great. Thanks.

Thank you, David. And again, I'd like to thank all of you for joining us today. And I also want to thank those investors who were able to either attend our investor conference in September or who visited the website. We very much appreciate your participation and the feedback that you've provided us. At the conference, we enjoyed the opportunity to share with you the way we are approaching the management of our business through the Masco business system, actions that we are taking to reposition certain of our businesses and some of our exciting new products. In addition, the conference gave many of you a chance to meet and interact with other members of our management team and we thought that was a major plus.

It's been a difficult couple of years and we're very proud of the worldwide Masco team as they have stepped up to address the challenges of the marketplace while at the same time implementing those actions that will help position Masco to win in the future. We had a good quarter. And we are gaining market share across many of our business units and I'm especially pleased with our global performance in paint, plumbing and our window businesses. We continue to believe that the long-term fundamentals for our business are positive, and look forward to driving value for our shareholders as we continue to strengthen our leadership brands and improve our execution through the Masco business system. Thank you again.

That concludes today's conference. Thank you for your participation.