馬斯科 (MAS) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2010 fourth-quarter conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If the you have not received the press release and supplemental information, they are available on Masco's website along with today's slide presentation under the investor relations section at www.masco.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 it's future performance and about nonGAAP financial measures. After a brief discussion by Management, the call will be opened for analyst questions. As a reminder, we would appreciate if the participants could limit themselves to 2 questions today. If we are unable to get your question during this call, please call the Masco Corporation investor relations office at 313-792-5500.

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

Thank you, Clayton. And thanks all of you for joining us today for Masco's fourth quarter and full-year 2010 earnings call. I am joined by Donny DeMarie, our Executive Vice President and Chief Operating Officer, and John Sznewajs, our CFO.

And if you would please flip to slide number 3, we'll start with the fourth quarter. Fourth quarter sales were off 9%. Excluding unusual items in the quarter, business rationalization charges, impairment charges for goodwill and other intangibles and normalizing our tax rate at 36%, we would have lost $0.08 in the quarter compared to $0.05 of income in the fourth quarter of 2009. On an as reported basis, including those items and a valuation allowance for deferred tax assets, we would have lost approximately $2.96 in the fourth quarter. Gross margins adjusted for the items that I described earlier decreased 370 basis points to 23.2%. And for those of you who have had a chance to look at the appendix, we do have a reconciliation of EPS, gross margins, as well as operating income in the appendix.

If you'd flip to slide number 4, please, we did have some significant charges in the fourth quarter. We had a goodwill and other intangible impairment of $721 million. That primarily relates to our Installation-related business. I think you're all aware that on an annual basis we do a goodwill impairment test, that's a discounted cash flow, has a lot of assumptions in it. We did tweak a couple of the assumptions in terms of the terminal year, reducing housing starts from 1.6 million to 1.5 million, that's about a 6% reduction, and an increase in the discount rate, and those 2 essentially drove the impairment charge.

In terms of deferred tax assets, the fact that this is a very highly technical accounting area, the fact that we are in a 3-year cumulative loss position in large part driven by some of the charges that we've taken over the course of the last couple years, negates previously identified tax strategies and put us in a position where we had to record a valuation allowance for those deferred tax assets of $370 million. Those assets incidentally are still available to us from an economic standpoint in terms of limiting tax -- cash taxes going forward. Both of those items cost about $2.76 in the quarter, that's the EPS impact. And I would point out very importantly that we were able to amend our credit agreement just a couple days ago. So we continue to have significant availability, I think about $1.1 billion in terms of availability under the line.

If you flip to slide number 5, take a quick look at the full year, net sales on a full year basis were down 3%. Again, excluding the items I mentioned earlier, adjusting for those, our earnings per share would have been $0.16 in 2010 compared to $0.31 in 2009. I would point out to you, and it is in the reconciliation in the back, that we did have increased other expense this year over last year of about $72 million pre-tax. That's about 13% -- or $0.13 in terms of earnings per share. That reflects interest, currency translation losses and impairments for financial investments. Our loss on an as reported basis in the year would have been $3 per share. And gross margins as adjusted would have been down only 10 basis points to 26.4%. Working capital as a percent of sales improved to 13.4%, I'll talk a little more about that later. We generated $290 million of free cash flow, and very importantly ended the year with $1.7 billion of cash.

If you please-- slide number 6. Obviously 2010 was a very challenging year for us. We came out of 2009 with a relatively strong operating performance, offsetting a lot of volume drop with cost reductions and improvement in price commodity relationships and had some nice momentum going into 2010. The first half was a little more positive. I think our sales were up 2%, 3%. And the second half was much more challenging. We saw housing starts slow in the second half. We saw expenditures for big ticket repair, remodel items continue to be deferred.

And I think this is a good point for me to talk about our sales to key retailers. In the fourth quarter, our sales to key retailers were off mid-teens. About two-thirds of that decline relates to our Cabinet-related businesses, and as you know we're exiting some products related to cabinets. That would put our non-Cabinet business off mid-single digit in the fourth quarter. That's up against a pretty tough comp in the fourth quarter of 2009, when sales to key retail customers were up 8% and we had pretty strong Cabinet results in the fourth quarter of 2009. From a [current] standpoint, if you take a look at the third quarter, we were off 4% in terms of sales to key retailers. About 50% of that related to our cabinet business which would put our non-cabinet business off about 2% in the third quarter. So for comparative purposes, off mid-single digit in the fourth quarter for non-cabinet business, off about 2% in the third quarter for non-cabinet business.

Full year adjusted gross margins and operating margins were pretty comparable to the prior year as you can see on the slide, and that was somewhat of a positive for us. Obviously, a difficult year but we were able to keep our decremental margin to about 2%. On an adjusted basis, our operating profit was down from $435 million to $430 million on a $200 million decline in sales. And so we were able to offset volume declines, negative price commodity relationships, those were both about $60 million, roughly, with about $110 million net of cost-related reductions. So again, a pretty tough year but one where we were able to offset some of the negative items impacting our business.

