馬斯科 (MAS) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Masco Corporation 2011 third-quarter conference call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received the press release and supplemental information, they are available on Masco's website, along with today's slide presentation under the Investor Relations section at www.Masco.com.

Before we begin Management's presentation, the Company wants to direct your attention to the current slide and the note at the end of the earnings release which are cautionary reminders about statements that reflect the Company's views about its future performance and about non-GAAP financial measures. After a brief discussion by management, the call will be opened for analyst questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at 313-792-5500.

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

Thank you, Debbie, and thank all of you for joining us today for Masco's third-quarter earnings call. I'm joined by Donny DeMarie, our Executive Vice President, Chief Operating Officer, and John Sznewajs, our CFO.

And if you would please flip to slide number 3. The operating environment for our businesses continues to be challenging, as commodity cost pressures, a very competitive retail environment and depressed consumer confidence continue to impact our performance. In this challenging environment, we continue to strengthen our market positions. We believe that we have maintained or gained share in our major product categories, we've introduced new products and programs and gotten some very nice industry recognition, which we'll talk about as we work our way through the presentation. And we've taken some additional actions to strengthen our position in several of our markets.

And if you flip to slide number 4, I want to talk about some of the things that have transpired here over the last couple of months. As it relates to Milgard, our window business in the Western United States, in September we exited our glass business. We also, in October closed -- announced the closure of 3 of our manufacturing facilities. That's going to cost us, we estimate, about $30 million, of you which about $5 million will be cash. And we expect to save on an annual basis about $7 million, give or take.

Those actions, together with some other actions that we've taken in other business units, should result in headcount reductions of about 750 for the period September through the end of the year. Obviously, those continue to be very, very difficult issues, difficult decisions, but certainly necessary in the environment that we're in.

We also announced in our press release the divestiture of 4 of our non-core diversified products businesses, and service businesses in our installation segment. That includes framing, commercial drywall and millwork. Those businesses will show up in our discontinued ops line in the fourth quarter. We'll be restating prior-year periods. From a modeling perspective, I think you can assume about $100 million of top line in terms of sales, and about $20 million of operating losses related to those businesses. Now, that operating loss number could move a little bit as we get into some of the detail based on allocations, maybe inter-Company activity, that type of thing. But again, I think that's pretty good guidance in terms of modeling.

If you flip to slide number 5, our sales in the quarter were up 3%. We benefited from foreign currency by about $40 million, and that basically offset the planned product exits in cabinets for our ready-to-assemble business which was a negative [$38 million] in the quarter. If you exclude the rationalization charges, gains on financial investments, impairment charges and normalize our tax rate, our earnings would have been $0.08 a share, compared to $0.11 in the third quarter of 2010.

We did not include in that reconciliation the impact of the metal hedge. We lost $10 million in the third quarter of 2011. We had income of $4 million in the third quarter of 2010. And again, those are not in the reconciliation of EPS. That cost us about $0.02 in the third quarter of 2011, and eliminating the gain in the third quarter of 2010 would not move the $0.11. It still rounds to $0.11. On a reported basis, we made $0.10 a share compared to a loss of $0.02 last year, and we ended the quarter with $1.6 billion of cash.

If you flip to slide number 6, please, in terms of gross profit and operating profits, on an adjusted basis, we were down 180 basis points in gross margin and again, that does not include any impact from the hedge. If you were to pro forma the hedge into that adjusted number, the difference would have been about 100 basis points. In terms of operating profit, down 110 basis points, as adjusted, on this slide. Again, if we include the hedge impact, that would have narrowed to about 40 basis points, third quarter last year to third quarter this year.

A couple of additional comments that I'd like to make. International sales were up 4% in local currency, and we continue to have double-digit margins there, although down from last year. We've got some negative mix, and we'll talk about that when we get to the plumbing segment. Sales to key retail customers were down low single-digit. And if you back out the impact of the product exit, we would have been up low single-digit.

And from a trends standpoint, the first quarter on that same basis, again, without the impact of the RTA exit in cabinet, first-quarter sales to key retail customers would have been down low single-digit. Second quarter would have been flat, and third quarter would have been up low single digits. Again, second half of the year comparisons are a bit easier than the first half this year.

Sales up $50 million. We would expect about $15 million of incremental operating profit. We're down $18 million, so that really suggests about a $33 million shortfall, if you will, on that kind of basis. That's really explained in 3 different buckets, price commodity, including the hedge was negative, slightly below $10 million. Our mix was negative in the quarter, about $16 million. And we had program costs. And again, we'll talk about those items as we work our way through the segments, but almost all of that on a net basis is reflected in the plumbing segment.

