馬斯科 (MAS) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2011 second-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 about 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 time, please call the Masco Corporation investor 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, Connie and thank all of you for joining us today for Masco's second-quarter 2011 earnings call. I'm 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.

Sales in the quarter were down 1%. Excluding rationalization charges, gains, and impairments from financial investments, and adjusting for a normalized tax rate of 36%; income as reconciled would have been $0.05 a share, compared to $0.16 in the second quarter of 2010. On an as-reported basis, we earned $0.02 in the second quarter, compared to $0.01 in the prior year. Working capital improved in the quarter to 15.6%. We'll talk about that a little later on. And we ended the quarter with $1.6 billion of cash.

If you flip to slide number 4, please. Gross profit and operating profit, as reconciled for the rationalization charges and for a litigation charge in the second quarter, gross profit would have been down about 150 basis points, to 26.9%; and our operating margin would have been 5.5%, a 280 basis point decline. A little bit of color in terms of our overall financial performance. I mentioned that sales were down 1%. That equates to about $26 million. That includes an unfavorable change in terms of product exit.

As we've announced previously, we have exited the ready-to-assemble product group. That ended in the second quarter, and that was a reduction of about $49 million in terms of sales. Offsetting that was positive impact from foreign currency of $54 million. Our international operations were up 5% in the quarter in local currencies, and had another very strong quarter in terms of operating performance with margins at 9.8%. That compares to 9.5% last year.

Sales to key retail customers were down mid-single digits in the quarter. All of that is represented by the exit of the ready-to-assemble product group. Without that impact, we would have been flat in the quarter, in terms of key retail sales. And that includes some declines at Wal-Mart that we'll talk about in a little bit. Just to give you perspective -- in the first quarter, if you eliminate the exited products, we would have been down low-single digit, as we communicated a while back. Sales off $26 million. Our operating profit on a reconciled basis was down $59 million. We think volume accounted for about $25 million of that, and obviously we did benefit from foreign currency translation, so that masked some of the volume decline.

Price commodity relationships in aggregate cost us about $10 million in the quarter, and almost all of that is in cabinets and plumbing. Mix was about negative $10 million in the quarter, and almost all of that is in plumbing. We did have a little bit of combined mix and price commodity impacting other specialty products. In addition, we incurred some expenditures for some of the growth initiatives that include our international expansion in paint and plumbing, some new retail programs, innovation, and the dealer initiative in cabinets and the pro initiative in our paint group. And we'll talk about those as we go through the segments.

If you would please flip to slide number 5, where we reconcile earnings per share. As you can see here, this takes into account the reconciliation for the rationalization charges, as well as the litigation charge. And a pretty significant impact in both quarters related to financial investments. In the second quarter of 2010, we had an impairment charge of $33 million. In the second quarter of 2011, we had gains from the disposition of financial investments of $33 million. Those are coincident numbers. As I mentioned, adjusting or reconciling, if you will, we made $0.05 in the second quarter, compared to $0.16 last year. And on an as-reported basis, just as a reminder, earnings per share were $0.02, compared to $0.01 in the prior year.

Please flip to slide number 6. We'll talk about the cabinet segment. Our sales in cabinets were down in the quarter, 18%. And again, that includes the impact of the products that we exited. Without those impacts, we would have been off about 6% in the quarter. Decremental margin in the quarter was inflated above our contribution margin. The decline in margin reflects volume. The under-absorption of fixed cost -- we had about $6 million, related to the $49 million of product exit. In this segment, as I mentioned earlier, we had about $5 million of unfavorable price-commodity relationship; and we did incur some increased costs relative to promotion related to the dealer initiative, brand building, and some promotions at retail.

If you flip to slide number 7, in terms of cabinets -- just a quick update. We got a lot of things accomplished in the second quarter. We completed the common architecture program that affected the Merillat and Quality brands. We also, as I mentioned earlier, finished the exit of the ready-to-assemble related product. And again, we're very happy to have those behind us. We continue to benefit from the cabinet integration. We're tracking the savings that we've communicated previously. We believe we'll be on track to show about $35 million to $40 million of savings by the end of 2012.

And we continue to add dealers -- or have dealers that have added a Masco cabinet brand. Over 400 dealers, we estimate, have done so, and my memory tells me that about 180 or so of those are new dealers to Masco. So we're pleased with that. We did idle another manufacturing facility in the quarter, and Kraftmaid was awarded the highest ranking in terms of customer satisfaction related to cabinets in a JD Power study. And obviously that relates to the US, and obviously we're very proud of that.