If you flip to slide number 7, in addition to holding our decremental margin to 2%, we continued to do a lot of positive things to position Masco for success down the road. We continued to strengthen our brands. We're working very hard on fixed cost reductions, we've shared that with you in the past. We estimate by the end of 2010, we had achieved about $500 million of fixed cost reductions. We've got a lot of good initiatives going on from a supply chain standpoint. And innovation, again, is a major driver for us. We've talked about the Watkins a sanitizer, the R.E.D. line at Arrow and some of the sensing technology at Delta. Those have all been very positively received in the marketplace. And we continue to focus on new products at value price points, the Milgard simplicity window, the Watkins hot spot spa, KILZ Pro-X, which we recently announced have all been -- all will be positive entries at the lower price point area. And we've got some exciting things going on in cabinets and plumbing targeted for later this year.

If you flip to slide number 8, we'll take a look at our segments and we'll start with Cabinets. Cabinets had another very tough quarter in the fourth quarter. Our sales were down 29% in the quarter. For the full year, we were off 13% in terms of cabinet sales. Excluding sales related to products that we're exiting, we would have been down 22% in the fourth quarter, and about 10% on a full year basis. Decremental margin was 45% in the fourth quarter, obviously, that's very high. Our contribution margin normally is around 30%. But we did, in addition to volume reductions, we had under absorption of fixed costs impacting us, increases in promotional activity and less favorable price commodity relationships. There were challenges in Europe relative to particle board. On a full-year basis, our decremental margin of 24% is very much in line with our contribution margin.

If you flip to slide number 9, just taking a look at Cabinets. We've talked a lot about our Cabinet business over the last several quarters, at investor conferences talked about our strategy, and we feel like we've got a lot of things going in the right direction there. Our integration is on plan and we are focusing on about $180 million of fixed cost reduction by the time we complete that process with a much more nimble footprint. We think our brand strategy is resonating well with customers, particularly with dealers. Our 3 brand strategy really covers very effectively the market needs from 1 vendor which gives us a little bit of leverage in terms of being able to spend that innovation and brand building. We've got a lot of innovation in the pipeline. We shared some of that at the international builders show and we continue to believe that the countertop solution that we're developing, ProCision, gives us a distinct competitive advantage. We believe that with housing starts in a range of 1.1 million to 1.3 million, and with a more normalized repair and remodel environment, that this segment can get back to double-digit margins, and we feel very confident about that.

If you flip to slide number 10, talk about Plumbing. Sales in the fourth quarter were off 1%, down slightly. Our decremental margin was pretty high in the quarter, as you can see, the $10 million drop in sales, we had a $10 million drop in profit compared to the fourth quarter of last year. That includes the decline in sales, some product mix that was somewhat unfavorable in the quarter, and expenditures for increased promotional activities. We did have a decline in margin in the quarter from 11.9% to 10.6%, still relatively strong. On a full-year basis we were up 5% in this particular segment and we saw 140 basis point improvement in our operating margins with an incremental margin of 41%. So we feel real good about the Plumbing business, feel real good about the prospects going forward and feel real good about our full-year performance.

If you flip to slide number 11, Installation and Other Services. Again, one of our segments that has been most challenged by the downturn and as a reminder, I think most of you are aware that the lion's share of the sales in this segment are tied directly to new home construction. We were off 7% in the fourth quarter and our operating loss was constant with the prior year at $25 million. We were able to offset the volume declines with cost reductions. And as a reminder, I would mention to you on a full-year basis incremental losses related to the launch of our new WelHome business, were $12 million on a full-year basis and incrementally $1 million in the fourth quarter. On a full-year basis, sales were down 9%. And again, we did a very good job there in terms of holding operating losses relatively constant, obviously still very high, but a lot of good work in terms of cost reductions offsetting volume declines.

If you flip to slide number 12, we've talked about Installation and this segment from an ongoing basis. We have lowered our fixed costs by approximately $180 million. We did announce late yesterday, and our new partnership if you will with Owens Corning that we think has some significant opportunities for us in terms of supply chain management, combining together to look at building science and applications to better develop products, techniques, if you will, for installation and really an opportunity to better serve our customers. I'm sure you'll have a couple of questions about that and Donny can elaborate on that a little bit later on.

We expect that our ERP system will be fully implemented by the end of the second quarter. Again, giving us some significant capabilities in terms of efficiency and productivity. We continue to do a good job with -- on the retrofit side, that business continues to grow. We've reduced complexity in this business and I think have done a very good job of enhancing our ability to execute in terms of some of the structural changes that we've made organizationally. We also have expanded our service partner's footprint in terms of distribution opportunities, which we think will be very positive going forward. With housing starts in this particular segment at 1.1 million to 1.3 million we think we can return to a minimum of high single-digit margins.