If you flip to slide number 7, a couple of points here. We talked about the reconciled numbers. We also mentioned that the hedge is not in the $0.08 and $0.11. Including that would be $0.10 this year versus $0.11 last year. We did have on the pro forma here, we backed out $0.03 of gains from our portfolio of financial investments. We're making a lot of good progress there, incidentally, and I think we're down below $100 million in terms of assets on the balance sheet, so we're making very good progress there.

If you flip to slide number 8. Cabinets. We were down 14%. Excluding the planned product exits, we would have been down about 4%, and we had about $8 million benefit in terms of foreign currency translation on the top line. We were able to hold, even with sales down, we had no incremental loss. We had a nice job in the quarter, related to profit improvement programs. That offset a little bit of unfavorable mix and a modest negative, in terms of price commodity relationships.

If you flip to slide number 9, we continue to benefit from the integration of our North American cabinet businesses. We're on track to realize the approximate $35 million-plus of savings by the end of next year. In the retail and dealer channels in North America, still a lot of promotional activity. European markets continue to be very, very challenging for our businesses. Obviously, we're all aware of some of the discussions in Europe, relative to Greece, and some of the other issues around the European Union, but our businesses are having a difficult time. We believe from a share perspective relative to cabinets, that we continue to gain traction in the dealer and big builder segment. We continue to have a bit of a challenge at lower price points in terms of our big box customers, but did have a very good quarter at the higher end, as it relates to the KraftMaid brand for the big box consumers.

Countertop model continues to gain some traction and if you would flip to slide number 10, we've got some highlights here from 3 programs that we have, 2 with Lowe's, 1 with Home Depot. 1 of the Lowe's programs, 1 of the Home Depot programs are for vanities and tops. And getting a lot of good traction here, really working out well for us, and for our key customers here. And the vanity programs are really driven more towards bath remodeling, which typically is a little bit smaller project, which consumers are a little bit more likely at this point in time in the cycle to undertake, as opposed to maybe a major kitchen remodel program. But again, getting a lot of good traction here, and the top, bottom program is also, as we have mentioned in the past, resonating with larger builders.

If you flip to slide number 11, plumbing products. Our sales were up 12% in the quarter. We did have about $30 million of benefit from foreign currency translation. Without that benefit, we would have been up about 8%. So that was certainly a plus. Margins, as adjusted for rationalization charges, are down from 14.6% to 12%.

I would point out that the hedge impacts these numbers. If we were to exclude the negative $10 million in the third quarter of 2011, and exclude the $4 million positive in the third quarter of 2010, we would be comparing 14% to 13.3% in terms of margin. We did have unfavorable price commodity relationship in this segment in the quarter, driven in large part by the hedge. Had we not had the hedge, we would have been a little bit positive. Mix continues to be unfavorable in this segment, that was about $13 million. And we continue to incur costs for some of the programs that we're launching including faucet programs as well as plumbing supply-related programs.

If you flip to slide number 12, we continue to invest in brand building, new product development and international growth, and feel really good about the traction we're getting in North America in terms of share with the Delta, Peerless and Brizo brand. Also, doing a good job from a share standpoint with hot tubs. We continue to extend the Peerless and Delta brands to additional product categories, including tubs, shower surrounds, bathing systems and hardware. And we're really, really proud, if you flip to slide 13, that Delta was recognized as the WaterSense partner of the year by the EPA. And again, very proud of that distinction. I think that's the first time that we've been recognized for that award, and certainly very proud of that, and certainly appreciate the efforts of our folks at Delta faucet.

If you flip to slide number 14, installation and other services. Net sales were up 8%, and I think it's been a while since we were able to make that comment. But we were up 8% in the quarter, against lag starts of a negative 5%. So we saw some very good movement there in terms of share gains. Margins continued to be impacted by unfavorable price-commodity relationships and that really relates more to products that we distribute as opposed to products that we install. And we had slight mix negative in the quarter.

If you flip to slide number 15, we gained share year-over-year. You might remember last year at this time, we talked about maybe being underrepresented in certain areas. We have added some people in terms of the sales side of things, and that's starting to pay off. We continue to do a really good job on the retrofit side and in fact, we integrated our WellHome business into the Masco Contracting Services Business to eliminate some costs and some overhead, and also to help leverage our capabilities in WellHome as we continue to pursue retrofit opportunities, and that's going really, really well for us. We increased our penetration of multifamily and continue to do a good job with the larger builders. And I mentioned earlier that we are divesting businesses that are non-core in terms of diversified products.