If you flip to slide number 8, our plumbing-related business. We had another solid quarter in plumbing; plumbing was up 12%. We did benefit from foreign currency in this particular segment. About $42 million of the $54 million of positive currency translation relates to plumbing. Without that, we would have been up about 5%. We did see a modest decline in terms of margin -- down about 40 basis points. And profitability is impacted by unfavorable price-commodity relationship. We talked about that a little bit earlier. Unfavorable mix, as I mentioned, and some investments -- incremental investments -- in the quarter, in terms of international brand and some other marketing-related programs.

If you flip to slide number 9, we continue to invest in the plumbing segment in brand building, innovation and design; and pursuing international growth. And we had very strong performance in the quarter in our faucet brands in the US -- Delta, Peerless and Brizo. And Hansgrohe had just a fabulous quarter -- in fact, a record quarter in terms of their operations, as they continue to expand in global markets. We continued to innovate. Our touch technology has now been applied to bathroom faucets. Those were introduced, and we're really excited about the opportunities there. We continue to gain share in tubs and spas -- hot tubs and spas -- with our HotSpring and Caldera brands. We mentioned last time that Delta was nominated for an Effie Award, and they were recognized with a silver Effie in the quarter. And again, that's a prestigious honor related to advertising and communication; and certainly very proud of that.

If you flip to slide number 10, installation and other services. We were down about 5% in sales in the quarter, and that compares to a 7% decline in 90-day lagged starts. In addition, we were off about $3 million in terms of profitability. That 20% decremental margin pretty much explains or pretty much approximates our contribution margin in that particular segment.

If you flip to slide number 11, I believe we had some sequential share gains from first quarter 2011. As we mentioned, in the first quarter, we had, we believe sequential gains from the fourth quarter of last year. And obviously that's an important topic. I think last year at this time, with some of the compression in the build cycle, some of the decontenting that was going on in terms of housing, we had a lot of discussion around share in this business; and we're really pleased with some of the progress we've been able to make in terms of installation. We continue to benefit from increased retrofit sales, and we've got some really good opportunities that are developing with some of the larger builders going forward.

Unfortunately, not a lot of that's showing up on the top line at this point in time, because of the depressed activity; but we certainly are encouraged going forward, relative to some of the opportunities that have developed. We also completed the implementation of the ERP system in this segment, and we believe that initiative, and some of the things we're doing from a lean standpoint, should continue to drive efficiencies and cost savings going forward. So making a lot of progress in terms of installation.

If you flip to slide number 12, decorative architectural products were off 3% in the quarter. We had a pretty significant drop relative to sales in terms of profitability. We continue to see commodity cost pressure, but in this segment, in this quarter, price commodity was basically neutral. Decremental margin includes the timing of advertising spend, which was up compared to the second quarter of last year $5 million, $6 million. And we also incurred $6 million or so for program costs related to new opportunities in builders' hardware, the investment in the pro and international expansion, and some work we're doing to reformulate some of our paint-related products.

So if you flip to slide number 13, we continue to be very excited about some of the top line opportunities in this segment. Our Direct-to-Pro program with Home Depot continues to gain traction. We have all the Home Depot stores are set now, with the KILZ Pro-X product. We got that accomplished in the second quarter, so feel really good about that. And Liberty is in the process of launching some new programs at retail in both bath- and cabinet-related hardware; and we'll talk more about that later this year as those programs develop. But a lot going on in terms of top line opportunity in this segment.

If you flip to slide number 14, other specialty products. Sales were off 5% in this segment, about $7 million, and we had a pretty significant decline in terms of operating profit in relation to the sales. First and foremost, I would point out that last year, we had an exceptional second quarter. We had about a 7% margin in terms of last year in the quarter, as you can see here, so very good second quarter last year; and those of you who have followed us know that we've seen declining performance in this segment since that point in time. We continue to believe that we're being impacted negatively by declines in new home construction in the Western US, lower repair-remodel activity; and we believe that that's in part driven by the expiration of the home buyer tax credit last year, as well as the expiration of some of the energy tax credits that were available.

Our lower operating profit reflects volume. About a $4 million spend on geographic expansion, product launch, promotions and trade shows. Some loss of leverage, additional freight cost in the quarter, and we did -- when you look at price, commodity and mix combined, we were down probably in this quarter, or in this particular segment $1 million to $2 million. So again, not a real solid performance in the segment, but a lot of work going on in terms of product launch.