If you flip to slide 13, our Decorative Architectural business was down 4% in the fourth quarter and on a full-year basis was down 1%. Reduced sales of builders hardware offset a modest increase in paint and stains sales for the full year. Decremental margins in this segment are relatively high, and as we've communicated previously, reflect unfavorable price commodity relationships. I would point out in this segment that we had significant impact this year but the group did a really nice job of offsetting a fair amount of that with productivity, cost management, expense management and that type of thing. So we're very pleased with that. And they also managed very well through a tight supply situation relative to raw materials. We talked about that in the past, obviously. Margins on a full-year basis were down from 21.9% to 20.7%. Still obviously a very, very solid performance, a very significant contribution, and we're very, very pleased with the work that took place in this particular segment over the course of the last year.

If you flip to slide number 14, Other Specialty Products. Sales in the fourth quarter were up 3%. And on a full-year basis we were up 2%. Those sales increases were driven by share gains, geographic expansion and new products. Having said that, we also have an inverse relationship in terms of increased sales and reduced profitability. Those decremental margins in both the full year and the fourth quarter were impacted by cost related to new product launches, geographic expansion, less favorable product mix and unfavorable price commodity relationships.

If you flip to slide 15, I mentioned working capital a little bit earlier. We've seen some nice improvement here, working capital as a percent of sales, defined as receivables plus inventories less payables, decreased to 13.4% from 14.7%. And just really an outstanding job across the enterprise. We started to focus on working capital management pretty intensely about, I'd say about 10 years ago or so. These are the lowest -- or this is the lowest relationship, the 13.4%, at least in recent memory, so we feel very good about that. We continue to believe that we can continue to improve our working capital management. We've got, as I mentioned earlier, some supply chain initiatives in place and we think there's more opportunity here but just a really outstanding job across the enterprise, Donny, John, our group guys, our business unit leaders, very, very pleased with the management here.

If you flip to slide 16, want to make just a couple of comments before we move to Q&A. We're anticipating a relatively slow start to 2011. Housing starts in the last half of 2010 were pretty slow and we tend to operate on a lag basis of about 90 days, typically, so as we go into 2010 -- or excuse me, 2011, we're anticipating a little bit of a slow start. Obviously the weather's been a little bit of a factor. We do think repair, remodel activity will be a little bit better this year, modestly improved. We continue to believe that bigger ticket items will probably continue to be deferred at least for a while until home prices stabilize and we see a little bit of movement in terms of job creation.

Having said that, we'll continue to focus on the things that we can control, driving the Masco Business System across the enterprise, continuing to invest in innovation, continuing to focus on our cost structure, and in particular, we'll continue to focus on the Installation business and the Cabinet business. Obviously, last year was a tough year for both of these segments. We anticipate that we'll see some bottom line improvement this year. Our sense is that if the economic numbers come in where we think they will, and again, we're anticipating housing starts to be up about 15% which is pretty much in line with the blue chip consensus, if we see that kind of activity, our feeling is that we can cut the losses that we incurred in these segments last year by $60 million to $80 million and certainly anticipate making some very good progress in both of those segments.

We continue to be very optimistic about the longer term. Household formations, population growth, the age of the housing stock, all of those are positives we think for our business and we don't know when, but when we get back to a stronger situation relative to housing, relative to repair, remodel activity and we can see ourselves at $10 billion to $12 billion in sales, we certainly believe that we can generate low double to mid-teen margins at those kind of sales levels. And we think we're laying a very good foundation, a very good base to get us there. And with that, we will open up the lines for Q&A.

Thank you. (Operator Instructions). We'll go first to Josh Levin with Citi.

Good morning.

Good morning, Josh.

My question is about the Cabinets business. Do you have an estimate of how your market share adjusted for the exit of the RTA business?So your estimate of your market share in the Cabinets industry has changed over the past few quarters and where you think it might be going over the next few quarters?

Yes, Josh, this is Donny. We look at market share in the Cabinets, I mean clearly in the retail side of the business we've had some challenges there with price points and we've seen the consumer really-- we're seeing more activity at the lower price points, where through some heavy promotional activities consumers are getting better value at lower prices. And with our retail presence of KraftMaid, that creates a little bit of a challenge for us, getting into some of those lower price buckets where we're seeing a higher percentage of sales. We're working on that. We believe we've got some things we'll be launching here in the second quarter to really address some of those lower prices and we have our team really focused on how we want to attack that at retail.

Within the dealer community, a little bit of mixed results. We've seen a little bit of share loss on quality as we went through our Q-back initiative which was really getting all of the Merillat and Quality product on the same chassis. We've completed the first phase of that and began shipping product in December on the new chassis, so we think that was a temporary share loss that we'll get back. Merillat really had a strong year, gaining share both at dealers and new home construction. So we feel really good about where we're at with dealers. Plus, as we've talked about before, our dealer advantage program, we've had 279 dealers commit to dealer advantage program, representing 92 new customers and 187 existing customers add an additional brand so we feel really good about where we're at the on the dealer side. And on the builder side we think we've held our share, if not grown our share, particularly with Merillat.

Okay. And in terms of either margins, what is the trajectory for getting Cabinets back to breakeven, not to normalize margins, but just back to breakeven?

Yes, we estimate, Josh, that breakeven for the Cabinet business, again, on an adjusted basis without rationalization charges is about $1.6 billion.

Okay. Thank you.

Thank you.

Thanks, Josh.