If you flip to slide number 16, decorative architectural products, sales were down 2% in that segment, and I would point out that we continue to be impacted by the loss of the Walmart business, and that affects both paint and builders hardware. And the markets for paint have been relatively soft. I think in the first half of the year, gallons were down about 8% as I recall, and I -- my sense is that probably continued into the third quarter to a certain degree. Commodity pressures continue. We've talked about issues around TiO2 in terms of availability, as well as cost.

Resins continue to be a bit of a challenge, but we were neutral in this segment in terms of price/commodity relationship in the quarter. We continue to be impacted by investments, costs that we're incurring for new programs. And costs that we're incurring to -- that include international expansion and our pursuit in terms of the professional painter. But a relatively good performance, just in terms of overall operating performance in that segment.

If you flip to slide 17, we continue to incur near-term cost to expand the top line in both paint and hardware. We're getting good traction with the Direct-to-Pro program at the Home Depot. We continue to invest in new products and merchandising innovation. And we're focused on international expansion in terms of paint, as I mentioned earlier. Liberty has got some new programs that they'll be launching, and we'll be talking more about those in subsequent quarters. And we're really proud that Home Depot recognized Behr in their recent vendor meeting as the Partner of the Year for the paint department, and a good job by the Behr team there as well.

If you flip to slide number 18, other specialty products. Sales in this segment were up about $2 million, and that was really driven by foreign currency translation, which increased sales by $2 million, so essentially flat without that. Had a really good performance here in terms of operating profit. We had favorable price/commodity relationships, which were really driven by a reduction in rebates, and also had a nice job in this segment from a cost standpoint in terms of profit improvement program.

And if you flip to slide number 19, we believe that Milgard continues to outperform the Western markets in terms of repair/remodel/new home construction. We're gaining share. We also continue to expand into Texas and Western Canada. And we've had some really good product introductions. Milgard was recognized by Window and Door Magazine for the most innovative new window for a large manufacturer, and we're really pleased with that. We talked earlier about the exit of the glass business in September, the closure of the plants in the October time frame.

Our UK window group continues to do a nice job in terms of share. And in fact, it's a little early, but we'll probably be able to talk about a pretty nice win they've got going that's developing for them, in terms of a retail opportunity in the next couple quarters. And we launched at Lowe's the Arrow T50 Elite Staple Gun.

If you flip to slide 20, this gives you a little bit of perspective in terms of the Essence Window Series, which won the award that I mentioned earlier from Window and Door Magazine. We have also come out with some premium colors for our vinyl window and frame offerings that was really a nice collaboration with Behr. And those premium colors represent an upgrade opportunity for consumers.

If you flip to slide 21, working capital. We continue to see some good improvement when we take receivables, plus inventory, less payables and compare that to the last 12 months of sales. We're down from 16.2% last year in the third quarter to 14.8%. We've got a little bit of a tick-up in terms of inventory. We're not overly concerned about that, and we'll probably work part of that down in the fourth quarter. That's offset substantially by improvement in accounts payable days, as we continue to aggressively manage our supply chain. I'd like to thank our team across the enterprise for the work they're doing from the working capital perspective, and also just in terms of some of the other positive things that we've got going in terms of new programs, new products that we're launching, some of the cost take-outs, et cetera. A lot of good work being done across the enterprise.

If you flip to slide number 22, I'd like to make a couple of comments before we move to Q&A. And as I mentioned earlier, market conditions remain very challenging. And for the most part, it was a pretty tough third quarter, no question about that. Having said that, we grew our top line, launched a lot of new products, and we believe that we continue to gain share, as I mentioned earlier, or at least maintain in our major product categories.

As we previously communicated to you, we'll continue to focus on the things that we have control over, improving our execution, continuing to invest in innovation, leadership brands, global expansion and aggressively managing our cost structure. 2 of our major operational priorities continue to be the improvement of our installation and cabinet business. Earlier this year, we anticipated that we would see aggregate improvement in these segments in terms of reduced operating losses. And at this point, it does not appear that we're going to get there.

We anticipated a stronger top line in the second half of 2011, and we might have been a little bit optimistic in terms of market conditions, particularly as it relates to Europe in cabinets. And while we have successfully completed a lot of key initiatives, as we've discussed in previous calls, we're extremely disappointed that we did not improve the bottom line. As we plan for 2012, we're pushing the businesses in these segments very hard to significantly reduce their breakeven points, irrespective of the economic environment.