And if you flip to slide number 15, a couple comments relative to this segment. We continue to believe that in windows, in both the Western United States as well as the United Kingdom, that we're gaining share. That's been a fact for us, we think, over the course of the last 6 quarters or so. Unfortunately, the pie is much smaller. Milgard continues to expand in geographies in Texas and Western Canada. The expansion into Texas has cost us a little bit, including some additional freight. And Arrow Fastener has come out with a couple product lines -- we talked about the Red line; they've also come out with a new Elite Tool line. So we're excited about that opportunity, and as it develops, we'll be able to share some information with you about the outcomes there.

If you flip to slide number 16. Mentioned working capital earlier -- we improved from 16.1% to 15.6% in terms of receivables plus inventories, less payables, as a relationship to last 12-month sales. And you can see that in terms of the components here, we're up a little bit here, in terms of inventory days; don't feel like there's anything there that is of concern. And continue to do a very, very good job in terms of accounts payable management. And really, we want to take this time to kind of thank the team -- the Masco team -- for the effort here, as well as the effort across the other aspects of our business. Obviously, the environment continues to be very challenging, but we're very pleased with some of the opportunities that we're developing, and really encouraged by the effort our folks are putting forward.

If you flip to slide number 17, before we go to Q&A, I'd like to make just a couple of comments. Market conditions certainly continue to be challenging. The economic signals continue to be somewhat mixed, but basically, most economists have reduced their expectations for 2011; and we currently see a much less robust year than we anticipated at the beginning of the year. You might remember our housing start assumption early on was around 690. At the end of the first quarter, we adjusted that to about 640. And more recently, at least at this point in time, our view is that housing starts appear to be relatively flat with last year.

Having said that, for us, lag starts are very important; and on a 90-day lag basis, our sense is that starts will be flat on that same basis. We're not seeing a lot of pick-up in terms of repair, remodel activity for bigger ticket items, so that continues to be slow. And having said that, as we've said in the past, we'll continue to focus on the things that we can control and influence. That includes driving the Masco Business System across the enterprise, continuing to invest in innovation, our leadership brands, global expansion; and continuing to manage our cost structure. We've got a lot going on operationally.

Obviously, two of our major priorities are the cabinets and installation businesses, and I continue to be pleased with the progress we've made there. As I mentioned earlier, we've completed several key initiatives. The ERP installation at installation services, the product exit, the common architecture program -- obviously all of those have required significant time and attention, and we're certainly glad they're behind us. In addition, as I mentioned, we did idle another manufacturing plant in cabinets. And although the economy is not as robust as we had anticipated earlier this year, we still anticipate significant improvement in terms of the operating performance of both of these businesses.

We currently anticipate that on a full-year basis, that we can reduce the operating loss by $20 million to $40 million in terms of installation and cabinets combined. And we will continue to push very hard to reduce our breakeven point; and we expect to make more progress in 2012, irrespective of the economic environment. We also continue to believe that we will successfully offset commodity costs and other inflation on a full-year basis. As I mentioned last time we were together, that's certainly a fluid situation; and since we last talked, we do face some additional challenges as it relates to lumber, particle board, TiO2, resins for paints and windows, as well as metals and other commodities. But we continue to be confident that as we work with suppliers, focusing on supply chain, work on cost reductions and implement pricing, that on a full-year basis that we'll have these costs covered and neutralized. Year-to-date, we're negative about $20 million in terms of price-commodity relationship.

There's a lot more work to do, but we feel confident that we'll be in good shape as the year continues to unfold. We continue to be confident in the long-term fundamentals for our markets, and we continue to invest. We're increasing our penetration in North America, in terms of dealers for cabinets, in that particular channel, and with the professional painter. We continue to develop international opportunities for paint and plumbing; and we're launching several new programs this year in plumbing, cabinets and builders' hardware. While it's too early to talk about specifics, we think these opportunities are very exciting, and we'll be able to share some of the details with you as these develop over the next couple of quarters.

We're incurring some incremental costs, as I mentioned earlier, and covered when we talked about the segments, as we execute on these opportunities, but we anticipate that they will add significantly to our top line as they mature over time. Longer term, we continue to feel very positive about our ability to create value for our shareholders. We believe that when we can get volumes back to -- on a top line basis, -- the $10 billion to $12 billion area that we enjoyed previously, there's no question in our minds that we can deliver double-digits margins at that kind of level; and certainly produce the kinds of returns that shareholders are looking for as they think about Masco as an investment.

And with that, Connie, we'll open up the lines for questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). We'll take our first question from Josh Levin from Citigroup.