We'll go next to Budd Bugatch with JPMorgan.

Good morning, everyone. This is Chad Bolen filling in for Budd from Raymond James.

Good morning, Chad.

Thanks for taking my questions. First of all, as we look forward to fiscal 2011 and think about some of the margin puts and takes, could you update us as to your thinking as far as where you stand right now from sort of a net pricing and commodity headwind position, how did that play out for the rest of the year and what offsetting savings or other items from restructuring could we anticipate?

Sure. Yes, what we're anticipating at this point from a price commodity standpoint, obviously we're seeing a fair amount of pressure pretty much across the spectrum. Metals prices, zinc and copper have continued to move up. We've had tightness in supply related to the components that go into paint, both resins and TIO2. But having said that, we're in a relatively good position. We estimate at this point in time that the headwinds going into 2011 represent about $30 million to $40 million in total. In other words, that would be the unfavorable relationship, if you will, between price and commodity based on what we sort of see on the horizon. Now, having said that, we fully expect that we can offset those -- that $30 million to $40 million either through productivity, either through working with our suppliers or through pricing-related activities. The items that are probably the most significant for us again would be paint and plumbing.

I mentioned earlier, we have seen some real challenges from a particle board standpoint in Europe related to our Tvilum operation over there. We estimate that we've got about $65 million of rationalization charges as we go into 2011. About $35 million of that relates to our Cabinet business, about $10 million in Install and about $20 million in Plumbing. From a cost savings standpoint, on a gross basis at this point in time, we estimate that our lean activities, productivity focus, as well as some of the cost reductions that we've been driving across the enterprise should on a gross basis represent about $150 million. Most of that would be in the Cabinet, Installation and Plumbing-related business, say, $40 million to $45 million in each of those segments, with the other approximate $20 million spread among the Decorative Arch and the Other segment. And I think that gives you pretty good perspective.

One of the other areas that you folks have probably noticed is that we had a very good outcome in our general corp expense in 2010. We came in at $110 million, and we're estimating that that number will be more like $140 million in 2011. Hopefully, we've got a little bit of conservatism in there, but we had a very good experience in 2010 related to general insurance, workers' comp and some other accruals related to performance compensation were down. We do anticipate those moving back up, and again, a lot of that's based on experience. We continue to manage all those areas very aggressively and we've got a little bit of healthcare-related inflation as well.

But I think from a big picture standpoint, that gives you a pretty good perspective of some of the components that we see going into 2011. I would point out that just from a modeling standpoint if you're using -- if you're anticipating incremental sales in 2011, we would suggest a contribution margin of approximately 30% continues to give a pretty good feel in terms of where the bottom line would fall out.

Well, thank you for that detail. That is very helpful and if I could have one quick follow up. But thanks again for the commentary around key retailer sales, does the down mid-single digits or so, excluding the Cabinets, do you think that's pretty indicative of end demand from consumers right now, are we seeing any changes in terms of stocking levels or shelf space at the key retailers?

Yes, I don't think we had a lot of impact in terms, Chad, in terms of inventory balancing in the quarter. That did not seem to be an issue for us. We may have had a little bit of impact, but typically that doesn't move the needle for us.

We'll go next to Peter Lisnic with Robert W. Baird.

Good morning, everyone.

Good morning, Pete.

I guess first question, if I look at the fourth quarter, the restructuring charges were markedly higher than I thought they would be, at least based on your third quarter forecast and outlook. Can you give us a sense to what the incremental actions were and just kind of run through what the pay back on some of those might be as well?

Yes, Pete. The thing that really drove the $104 million of rationalization charges in the fourth quarter was a significant charge that we took at-- to shut our West Jordan, Utah cabinet manufacturing facility, that was about $70 million or so in the quarter. So that was the biggest bucket of it. Beyond that we had a couple other facilities that we shut down that contributed larger than normal rationalization charges that--than we've experienced in the past couple quarters.

Yes, the big one would have been that closure, Pete.

Okay, all right, perfect. And then I was just wondering if you could run through the businesses and maybe talk about -- I mean, it's mentioned in the PowerPoint a decent amount, in terms of promotional spending or the competitive pressures that you saw, just run through by business and give a little bit of color or maybe quantify what you think that may have cost you in terms of gross margin or some profitability metric as well?

Yes, Pete, this is Donny. If we start-- if we talk about Installation, certainly we still have a tough Installation market as far as demand goes, we've still seen competitive pricing there. But I will tell you on the Installation side, we've really moved from continuing to rationalize that business and take cost out to really more of an offensive approach. We've put more people on the streets, we're leveraging our new ERP system and really driving efficiencies and really looking to grow our share this year and we think that we started to see some of those results in the fourth quarter and we're optimistic going into 2011.