In addition, we now expect to have a negative relationship in terms of price/commodities for the year. While we have successfully offset hundreds of millions of dollars in increased commodity costs in 2011, working with suppliers, working on lean in our supply chain and through pricing actions, we have about $30 million negative price commodity relationship through the first 9 months. Now, that does include the hedge loss in the third quarter, which as I think I mentioned earlier, if we hadn't had the hedge loss, we would have had a positive relationship in the third quarter. As we also have mentioned a little earlier in our last call, lumber, particle board, finishing material, resin, TiO2, continues to be very challenging, and we'll continue to work hard on these. We've got some good things going on from a supply chain standpoint, and we expect to see some benefits from that continuing as we go forward.

We continue to be confident in the long-term fundamentals for our markets, and we continue to invest in penetrating the North American cabinet dealer and in terms of that channel and the professional painter, developing international opportunities in paint and plumbing, and expanding our leadership position in the do-it-yourself coatings market. We're launching new programs in plumbing, cabinets, and builders hardware and we'll continue to discuss those as they develop and mature over time. Obviously, we're incurring some incremental costs to execute on these opportunities, but our feeling is they'll add significantly to the top line going forward, and should create a good value for our shareholders.

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

Thank you, sir. Ladies and gentlemen, the question-and-answer session is conducted electronically. (Operator Instructions). We'll go first today to Josh Levin with Citi.

Hi, good morning.

Good morning, Josh.

So as you look towards 2012, assuming the housing starts environment does not improve much next year, it sounds like you think you might be able to get cabinets and installation at breakeven, if I understood your remarks correctly, and if so, how do you get there? Is that more top line or further cost cuts?

What we really are challenging both of those businesses to do in North America, both our installation business as well as our North American cabinet business, is to assume a relatively flat market next year, and again, we'll talk about that in a second, in terms of where blue chip is relative to starts. And really pushing them to do everything they can to get as close to breakeven as possible. It's a little bit too early to declare that we think we can get there. We're in our planning process as we speak. We have not reviewed some of the plans, and obviously, part of that is going to be to the extent that we think we can get there, what are some of the things that we might not be able to do that might have some longer-term implications to us. So I -- we're pushing them very, very aggressively.

I think the 1 wild card in cabinets is probably Europe. The environment over there is very, very difficult, and as we've indicated in the past, we've got 2 new leaders there that have been at Moore's and at Tvilum in Denmark, that have been basically in the businesses now for about 9 or 10 months, and so we're pleased with the folks we have. We've got some additional changes in the leadership teams, but the environment there continues to be very, very difficult. So, we're pushing the businesses very hard.

My sense is, if the blue chip consensus is right, relative to housing starts, and there are a lot of folks that are very good as projecting that, are significantly above the 700,000 unit number for next year, if we get close to that number in terms of starts, I think we've got a real good chance to show some substantial improvement in both of those segments. And I guess for this -- at this point in time I'd rather not get any more aggressive than that. We'll be able to give you a better update in February, when we get together on the fourth-quarter call.

Okay. On a separate note, Behr has been a real star for Masco. 1 of your competitors recently launched a paint and primer product at Lowe's. How are you positioned there to deal with that competition?

Hi, Josh, this is Donny. Really most of our competitors have launched new products either 2-in-1, 3-in-1 products that are following our leadership in creating a whole new category with paint and primer in 1. We continue to be the market leader in DIY, and believe we have held that share position in the US by a long shot. We will continue to defend that position. We feel really good about our product, our brand and our performance, both on the top line and bottom line in the quarter. Certainly, we've had some short-term responses related to some of the new offerings and lower price points, and we think that's important to defend where we sit in our share, and on the shelf with our key partner.

I think, Josh, you'll see us continue to invest in innovation. We obviously have been a leader in the do-it-yourself market, as Donny mentioned, paint and primer in 1, the color center, low VOC paint, so we'll continue to innovate and work on merchandising solutions with our partner there as well.

Thank you very much.

Thank you.

We'll take our next question from Peter Lisnic with Robert W. Baird.

Hi, good morning, this is Josh Chan filling in for Pete.

Good morning, Josh.

Good morning. I was just wondering on the Milgard plan take-outs, taking out 3 plants in a month, could you walk through that decision, and whether there was a change in how you thought about the market or your positioning in that market?

Yes. The announcement, Josh, was made in October. It will take us a little bit of time to wind those plants down, so that will be an ongoing process that I imagine will probably finish in the fourth quarter. But our feeling is with, as we assess market conditions going forward in the Western United States, that we can serve with our remaining plants. We'll have 6 remaining manufacturing facilities in the Western part of the country. And our feeling is that we can maintain lead times, given current market conditions, with the manufacturing footprint that remains behind. We've done some good things from a productivity standpoint. We just completed and have -- the launch of the essence product, which was a new product for us.