Good morning. You talked in the press release about new programs in plumbing and cabinets. You just made a passing reference to it, and I suppose understandably for competitive reasons, you don't want to give too many details, but can you, with regards to those new programs, can you help us think about when and how those new programs might start to impact earnings?

Yes, Josh. We're looking at top side opportunities that we think are very significant. We think the Pro initiative with the Home Depot is an opportunity that could result in hundreds of millions of dollars on the top line, as it develops over time. We also think that some of the opportunities that we're pursuing in cabinets, builders hardware and plumbing have top line opportunities of hundreds of millions of dollars.

Having said that, many of those programs will be launched later this year, and it's important for us, obviously, to coordinate communication, promotional strategies with our customers, and so we don't want to get ahead of ourselves, but I'm very certain that you'll be pleased, as we are able to communicate more about those programs going forward, and we will do so at the appropriate time. But we've been very hard at work, obviously, strengthening our brands, investing in innovation, and we've shared that with investors over time and that's been a big part of our strategy. But we feel very confident, very comfortable that these opportunities, as they develop, will provide significant earnings and significant top line growth.

Okay. My second question, so single family starts appear to be sort of just flat-lining but multi-family starts are picking up. Can you give us an idea of how your earnings sensitivity differs from a multi-family starts to single family starts?

Generally speaking, a single family start would have more of the types of products that we manufacture. For example, insulation, more fixtures in terms of faucets, those types of things. So generally speaking, single family starts are more important to us. Having said that, we're certainly very much aware that multi-family starts are growing more rapidly than single family and so from that standpoint, we've got products that we certainly think will resonate well in those applications. I mean, basically, they tend to be the same products. There's just fewer of them.

Josh, I would add that we saw this trend coming really about two years ago, and have worked hard in both our cabinet segment and install to position ourselves to win. The installation services, although the take per unit is lower, we believe our market share is at least the same as it is on the single family side. So we think we're positioned to win there. We're surely a better balance sheet, strong capital base is really important to do those bigger projects, and on the cabinet side, we've really been focused on doing more in smaller spaces. It applies both to multifamily, but also to what we're seeing in the single family market today. We're dealing with smaller kitchens, and so how do we do more in smaller spaces and really bring out more value to consumers. So we see this trend as one that we think we're positioned to win, and we're going after it aggressively.

Thank you.

And we'll take our next question from Josh Chan from Robert W. Baird.

Hi, good morning, everyone.

Hey, Josh.

Hi. I was just wondering, a lot of building products companies have talked about tough April and May but June was a little bit better. Could you comment on that for your Company, and if you also care to comment about July?

Yes, yes. What we mentioned last time we were together was that April, when we had our call I think on the 26th of April, that April looked like it was going to be down high single digits, and in fact it was. We did see a pretty nice lift in May. We were up mid to high single digits in May and June was relatively flat for us. July at this point in time, our sense is we'll be down low single digit or flat, if you exclude product exit, the way it looks at this point.

Okay.

And again, to your point, Josh, weather has been commented on by several folks in the industry and I don't think there's any question that weather has been a factor in terms of certainly impacting consumers' involvement in projects over the late -- early part of the first quarter or late part of the first quarter, excuse me, early part of the second quarter. No question.

That's definitely understandable. And then going over to the second half outlook, you talked about some program launch and then you also have easier comparisons. I mean, I understand what's going on with the macro, but your comment about second half growth being challenged seems somewhat conservative. Could you explain a little bit about the outlook?

Well, the outlook -- what we tried to talk about there was more from a macro perspective, and we certainly continue to believe that the macro side of things is weak. You've got the near-term reality of higher energy costs, higher food costs, which impact disposable income for consumers, and you've also got the near-term uncertainty that seems to emanate from the discussions that come out of Washington in terms of a variety of economic topics that I think people think are important. So when you think about that, the consumer does not appear to be very actively engaged at this point in time. So our feeling is the macro side of things is going to be pretty tough.

Having said that, from our perspective, as I mentioned earlier, we've got a lot of new product opportunities that we'll be launching in the second half, and we certainly expect to have some positive impact from that. So our concern about the environment is more on the macro side, the things that we can influence, the things that we have the ability to control, which include some of the new products that we're bringing to market, certainly we believe put us in a great position. We've done a lot to strengthen our brands over the course of the last couple, three years, we're in a very good position there. We continue to be in an extremely good position from a share standpoint.