If you move over to paint, really in paint we've got a three-pronged strategy. We have enhancing our core DIY paint, and that's our premium plus where we brought out our new low VOC formula at $50 or less. We have our PPUI business which continues to perform extremely well at rates above-- the conversion rates above what we had originally anticipated. We're growing in adjacent pro categories with KILZ, which really gives us the right product at the right price for the pro but it has a tremendous value prop where we've got factory tinting, direct to job site, it's available in stock at the Home Depot and it's supported by both inside and outside sales. And the roll out of that new product really starts next week and continues into the second quarter. And then we're penetrating markets outside of the US. So we've got Behr really doing a lot of work to really look at how do they limit their concentration in North America. So we feel really good about paint.

On the Cabinet side, we've talked about cabinets. Cabinet's still been a very high promotional category. Competitors as well as ourselves are having to run promotions to drive sales. We're seeing that those promotions had kind of lingering effect, meaning that there's a lot more value at opening price point. So we're seeing consumers -- we're seeing a shift down there, not necessarily where consumers are moving off of high-end products but they're just getting better value at lower prices, and we've got to respond to that with some different products and we're in the midst of coming up with a response to really that changing marketplace.

On the Plumbing side we've really done a lot of good work in Plumbing. As a matter of fact I would say our share's up on the wholesale channel as well as on the commercial side. Our high-end products are selling well. Our technology is resonating, our touch faucets continue to do extremely well and we'll be launching touch into the lavatory faucets in April of this year where we think it may even be more of a compelling value proposition. Our DIAMOND Seal technology has really been a real win for us in Plumbing. We have it in our single handle faucets, we're moving it into our 2 handled faucets. And DIAMOND Seal does a lot of things for us, but by converting that waterway from brass to packs it allows us to really change the dynamic related to the impact from the commodity costs.

So we're looking at alternative materials that we can use in the construction of the faucet body. That helps mitigate some of the effect and so we feel really good. Probably the area in faucets that we've really worked hard is really at the opening price point. And in the opening price point, we've done a lot of work there to kind of retool the line. We did a lot of work back really in 2007, 2008 and 2009 to get our cost structure right. And we've been relaunching both the low end Delta product and the Peerless product and we've had a new launch just recently at Menards that we're pretty excited about. So we're doing a lot of good work across all the segments.

And I think, Pete, a couple-- maybe a couple of other points. When you look at both Plumbing and Other specialty, we talked a little bit about geographic expansion. We have incurred some costs in both of those segments in the fourth quarter. Plumbing, that's basically related to Hansgrohe, we've talked about that in the past. They continue to do just a very good job of moving into other geographies, if you will. And our Milgard window business has done a very nice job of penetrating the Western Canadian markets as well as in Texas. I think they've got about 68 dealers currently signed up in Texas. So we've incurred some costs in both those segments related to geographic expansion. And in the Cab area, we had expense in the fourth quarter that last year was in the third quarter in terms of some major promotional activities, just relative to where the cost kind of fell. So hopefully that helps a little bit.

Go next to Dennis McGill with Zelman & Associates.

Good morning, guys, thanks for--

Good morning, Dennis.

Just looking for some more help on the Cabinet segment. When I read your comments of getting back to double-digit margins in a $1.1million, $1.3 million housing start environment, whether you use our forecast or consensus, that's something that might not happen for five years. Realizing this is a business that did mid-teens, we're sort of waiting quite a while just to get back to double digits. And if I look at the business prior to the restructuring it lost about $20 million over six quarters, but two quarters since restructuring where we've taken costs out it's lost over $70 million. So really just trying to get a handle on how we should really think about this business, if it's just a wait for volume approach and it's going to be multiple years until we can think about it as a normal run rate, or if there's going to be dramatic changes that we're going to see ultimately flow through here in 2011?

Yes, well, yes, the answer, Dennis, to that is that obviously it's been a tough run. In terms of getting back to that double-digit margin, we mentioned that we think we can do that at $1.1million to $1.3 million in terms of starts. And most forecasts have starts getting to $1 million in 2013. So obviously that's a ways off. But having said that, I don't think there's any question in our mind that we could see some significant improvement in terms of reducing the losses in 2011. Obviously, this is a business that is very sensitive to volume. We mentioned that we believe the breakeven is $1.6 million in terms of sales. And generally speaking what probably makes the most sense is the contribution margin around 30% for this particular business.

As we continue to push on the dealer side, we've mentioned this in the past, dealer represents about 70% of the market. Donny talked about some wins that we've had there that we're very encouraged by. Our three brand strategy continues to resonate. The problem is, we just haven't seen a lot of impact on the top line. Just to give you perspective, we estimate that the dealers that we've been able to penetrate with an additional brand, as Donny mentioned earlier, that represents about $50 million in annual revenue opportunity. Again, and that's based on current market conditions. The other thing that we think can help differentiate us is the ProCision investment that we've made in the countertop solution which we can marry up with the cabinets. So we think as we continue to roll the strategy out, continue to focus on expanding our offerings at price points as Donny mentioned earlier, that we've got a chance to pick up share with the 2 leading brands in that particular category.