But as we think about it, we think there's some things that we can do more on a regional basis going forward, just in terms of cost management and supply chain and certainly feel pretty comfortable that we can handle the market demand, again, with good lead times for our customers. If things do pick up for a limited amount of capital, we could put another plant in or that type of thing. I mean, that's not that challenging to do. But, we feel very comfortable that we can handle the demand at this point in time.

Josh, if I could add, we've been talking a lot about the work we're doing in supply chain and manufacturing, and really this is -- what you're seeing now is really a result of a lot of those efforts, where we have looked at our supply chain and our manufacturing base which was primarily served to local markets and have regionalized our ability to serve in a way where we think we can maintain lead times and our service levels and take cost out of the business. So we're excited about the changes. Change is always tough, but we think it's necessary in the current environment and going forward, we think it will serve us well.

Right. Okay. That makes sense. You talked about ongoing competitiveness in the retail market. I think in the cabinet side, that's been pretty well-documented. Are you seeing that above-normal level of competition spilling over into some of the other categories as well?

Well, I think Josh Levin mentioned that in terms of Behr, where there had been some new competitive products, competitive price points. A lot of promotional, obviously related to cabinets, as you articulated. And basically, I think the environment, when you look at plumbing as well, it's pretty much across the board. Obviously, we feel good about how we're positioned in all of those categories, but with the increase in promotional activities, it's just a little bit more intense from a -- ultimately a pricing standpoint as well.

Okay. Great. I understand. Thank you for your time.

Thank you.

We'll take our next question from Sam Darkatsh, Raymond James.

Good morning, Tim, Donny, John, how are you?

Good morning, Sam. We're good.

2 questions. First off, you had mentioned a number of instances of costs for new programs. Could you quantify the impact for that overall, and then how much of these costs are 1-time in nature in terms of starting up a new program versus ongoing and then would have to be leveraged going forward. And then I have a follow-up as well.

Yes, we estimated, Sam, that in the quarter we probably spent about $20 million incrementally on some of the programs that we're launching, and again, that primarily was -- well, pretty much across the board, you've got some in cabinets. There certainly are some costs related to plumbing. I talked about that. Paint programs, et cetera, et cetera, and I would say that those incremental costs, at this point in time, I would guess that we'll be able to -- you're always going to have new programs and so typically, when you have those kinds of costs, there's an expectation that you're going to get some additional revenue on the top line. So the paybacks we think tend to be pretty good.

I wouldn't want to suggest that we won't see -- well, I would say this. I don't think we'll see that level of increase next year. Whether we see some reductions kind of remains to be seen, but I think it's really going to be driven more by our ability to continue to bring out new products and new programs, which, quite frankly, we certainly anticipate doing. But I would doubt the level would be much higher than it is this year, because we've been running at a fairly high rate.

My follow-up question has to do with Europe, and the trends you're seeing throughout the quarter in the European theater. You mentioned Moore and Tvilum continuing, that the end markets are soft, and you also mentioned Hansgrohe with some nice share gains. Are you seeing any meaningful deterioration in the European demand picture, or is it kind of the same-old, same-old at this point?

I would say for cabinets, it's probably deteriorated a bit. That tends to be a little bit higher ticket. When you go to the UK, there are a lot of austerity measures in place. We have tended to serve what is called public housing over there, which is really like new construction here. And in terms of our ready-to-assemble Tvilum operation, demand has been down in virtually all of their markets. So I think there's just a -- that tends to be a little bit more of a discretionary purchase as well.

When it gets to plumbing for Hansgrohe, we continue to do a great job of global expansion. We're seeing a lot more pressure from a mix standpoint as consumers seem to be trading down a little bit to lower price points. And then as we enter some of the emerging markets, that tends to be at little lower price point as well. I wouldn't say necessarily -- I mean, it's always been competitive, but I don't know that I would say it's ratcheted up any more so than it has in the past. But they continue to do a very good job from that perspective.

I mentioned our UK window business. We continue to take share there, and as I mentioned, we've got a really neat opportunity coming up, that we think we're going to win, and we'll be able to talk a little bit more about probably in February. But other than that, that pretty much covers the landscape, I think.

Yes, Sam, I would add to Tim's comment that if you think about our exposure to Southern Europe, where a lot of the trouble seems to be focused, we don't have a heck of a lot of concentration down there. It's probably overall less than 2% of our overall sales, so not a big exposure there whatsoever.