One of our strategies has been through innovation, through a lot of the work that we've been doing with the consumer to increase our very strong market positions, and as we sit here today, I don't think there's any area, given the fact that we've seen some good improvement in terms of installation and cabinets over the course of the last couple of quarters, at least on a sequential basis, that puts us in a position where from a share standpoint, we continue to grow. So we think the environment's going to be challenging, but we certainly think that the opportunities that we'll be rolling out will be a plus. And your comment about easier comps in the second half is certainly accurate and, we'll see how things unfold. But we feel very comfortable with the opportunities that we're developing inside.

Okay. Great, thank you for your time.

Thank you.

And we'll take our next question from Dennis McGill from Zelman & Associates.

Good morning. Thank you guys.

Good morning, Dennis.

Hi, Dennis.

Good morning. Just want to follow up on the multifamily discussion, just to make sure I understood your comments correctly. You're saying your share in multifamily is similar to single family. Is it fair to assume that in the install business, roughly 25% to 30% of revenue is multifamily?

Dennis, I would have to look at it to see. I don't think we've broken that out, have we, Maria, or given that out?

I don't know that we have the breakdown. I'm not sure that we --

Plus, it's influenced by the take per unit, Dennis because the take per unit in that segment is lower than it would be on a single family. That's something we can look at and decide whether or not that's something we have disclosed that previously.

Might be something helpful to disclose in the future, if you're able to dig it up. Other question just had to do on the cabinet side, the facility closure in New Mexico. Just wondering if you could elaborate on that a little bit how that fits into the cost savings that you previously talked about and how we should think about that moving forward, and also the decision to close now versus a year ago with restructuring efforts, what factored into that to lead you to close it today?

Well, I think in terms of the decision, Dennis, obviously we've completed a lot of work in that segment, the exit of a product group that we talked about, the common architecture program. I mean, those were certainly initiatives that were very important. The integration has been going well.

And I think as we have looked at expectations for volumes out there, having an operation on the West Coast was important for us from a freight standpoint at one point in time. But as we've reviewed our footprint, reviewed the economics, we felt like we could eliminate some of the capacity there and we'll have a little bit of a penalty in terms of freight, but we think that's certainly manageable. I think the cost, about $1 million, John, in terms of charge and I think the savings, Dennis, this plant will be idled by the way, so we'll continue to depreciate it, but I think we're looking at, what, about $3 million, $3.5 million.

On a full-year basis. $1.5 million to $2 million this year.

Okay.

That will be incremental to the costs you discussed previously?

Yes. That's correct.

We'll take our next question from Nishu Sood from Deutsche Bank.

Thanks. I actually wanted to ask about commodity costs. The negative $20 million headwind you talked about sounds small relative to just some of the headline price figures you see, especially in areas like decorative architectural. So are there hedging activities going on, or what are you folks doing to manage that so well?

Hedging issue for us has been fairly minimal and pretty much limited to metals, particularly copper and zinc. But what we've -- you might roll the tape back a little bit, you might remember late last year, second half, I think we incurred negative price commodity of about $60 million, $65 million on a full-year basis, and I think almost all of that was in the third and fourth quarter. But we have been very active in the areas that we talked about. I think you can assume that we have seen hundreds of millions of dollars of commodity cost increases this year, but obviously we've been able to offset that with supply chain initiatives, with pricing, so we've been very, very active, and I think we've had some very good success. The strength of our brands, the innovation that we've worked on, certainly aids us in that opportunity. But we feel pretty good about where we're at and, again, it's been a lot of hard work by the folks across the enterprise but we've been pretty successful.

Got it. Okay. So I guess looking at that as a net figure, but the second question I just wanted to make sure I got in there was about the plumbing products division. You mentioned unfavorable products mix shift in that division. Now, when I think about that division, the first thing I think about is the -- one of the first things I think about is the success of Hansgrohe, obviously at the higher end. Now, with the decline in big ticket remodeling that obviously would have shifted your mix there to probably more replacement and retail type stuff, but I would have thought that the Hansgrohe effect would have been stronger than the countervailing effects. So how should we look at that negative mix effect that you were talking about?

Actually, a lot of the mix impact is related to Hansgrohe, and a fair amount of that relates to their movement from principally a shower head manufacturer to a faucet manufacturer. That transition -- well, actually I shouldn't say moving away from shower heads, but basically getting more balanced with faucets and faucets versus shower heads in terms of the products that they manufacture tend to have a little bit lower margin. The other issue that affects them is the expansion that they've had into geographic areas. Typically, as they go into geographic areas, and I think they're in, what, about 30 --

70.