And Dennis, I'll add. The last thing we're doing is waiting for volume to fix this segment. We've already closed seven facilities including West Jordan in the fourth quarter. We're removing $180 million in fixed costs. We integrated these businesses because we saw this coming and needed to have a different cost model on a going forward basis. By integrating them, allows our supply chains to be more flexible, our manufacturing to really be more nimble as far as responding to changes. Clearly, it's going to be a different market going forward. We see smaller home sizes, we see smaller kitchens. We've got to have the right product and portfolio to be able to address that and do so in a meaningful way. We're attacking the dealer. 70% of the sales here are to new construction. We really have to get after that larger dealer segment where we think our branding strategy gives us a huge advantage. So we're doing a lot of things we can. I want to make sure you realize the last thing we're doing is waiting for a rebound improved performance in this category.

Yes, Denny, at $1.1 million to $1.3 million, our estimate is that this segment would be somewhere around $2.25 billion to say $2.5 billion in terms of top line, just to give you some perspective. And the other thing I would point out too is that we often tend to focus more on North America, but we do have two operations in Europe. Both of them are having a pretty tough time. One of them is in the United Kingdom and I think you're aware that obviously the economy there is still very slow. A lot of austerity measures relative to trying to manage their way through the deficit they have to deal with. Our business in Denmark has got some challenges around input costs in terms of particle board. Incidentally, both of those businesses have new leadership over the course of the last few months. So again, it's a tough category but certainly one that we're very, very focused on and very actively monitoring in terms of progress.

And all that's very helpful, I guess my only comment would be I would think the incrementals would be better than historical, given all the cost take-outs that you had, but I appreciate that volume's a big part of it.

I think, Dennis, we don't want to get ahead of ourselves. I would be surprised if we don't do better than the 30% on pure volume. But keep in mind in this business, Donny talked a little bit about promotional activities, there is more of that going on in this segment. And as we continue to roll out our dealer advantage program, again, there'll be some ongoing costs related to that over time. So I think as we continue to grow aggressively and, again, we think we can take some share definitely in this category, my sense is we'll l probably be a little closer to 30% than maybe 35% or 40% which might happen in a more accelerated kind of recovery.

Yes and, Tim, I'll add. In the fourth quarter, Dennis, we have about $10 million of expenses flowing through the P&L that's not captured in the rationalization charges related to the under absorption of fixed and variable overhead in the wind down of our ready to assemble and in stock assembled cabinetry businesses.

And then my second question is more big picture, I guess. But if you think across the entire Company and the platforms that you have, how committed are you to the existing platforms? We've seen some smaller divestiture's in the past, could we see anything larger or are you pretty committed to the businesses that you own?

Well, I think the way to answer that question, Dennis, is that we obviously have two segments that are very, very challenging right now. That's Cabinets and that's Installation. And I guess from a big picture perspective, given your question, there probably are three things to think about. One would be closure, one might be divestiture, the other might be trying to balance the short term and manage the short term as aggressively as you can and position the business for the future. From our perspective, we think there's a lot of value creation opportunity in both of these segments. Obviously, volume is very important to us in both of these segments, I mean there's no question about that. These businesses were built for a much different environment.

But having said that, our feeling is that continuing to manage aggressively to do the best job we can on a near-term basis to limit the losses and negative cash flow, but to continue to invest and position these businesses for the future makes a whole lot more sense to us from a shareholder perspective, just in terms of value creation. We've got, we think very good leadership teams in both businesses. We've got a lot of good things going on from an organizational standpoint, just in terms of the way the business is structured and managed. We should be much more nimble. We should be much more flexible going forward. And I think my sense is we'll be very, very efficient as we work our way into a more normalized environment. So we think there's a huge value creation opportunity here. I don't know, Donny, if you want to mention a little bit about the (inaudible) rates to install, maybe something that folks haven't focused on maybe as much as -- go ahead.

All right, thanks, Tim. And let's not forget, we are-- we believe we're the number one cabinet manufacturer in North America. We're the number one installation provider in North America. These are leading segment-- leading businesses within their segments. We feel very, very good about the teams. Tim talked about what we've done to really improve our leadership teams and drive accountability and execution, seeing the results of that in Installation where we're moving from really restructuring to offensive positioning here in 2011, and like what we're seeing as far as early results. We certainly are seeing more bidding activity so far in 2011 than we saw at the end of 2010 and we're encouraged by that. Now whether that turns into projects and work, we'll see but we're encouraged by the level of bidding activity.

Tim mentioned the Owens Corning agreement and we're excited about the relationship that we announced with Owens Corning. We see tremendous opportunity with our new ERP system around supply chain by giving them forward-looking visibility to our demand and how we might think about taking costs out. We think there's tremendous opportunities between Masco and Owens Corning, we are the leaders in building science. We brought out the environments for living program. We have 140,000 homes built to that specification where we can guarantee energy costs, drive efficiencies, really improve our take per unit. Owens Corning is the leader in building science with some of their programs. So we start looking more from a solutions point of view, not a product and install point of view, what can we do together, we think it's pretty staggering. And then the work we can do on governmental affairs and really driving the right type of legislation and getting behind things that make sense for energy efficiency, greenhouse gases. We just see a tremendous partnership here with Owens Corning. So we're really excited about where we're at in those two segments. So we think there's a tremendous opportunity to create value, continue to take costs out, we're doing the right things and we're hoping that's going to pay off very shortly.