If I could sneak 1 little question in, last 1, then. If you're assuming flat housing starts market next year or flattish, does that affect your goodwill impairment test at all?

Well, let me make sure I clarify that, Sam. We have not given formal guidance for next year. What I did mention was that we are challenging our installation business, and our North American cabinet business, to plan for an environment that does not show any lift on the macro side. So we're pushing them very, very hard to see what we can do to get to breakeven in an environment like that.

As I mentioned, if we get to that 700,000, that is the blue chip consensus. Again, we'll talk about our thoughts in February. That would certainly help that process greatly. But we're really pushing our guys to assume the same kind of environment in those 2 businesses that have been the most problematic for us, relative to performance.

Thank you much.

Okay. Thank you.

We'll take our next question from Ivy Zelman with Zelman & Associates.

Good morning, guys, thank you for taking the question.

Good morning, Ivy.

Just curious on your cash flow. I noticed in the presentation you talked a lot about the working capital as a percent of sales. Can you tell us what your actual cash flow before CapEx was, and then just looking at that cash flow, I notice you've got your $800 million, just south of 6% notes coming due, and I know you talked about in the past that you would refinance half of it and pay off the other with cash. Is that still the expectations and timing of that? So the first question relates to actual cash flow from operations for the quarter, and then the timing of the refinancing, or is that still the plan when you're going to pay half off with cash?

The cash flow will be available, Ivy, when we issue the Q, and that should be, what, John, late this week I think?

Either late Thursday or early Friday, Ivy.

We'll have that out. And then yes, we still intend on the $800 million that is due next, what, August --

July.

July, to hopefully re-fi about $400 million of that, and then use $400 million in terms of internal cash to pay that down.

Okay. Just curious, is there a reason why you don't want to talk about cash flow from operations on the call? I know that you say it's going to be in the Q but just curious, is that --

The Q is not finalized at this point.

I see. My other question relates to the 4 divestitures in installation services and I think the 4 plant closures in windows. I think we've been in this downturn a very long time, and a lot of us have questioned you on whether or not you will stay in the installation services business, given the continued losses. Seems to me that now, at this stage of the downturn, to first be deciding to divest out of those non-core installation services businesses is a bit surprising, because you've stuck with it this long, it seems a little bit of a late decision.

What happened at the Board Meeting with the Directors that you now decide, after all this time, to do it when it could have been done years ago and really the same thing within windows, I mean, closing 4 plants this year. A year ago, the same situation we existed in and windows were doing better, I guess with the tax credit. Just seems like there's a lot of things that you're doing now that could have been done earlier. So I'm trying to get a better understand of, is there even more stuff that can be done, that is not being done, like selling more of the installation services, so I'm a little bit surprised about that, and just some of these late stage restructurings.

Yes. Fair question. As it relates to the contracting services business, Ivy, we've got a new management team on the ground that basically has been in place now for a little less than a year. As you might remember, last year, we talked a little bit about rationalizing some of the diversified products that we installed. Basically, the businesses that we're talking about here are not really core. We tried to simplify that business immensely. We put in a new ERP system, and these businesses, given their product mix and what they do kind of fall outside of that area, if you will. So from our standpoint, as we looked at opportunities going forward, didn't really feel like they were going to add a lot.

We also had a couple of, on the commercial drywall side, we had a couple contracts that we recently completed. And those businesses in 2010 in aggregate were basically profitable as well. And as we think about the market going forward, the opportunities that we have from an installation side, driven more by the insulation install, we really think it makes a whole lot more sense to get out of those at this point in time. Again, with the new management team, that was their feel, and we certainly support that.

On the windows side, that really is a result of our perspective of the Western market, going forward. We have had several plant closings previously in the window category, but basically, given some of the supply chain work we're doing, some of the work particularly around logistics, distribution and freight, our feeling is that we can service that market with the 6 remaining plants, again, and do that in a way that maintains good lead times as well as service levels.

I understand all that and I think it makes sense. I just know that when you guys get into installation services you wanted to have diversity within the market. You wanted to be installing everything and not just limited to what you made and so -- and also within windows, and of course you want to rationalize costs, but a lot of that seems like it's being decided today, so what changed today versus -- sounds like new management in installation services. Is there new management in windows?

No, no, we've got the same gentleman is running that business. He's been there about 3 years. In terms of our perception of the Western market, on a longer-term basis, we don't see a lot of upside, I guess, just in terms of where we are today versus where we might be a couple of years down the road. As I mentioned earlier, if we did decide that we needed another manufacturing location going forward, a couple years out, it's not that difficult to put 1 in. It's really probably driven more by our perception of what we think the demand in that area of the world's going to be the next couple years.