70 different geographic areas with 30 different subsidiaries at this point in time, typically when they enter a new market there tends to be a little bit of shift or, if you will, or a little bit of pressure in the terms of margin. So that would be primarily where the mix shift has taken place. Now, we've also seen a little bit of shift in terms of hot tubs, for example, to opening price points, but basically Hansgrohe would be the one area where mix has probably been more of the issue. But having said that, they continue to perform at just a fabulous rate, if you will. As I mentioned, they had a record quarter in both sales and profitability, and so even though there's a little bit of a mix shift, we're still seeing some very good top line growth there.

Great. Thanks a lot.

Thank you.

We'll take our next question from Chris Wiggins from Oppenheimer.

Hi. Good morning.

Good morning.

Just curious, you called out $6 million year-over-year change in ad costs at decorative, and just wondering if you can provide any color on how you think those ad costs trend sequentially into the third quarter? And then related to that, I think some suppliers have increased the TiO2 pricing by another 25%. So I guess I'm wondering your ability to offset that, does it come from just kind of lower ad spending as an offset to higher pricing or how should I think about that dynamic?

Well, it is true that there have been some additional cost increases related to TiO2 and resins. I think that others in the industry have talked about those in terms of mid to high-teen type increases. Because of the fact that we deal with a lot of large suppliers and have one large customer, we don't typically get specific about price commodity detail in this particular segment. But I think you can certainly assume that we continue to face cost pressures, and as we've talked in the past, there are availability issues, if you will, relative to supply. And we've been able to manage through that and have done a very good job. So that would be part of the answer to your question.

The rest of the question related to promotional activity, and we did have incremental in the second quarter, about $5 million, $6 million of incremental promotional spend and typically the second quarter, Chris, is when we have the majority, if you will, of some of the promotional activity related to paint. You've got Memorial Day, typically the 4th of July starts sometime in late June. We also do some other things around other dates like Labor Day and President's Day but the second quarter tends to be the quarter when most of the advertising budget is spent. When you look at the sequential change in profitability versus the change in sales from the first quarter, you can see that impact. And we talked about that last year on the call as well. But second quarter is a very, very heavy period of time in terms of advertising spend.

Okay. Great. That's helpful. If I could ask a bigger-picture, strategic question. As you look out at some of the economic forecasts, particularly as you look to housing starts for 2012, a lot of forecasts imply kind of a big step up and I guess from a planning perspective, I'm just wondering how you view the environment. I mean, do you plan with that type of step-up in mind, or do you look at it as a much more conservative approach as you look at your strategic planning for next year.

We have tended to try to be on the conservative side, Chris, in terms of our planning. Our sense is that -- and to be honest with you, even though we think we've been conservative in terms of our planning, we've been surprised as starts have declined, just like most of the rest of the folks that use that. So it has been pretty difficult from a planning perspective. But we do feel very confident that if we miss, and there's more upside, that we'll be able to respond. We feel that the footprint in terms of our installation business, we made a t lot of changes there. Obviously, we've taken a lot of branches out, we've consolidated, but we think we're in very good position relative to where we think housing activity could be strongest.

We're also working very closely with the larger builders, as I mentioned earlier, so we feel like we can adjust there. And I think most of the rest of our businesses, we've got the flexibility, we're more nimble, we've completed the common architecture project that we talked about in terms of the Merillat and quality brands. So our sense is that we can react on the upside. So tending to plan maybe a little more conservatively, we think makes sense.

Great. If I could just sneak in one more question. I think it was interesting, you put out a press release during the quarter, I think that you were increasing some production lines for some hot tub manufacturing with some strong demand there. I found that interesting. I'm just wondering if you can give any color as to -- when I view hot tubs, I view it as a very discretionary item, and certainly a bigger-ticket type discretionary item. I'm curious why you might be seeing strength in that market but not so much in some of the other big ticket items.

That has been kind of an interesting phenomenon. That started probably about a year ago, and I think it has a lot to do with the strength of the brands. You know, our hot tub business, HotSprings and the Caldera brand are both leading brands in that segment. We also have taken a lot of share. A lot of folks have gone out of business in that segment. There's been a lot of folks unfortunately, that haven't been able to make it. From our perspective, I guess, fortunately. We've been able to pick up share and that is one of the bright spots for us.

But you are right, it is a very discretionary purchase. It tends to be a bigger-ticket purchase. As we mentioned, we have seen a little bit of migration to opening price point and we came out with a new product called HotShot, I think, and, yes, and John points out that we did develop the ace system which automatically regulates the chemicals in the spa. We brought that out about just a little less than a year ago. So it's been a fair amount of innovation and a lot of good work in terms of brand positioning in that segment.