Go next to Michael Rehaut with JPMorgan.

Hi, guys, this is actually [Will Wong] on for Mike, how are you?

We're good, Will, how are you?

Good, thank you. I just had a quick question. I know you guys in the past have talked about a $750,000 to $800,000 start for breakeven goal for the Installation Services business. I was wondering, is that number still relevant or have you guys adjusted that number in any way?

Yes, our thinking right now, Will, is that when we talked about that in the past, we said $750,000 to $800,000 probably closer to $800,000. At this point in time, our feeling would be that that number is between $700,000 and $750,000 and probably a little closer to the $750,000. But we think we can make, continue to make some incremental progress. Donny talked about more feet on the street. That should help us from a top line perspective. You saw, we talked a little bit about some of the cost take out last year. The guys did a great job offsetting volume declines which incidentally reminds me that you should point out that across the Company, not just in Installation, but across the Company, we had about an 8% headcount reduction in 2010. So again, as part of driving efficiencies, productivity, some of the other restructuring's that we've undertaken.

And Will, I'll add in addition to Tim's comments about really lowering the breakeven point, yes, that's in spite of an aggressive pricing environment, smaller home sizes and the incremental spend that we had on WellHome which was an incremental $12 million, $13 million last year versus 2009. So in spite of all those headwinds, we've continued to lower our breakeven forecast for this segment, just a tremendous amount of work done by the folks in our Installation segment and we're real excited because we're moving now from how do we restructure that segment to how do we go out and win new business and deliver value to our customers.

Okay. Great. And just my second question is related to the Cabinets business. Just to circle back, I know you guys talked a little bit about promotional activities and under absorption of fixed costs for this quarter. But in terms of what the drivers or in terms of the major drivers for the sequential decline in operating margins, I was wondering if the you could talk a little bit more about that as well?

Yes, sure. Couple things, that the sequential -- things that contributed to sequential decline in the Cabinet segment specifically. A lot of it was probably what Donny mentioned earlier was attributable to just the under absorption of overhead that we incurred. Also, we had a little bit of raw material cost increases that Tim mentioned earlier, particularly impacting our European businesses. So those are the two big chunks that impacted us overall.

And do you expect that to continue into the next quarter?

We're working right now with our supply chain guys and looking in to address the chip board issue in Europe. Don't have that well under wraps at this point, that might be a Q2 issue. And still to Donny's point, with the restructuring work we're doing in Cabinetry, focusing on some of that under absorption of overhead.

Yes, we will continue into the first part of this year as we wind down the products that we're exiting to have some negative impact in terms of operating results from that. As John -- I think Donny mentioned it earlier, that hit us to the tune of about $10 million, roughly, incrementally in the fourth quarter so that was a pretty good sized number. And we also mentioned earlier that we did have an increase in promotional related costs, really more of a shift, if you will, from the third period-- or third quarter 2009, more incurred in the fourth quarter of 2010.

Okay.

We'll go next to Chris Wiggins with Oppenheimer.

Hi, good morning.

Good morning, Chris.

Just to revisit the Cabinets business a little bit and you discussed the need to kind of address the lower price point in the segment. I guess I'm wondering when you look at kind of the foreclosure activity that we've seen, are you able to get any sense of if the associated remodels on those foreclosures are kind of at that lower price point where maybe you're missing some opportunity there?

Now Chris, we certainly can tell in markets where there's been higher foreclosure activity that there has been higher spend on repair and retrofit. And as we look at the type of kitchen that's going into the foreclosures, that's really related to price point. As we know, if you look at the price point of the foreclosure and whether or not it's an investor or homeowner that ultimately made the purchase. So a lot of variables there.

I would tell you that when we look at the portfolio, we have a tremendous opening price point product and that's our Quality product, and that product was hampered by our initiative to go to account and chassis, that's behind us. So in December we started shipping over 50% of the line on the new chassis. We've seen dealers come back and we've been able to attack that market through our dealer network. The Quality product is also made available to the builders, so we feel really good about where we're at with the builders and where we're at with the dealers of having the right product and then being able to trade people up into features, into Merillat and for those people who really want that dream kitchen we've got our KraftMaid brand.

Where we really have been lagging is our ability to get to those lower price points in retail. And I don't want give out any secrets yet but we're real excited about what we're going to bring to our customers here in early 2011 to address some of those lower price points and then really talk about how do we take those customers and provide opportunities for them to get better features. And we think some or a lot of that foreclosure business is running through our large home center customers, so we really need to work on being able to have the whole spectrum within those home centers.

Okay, good that's helpful. And just a quick follow up then on the product line exits at Cabinets, are we kind of at the full run rate there, or is there a little bit more sequential headwind? And how should we think about costs for the WellHome business going forward?

To your first question, in terms of headwind for the product exit, a little bit more of a sequential headwind in Q1 of 2011 that we'll be facing but after that it should start to lighten up pretty significantly. In terms of incremental WellHome costs, relatively modest this year, but not anticipating a huge roll-out like we had last year. As you may recall, I think we opened up 15 branches over the course of 2010 between the Q1 and Q2, and then some satellite branches toward the tail end of the year in Q4. So those should lighten up pretty dramatically as we enter into 2011.