Great. Thanks, guys.

Okay. Thank you, Ivy.

We'll go next to Michael Rehaut with JPMorgan.

Thanks. Good morning everyone.

Good morning, Mike.

First question on the cabinets, appreciate the comments about planning for flat next year and a lot of initiatives. I was wondering if you could kind of break down -- so far this year, excluding the restructuring charges, you're a little less than $80 million negative. I was hoping to kind of break down, at least on a year-to-date basis, what the negative mix and price commodity relationship, how that impacted, also the positive benefits of the profit improvement programs and what things can change potentially, if you look at that negative $80 million, going forward into 2012.

Yes, in terms of profit improvement programs, Mike, related to cabs on a year-to-date basis, we're at about $30 million, roughly. And that would project a -- as we said earlier in the year, we would expect to be somewhere around $40 million to $45 million in that particular segment, so they continue to do a nice job there. In terms of negative price commodity, we're probably looking at a little less than $10 million in terms of impact. I think we had about $5 million in the second quarter, and we did comment on that. We've had a little bit in the first and a little bit in the third, but not huge numbers.

And in terms of the rest of your question going forward, we have taken a lot of costs out, and as you know, we have completed a lot of initiatives this year. We've completed the common architecture program, ERP system implementation, also the exit of the ready-to-assemble business as well as the integration of the 2 businesses, continuing to be on track. We do anticipate some additional profit improvement next year from a cost reduction standpoint that, I would guess, just if we look -- again, we haven't gone through the plan yet but my sense is, it would probably be similar to what we've done this year, somewhere in that $40 million to $50 million range where they've been the last couple 3 years. I think that covered most of your question. If there's anything I didn't get to, maybe you can repeat that.

No, that's very helpful. I guess the second question, just to move to installation, where you are doing some important changes, I was wondering if you could give, perhaps, an idea on a pro forma basis, what is the non-installation portion of the business, let's say, what would it be as a percent in terms of top line following these divestitures? And if the remaining non-installation businesses are negative as well, I think you mentioned 1 was positive, but are there others or -- that could be identified for further divestiture or some type of restructuring to continue to get that business back to profitability?

Yes, the way I would think about that, Mike, is that the likelihood is that there may be, as we continue to work that, there may be other branch location opportunities that I would say are more likely then to focus on a particular product group. We have rationalized down to 6 core products, insulation, fireplaces, gutters, garage doors and then what we call after paint, which includes mirrors, closet organizers, tubs and things of that nature. So we're, I think in a pretty good spot now relative to diversified products. My sense is that insulation again, without factoring in the businesses that we're exiting, probably represents about two-thirds of what we install. Donny, does that sound about right?

That sounds about right.

About two-thirds. We're getting out of the commercial side. We've got some commercial drywall that was in there, the framing that was in there, that $100 million that I talked about. We've seen some really nice growth, Mike, on the retrofit side. As I mentioned, we folded WellHome into the contracting service business branches, and we really think that those capabilities, lead generation, et cetera, et cetera, should put us in a position to continue to grow the retrofit side. That's been pretty good business for us. That's probably up to maybe 12%, maybe 15% of our top line at this point in time. So we've seen some real nice growth there.

I appreciate that. 1 last question, if I could sneak it in. The other specialty had a good bounce back in margins after 3 quarters that were pretty disappointing. There's a little bit of lift in sales in 3Q. But even in 4Q 2010, with a similar amount of sales, you only had a 2% margin. What's been going on there? Is it sustainable? Was this more of a price commodity lag issue, or are there some identifiable changes that we can look to a mid to higher single digit type of margin level going forward?

Well, the biggest change, Mike, that I would mention to you is that we have launched a couple new products. Obviously, we talked about some of the cost reductions due to plant closures but we also have got less rebate hitting us in terms of our product offerings. We had a positive price commodity relationship in the quarter in that segment of about $3 million, and most of that is driven by a reduction in rebates that have been sort of part of the pricing landscape, if you will. So my sense is, that if we can continue to maintain that discipline going forward, that ought to continue to help the bottom line.

Great. Thanks a lot.

Okay. Thank you, Mike.

We'll go next to Nishu Sood with Deutsche Bank.

Thanks. First question I wanted to ask was on the Milgard. You mentioned that your changes to the way that you're perceiving the Western markets is the main rationale for the changes there, the plant closures. What about the glass business? Getting out of that business all together, were there other options available and so what was the rationale specifically on that?