That's good. Thank you for your time.

I would just add that I think innovation's played a big role. The Ace system has really changed the need to buy another spa. So we're seeing people who own spas trade them in on new spas, wanting to get this innovation. It's been such a strong innovation that it's really created new demand for us.

We'll take our next question from David MacGregor from Longbow Research.

Good morning, everyone.

Good morning, David.

Tim, your international revenue's about 22% of the total but there's a lot of Western European revenue and UK revenue in there. So I guess with respect to emerging markets, how much is emerging markets? You talk about developing your paint and plumbing business internationally. How much of that is really emerging market plans with respect to those segments rather than, say, Western European growth plans?

David, there is a pie chart in the back of the information that we provided, I think it's slide number 28, that gives a breakdown of our international revenue, kind of splits that into regions. And so that would give you a pretty good flavor in terms of where we're having the most success. I don't know, John, you have got it in the front of you. Why don't you maybe provide a little color on that.

David, to your question about emerging markets, sales outside of Western Europe, I mean, basically it would be call it sort of 2%, 3% in what we would define as emerging markets, that being Asia, Latin America. The balance of that, we've got a fair amount in the other European markets, either Northern Europe or Eastern Europe as well. So suffice it to say that overall it's relatively small. 2 to 3% that I referred to would be percent of our total sales rather than international sales. Okay, great. So thanks for directing my attention to the chart. I guess the question really is, what do we do about that, and how do we grow that. Seems like with growth opportunities in North America somewhat stunted for the time being, that there might be a bigger opportunity in some of these other markets. Just where within that list of priorities does that stand?

David, it's Donny. It's right up there. We really see growing in emerging markets and really in markets where the projected growth rates are higher than they are here in North America as probably our number-one priority. We've been doing a lot with Hansgrohe. They've been very, very successful at growing their business. If you go back 10, 12 years ago, they were 90%-plus on Europe and now we're doing as much outside of Europe as we are in Europe and they have a great model and we've had the Delta folks and the Hansgrohe folks working on some joint initiatives. John Sznewajs and I were in China earlier this year to announce the launch of the Delta brand in China. We're bringing our technology there with our Touch 2.0 and we think that's going to resonate really well, especially in the Asian markets.

Relative to -- we're looking at opportunities in paint. We sell paint today in Canada, Mexico, South America. We have a large R&D facility in India. And we've put together a team to really explore what's our best opportunities and where should we go next. So we really see those two platforms as global platforms.

Outside of that, we've got opportunities in hand tools. We've been doing things with Arrow Fasteners to get outside of North America and have had some good success. Some of the success we talked about earlier with hot tubs is really our ability to ship and sell product internationally. So we're doing quite a bit in hot tubs now too. So a lot of our businesses where we have reason to believe we pushed them very hard to get after it organically, so we're making a lot of progress.

Good. Just a follow-up. I guess 2012 you got $800 million of debt coming due. Is it your plan to refinance that, or would you use the cash on hand, and I guess just in association with that, you've got cash on hand at Hansgrohe. How much access do you have to that cash, and do you have the ability to declare a dividend?

David, a couple questions there. With respect to the $800 million coming due next July, we've said in the past that you could think about the March 2010 issue that we did, where we issued $500 million of debt to replace a $300 million maturity at the time, we'll take about -- because of the $200 million of over funding on that maturity, we'll take about roughly $400 million off the balance sheet to pay down that maturity, and then look to refinance the balance of it. So we feel pretty confident we can do that.

With respect to the cash over in Europe, there is some cash over at Hansgrohe. We do have an operating agreement between ourselves and the shareholders, the other shareholders of Hansgrohe, to get at that cash if we need to. We do have a dividend policy in place. We have a fairly efficient tax structure to get them to try to minimize as much of the tax penalty in bringing that cash back. So we've got some plans in place to, in the future to bring that cash back tax efficiently.

Just to amplify on John's initial comment, David, if you take the $300 million that was due in March of 2010 and the $850 million of debt that's due next -- about a year from now, that's obviously a $1.150 billion. I think when we get all done our intent would be to pay down probably $200 million to $300 million of that with internal funds. John mentioned that we re-fi, did a re-fi when we paid down the $300 million of $500 million. That would suggest another financing at some point of $300 million to $400 million, just to add a little bit of color to John's comment. With a net debt decline of $200 million to $300 million. And that's been consistent in terms of our communication to investors for the last couple of years.

Got it. Thanks very much, everyone.

Thank you.