Yes, John, I would say WellHome spend in 2011 will be flat with what we've had in 2010 and certainly hoping to reduce those losses as those branches mature. We're currently serving a out of our 17 locations and three satellites, we're servicing 26 of the top 100 MSAs so we feel good about our penetration and a lot of accountability-- we're driving down a lot of accountability now related to performance before we do any further expansion.So yes, we'll add that. Retrofit's been a good market for us in 2010 and our retrofit sales within that segment were up north of 60% in 2010 over 2009. So it's been a nice source for growth for us and we think it positions that segment even stronger going forward if we can continue to increase our mix of retrofit, add that to our new construction leadership position, we think we can be the leader in both retrofit and reconstruction coming out of this downturn.

And I would say -- I would add that the two branches, the two initial branches, one here in the Detroit area, one in New Hampshire in the fourth quarter as we suggested were slightly profitable in aggregate. And we've got time, Clayton, for one more question.

We'll go next to Dan Oppenheim with Credit Suisse.

Hi, this is actually Mike Dahl on for Dan.

Hi, Mike.

I had a follow-up question to Dennis' question earlier, was a little surprised to hear your comments on the narrowing the operating losses $60 million to $80 million in Cabinets and Installation. Given your comments on some of the cost and revenue actions along with the sales outlook, would have thought that we would have seen a little bit more there in terms of operating improvement. Can you help us understand that a little better, was that per segment or is that overall kind of--?

That's in aggregate. And that's based on our view of what the economic environment could be, particularly with a pretty slow first half of the year. We obviously will shoot to do better than that, but we think we've got a very good chance to deliver on the $60 million to $80 million.

Yes, and I'd add, Tim, I think a big influence was what Tim talked about, we tend to operate -- remember, both of these segments are highly related to new home construction and we tend to operate on a 90-day lag. So when you look at what's in the kitty now for the first quarter related to fourth quarter housing starts and we think about getting to a level around blue chip consensus of 670,000 units for the year, most of that has to happen now on a going forward basis. And when we lag that 90 days, that moves that out into the second half of 2011 for us. So I think they're pretty aggressive targets when you think about the activity ramping up in the second half of the year with the first half being a little bit more challenging.

Okay. Thanks. And then second question on the paint side. Can you talk about what you're seeing in terms of share specifically on the paint and as it relates to the big boxes? And then have seen some weakness there and obviously challenges on TIO2, what's the plan for pricing, understanding that you've still got the Depot and Lowe's that are very focused on value today?

Yes, let me talk a little bit about paint and then I'll have Tim make some comments about the commodities. Related to paint, we're real excited. We've got -- if you look at data related to share of paint on a gallon basis, we believe that Behr increased their share of both interior paint, exterior paint and exterior stains, so we feel really good about what Behr was able to accomplish. Also, we had a leading consumer magazine for the second year in a row rate all of our Behr premium plus ultra interior, our paint and primer in one paint, number one across the three big sheens. So we feel really good about the product we have, the share that we've gained in 2010 in paint and in the trends. And certainly with the roll-out of KILZ Pro-X, which allows our sales in the Home Depot to really have the right products at the right price for the pro painter, and we think there's a tremendous value prop with factory tinting, direct to job site delivery, the availability of having the product not only delivered direct to job site but in store, certainly the number of associates that we can really have promoting this product, both in store and out store. We feel l really, really good about what Behr is able to accomplish in 2010. It was a great year for Behr.

And in terms of commodities, as we mentioned earlier, we've got we estimate about $30 million to $40 million of headwind coming into the year, that's across the Company. The toughest areas are definitely going to be Plumbing, as well as the paint side of things. And I think we've managed very well so far through that. As we mentioned earlier, we were able last year to offset a major portion of that. We did have negative price commodity impact of about $60 million on a full-year basis, but we did have savings of about $100 million, $110 million, which substantially offset that and the volume drop. We continue to be confident going into 2011 that we'll be able to address the $30 million to $40 million of headwind.

And one of the key issues for us is availability as it relates to paint. That's an area that has been challenging. We see resins a little bit -- in a little better position from an availability standpoint going into 2011. TIO2 continues to be, probably a little bit more of a challenge. There's been some pretty significant cost increases in both of those areas, but given our relationship was our suppliers, the fact that we have shown some nice growth over the last few years and certainly anticipate growth going forward with our new pro-- our KILZ Pro-X offering on the pro side, we think we'll be able to get the amount of raw supply that we need and certainly be able to manage through that process.

And with that, we'll wrap up the call. Appreciate you being with us today. If we didn't get to your question, we certainly will be available the rest of the day and just check in with Maria and we'll be happy to talk one on one. Thank you very much.

Once again, if we were unable to get to your question during this call we ask you to please call the Masco Corporation investor relations office at 313-792-5500. This does conclude today's Masco presentation. Thank you for your participation.