We've been doing a lot of supply chain work, Nishu, as we mentioned, and our feeling was having our own glass manufacturing capability, tempering capability, if you would, didn't really make a whole lot of sense relative to some of the other alternatives, and my sense is, we'll end up saving a little bit of money by moving in that direction.

Got it. What were the sales roughly in the glass business?

They were de minimis. I think less than $5 million, as I recall. $2 million, $3 million.

Got it. Just a second question on the hedging losses. Now, this is something new that you're highlighting in terms of creating volatility in your results. So I just wanted to get a sense of, have the hedging strategies changed, let's say in the last year or so? Was this more of a 1-off event or should we expect this to become more of a -- perhaps more of a common feature?

No, Nishu, we've been in the hedging program for over a year now and just maybe to level set everyone how this works, is because when we're effectively hedging our copper and zinc, which go into our plumbing products, in the form of brass, since there's not a brass market, so we don't get hedge accounting treatment on this, so we have to mark-to-market our contracts on copper and zinc at the end of every period. So as you think about copper prices for the third quarter of 2011, on average, per pound they were up 24% versus the third quarter of 2010. Though at the end of the quarter they fell -- came off their historic -- or near historic highs and fell pretty dramatically on the period end date, so we had to mark-to-market to a relatively low number.

That said, copper, since that point in time, is up about 10%, since the end of September. So over the long term, we think copper prices, metal prices will tend to rise more than fall, and so if this does occur we should recognize gains on these contracts in future periods. So overall, as you think about how we much we hedge right now, as I said, we got into this last year a little bit, and overall less than 20% of our metals consumption is currently hedged.

Got it. Great. Thanks.

I think, Debbie, we have time for 1 more question.

All right, sir. Thank you. We'll take our last question today then from Bob Wetenhall with RBC.

Hi. Good morning. Just wanted to touch --

Good morning, Bob.

Touch base on your SG&A spending at around $1.6 billion a year. Just assuming your outlook for housing remains kind of flattish into 2012, are you going to try to grow margin performance by cutting SG&A? Do you think there's room to do that?

Well, yes, I think there's always room to improve, and we certainly -- I think we made a little bit -- had a little bit of leverage in the third quarter on SG&A. But there are a couple aspects there that I think are kind of important to understand. We do have service organizations. We've got -- at Behr, we've got a large sales service force that is in the field, and they tend to be a fixed number, if you will. We also have the same thing in terms of Masco retail sales service support for Lowe's, and we have a sales service support for Home Depot as well. So irrespective -- and generally, those guys are in the stores, working on our sets, our displays, et cetera.

And so that's a little bit like kind of a large fixed cost, and the number of stores doesn't change dramatically, and revenue may be down or up a little bit, but that tends to be a cost that's fairly fixed across the enterprise. Having said that, we have leveraged our sales folks. You might remember last year, that we talked a little bit in terms of the installation business that we were maybe underrepresented in a couple of locations, where we didn't have the sales representation that we would have liked to have had. We did add some folks there, we added some people on the pro paint side. As we pursue some of the new opportunities, Bob, my sense is, there's a bit of an investment that we'll make in that area.

You might have heard me comment earlier to a question I think from -- might have been from Sam or somebody about incremental spend on programs that were up about $20 million in the quarter versus last year and my sense is, I think on a year-to-date basis, that number might be around $50 million, John, right around $50 million. So we do incur expense for new opportunities. Sometimes those don't hit the top line in the same period. But you can rest assured that when you look at some of the headcount reductions that we've made across the Company over the last several years, a lot of that has been in the SG&A category. And I think as things start to pick up a little bit, there should be some really good leveraging opportunities for us.

That's helpful. And just very quickly to touch on plumbing, I think sales were up 12% year-over-year. I know some of that has an FX component but your operating margin was roughly 300 basis points lower. Can you give us the breakdown of the margin contraction, because I was surprised that you didn't get more benefit from sales leverage out of it.

Well, yes. 1 of the key items there, Bob, you might not have caught this, is that metals had the hedge that John just talked about is in that segment, totally. And if you factored out the hedge impact from both years, last year we had $4 million of gains, this year, $10 million of loss. You would be comparing 14% last year in the third quarter to 13.3% this year, and so we would only be down 70 basis points in the segment. And that is really driven primarily by mix, which I think I mentioned was about $13 million negative in the quarter, versus last year, and also some program costs that, as I recall, represented about $7 million.

Got it. That's good. Good luck next quarter. Thanks very much.

Okay. Thank you, Bob. And thank all of you for joining us today. We appreciate it, and take care.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.