And we'll take our next question from Bob Wetenhall from RBC.

Hey, good morning.

Good morning.

Just wanted to try to reconcile a little bit more your top line commentary that you have some relatively easy comps going into the back half of the year, but you also noted the challenges in the broader outlook for the economy. And are you just trying to direct us to think that sales in 2011 are going to be a little bit lower than in 2010?

No. We haven't given guidance for sales. We talked a little bit about the economic environment, but we haven't given any guidance, Bob, in terms of sales and certainly wouldn't necessarily direct you to that conclusion.

Got it. Okay. And just in terms of the commodity cost pressures, I kind of got confused when you were running through it. Seems like there are a bunch of different places. Could you run through by segment real fast where you feel the top two or three places where you can offset the raw material inflation most effectively?

Yes, we -- well, I guess what I would say to you is that I believe in all the segments that we will have success. I wouldn't want to tell you that each segment will be neutral at the end of this year, relative to price commodity because timing of actions certainly has some implication. But our sense would be that if we do have some negative impact in terms of price commodity, that is something that will correct itself in a subsequent quarter. So we've got pressure in all the segments, cabinets, particle board in Europe, as well as lumber here in the US is certainly a challenge.

Metals impact us in plumbing in terms of zinc and copper, which going to brass. We've talked about inputs for paint and in the window business, resins, glass costs certainly are items that we need to manage through. But having said that, I feel very good about our ability across all of the product groups to make that happen. Again, innovation, strong brands, certainly facilitate that.

So you're going to get some pricing to offset the raw material?

Well, we certainly anticipate that we will have pricing in certain areas. We'll be working with suppliers in certain areas and so, yes, yes, definitely there will be price. And I think we've got time for one more question. I don't know if you have one, Bob.

That was great. Thanks for the help.

Okay. Thank you. We've got time for one more.

We'll take our final question from Dan Oppenheim from Credit Suisse.

Thanks very much. Was wondering if you can talk about the -- you mentioned the cabinet and installation business narrowing the losses there. But running behind that level, talked about in terms of narrowing the running the business for so far this year. Can you give more clarity in terms of the narrowing the losses, what's left to do in terms of the costs and how you can make up there?

Well, I think, Dan, one of the comments that we heard a little earlier was more -- less challenging comps in the second half of the year. And I think that if you think back late last year, we saw a real slowdown in terms of housing starts. Obviously, the first part of this year was pretty slow. So to the extent that we're going to end up about flat with last year, that would suggest that the latter part of the year should be a little bit stronger in terms of that activity. We've also got some of the other major initiatives out of the way that certainly took time and attention. We've got some top line opportunities that we're developing in cabinets, particularly with the countertop solution that we've talked about in the past. And we've got some excitement there that we'll be able to share with you over the course of the next few months. So we've got some top line opportunities.

We've also got some top line opportunities in the installation side of the business. We expanded the footprint for our distribution business a couple years ago with a couple greenfields, so we've got opportunity there. We've also got some opportunity with the larger builders and we talked about that. So I think both the combination of top line, additional cost reductions in the second half, we've got the ERP system fully implemented in installation. So we feel like we've got a very good opportunity to make that happen and you are correct, as you look at the first couple of quarters, most of that improvement is slated for the second half.

And I would add, Tim, that we've got the realization of benefits from actions we've already taken.

Okay. Then I guess a quick follow-up. You talked about sort of lowering expectations in terms of just the housing starts this year and conservative view towards next year. How much does that impact your view in terms of the ability to get price to offset commodity costs, just in terms of a tougher environment, or do you think that's something you can get even with lower volumes there?

Well, I think we demonstrated, Dan, over the course of the last two, three years in a very, very challenging environment, I mean, we've been able to successfully offset commodity costs. I think if we were to go back and roll the tape back three or four years, I'm guessing that we're probably neutral over that long period of time and we've seen a $5 billion decline in sales from $12.5 billion in 2006 to about $7.5 billion last year, so I don't think it gets a whole lot tougher than that. But I think when you've got the focus we've had on innovation, the focus we've had on the work we've done around customer intimacy, the strength of our brands, certainly puts us in a good position. We've got a supply chain initiative in place that is getting a lot of good traction. So yes, we feel comfortable that even in a tough environment we should be able to make that happen.

Okay. Thanks very much.

Thank you. And I'd like to thank all of you for participating today. We appreciate that. And as Connie mentioned earlier, if we didn't get to your question please give us a call and we'll try to get back to you as quickly as we can. Thank you.

This concludes today's conference. We thank you for your participation.