馬斯科 (MAS) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation fourth quarter and full year 2012 conference call. My name is Brent and I will be your operator for today's call. As a reminder, today's conference is being recorded for replay purposes.

(Operator Instructions)

I will now turn the call over to the Vice President of Investor Relations, Maria Duey. Maria, you may begin.

Thank you, Brent, and good morning to everyone. Welcome to Masco Corporation's fourth quarter 2012 earnings conference call. Joining me on our call today are Tim Wadhams, President and CEO of Masco, and John Sznewajs, Masco's Vice President, Treasurer and Chief Financial Officer.

Our fourth quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion of our website. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we would appreciate it if you would limit yourself to one question with one follow-up. If we are unable to take your question during the call, please fall free to call me directly at 313-792-5500.

I'd like to remind you that statements in today's presentation will include our views about Masco's future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Qs that we filed with the Securities and Exchange Commission. Today's presentation also includes non-GAAP financial measures. We've provided a reconciliation of these adjustment measurements to GAAP on our website at www.masco.com.

With that, I'll now turn the call over to our President and Chief Executive Officer, Tim Wadhams. Tim?

Thank you, Maria. And thank all of you for joining us today for Masco's fourth quarter 2012 earnings call.

If you would please move to slide number 4. We're pleased with our fourth-quarter results, which wrapped up a relatively solid 2012 for Masco. Our fourth-quarter sales were up 9%, 12% in North America. And we go into 2013 with a fair amount of momentum. To that point, our January sales were up low double digits on a consolidated basis. While general economic conditions in both North America and Europe were challenging, and bigger ticket remodel activity continued to be slow, our top line benefited from new home construction activity, with housing starts up approximately 28%. And our top line also benefited from new product introductions in several of our product categories. As it relates to our bottom line, we benefited from operating leverage, good execution on pricing, and profit improvements, to expand our margins.

In addition to improving the math related to our financial results, we also accomplished each of the priorities we identified at the beginning of 2012, which are included on slide number 5. In essence, we delivered on what we said we were going to do at the beginning of the year. We'll touch on each of these items as we work our way through the presentation. They represent areas of emphasis and support of our strategic initiatives, which are included on slide number 6.

We communicated these strategic initiatives to the investment community at the beginning of the year. And they include expanding our market leadership positions. And in that regard we felt like we made a lot of progress in 2012. We had a lot of new product and program introductions in plumbing, paint, and decorative hardware. In the fourth quarter, our sales to key retail customers were up low double digits. For the full year, our sales to key retail customers were up mid single digits.

We also did a nice job on the Installation segment with adjacency's and retrofit and commercial, a couple of areas we entered a couple years ago during the downturn. Our window businesses in both North America and the United Kingdom continue to take share. Our vitality index for 2012 exceeded 30%. And that's the percentage of our products that were introduced in the last three years, manufactured products, to our total sales. So, a very healthy outcome there.

In addition to expanding our market leadership positions, another strategy that we focused on is our cost structure. We had a good outcome there, and John will talk about that a little later on. We did exceed the targets we set early this year. We continue to benefit from restructuring activities, actions that we've taken over the course of the last couple years, and our continued emphasis on supply chain and lean initiatives. We also made progress with our balance sheet. We had a net debt reduction. We ended the year with solid liquidity and good borrowing capacity.

Our fourth strategic initiative is improving the performance of our Installation and Cabinet-related segments. And we had a pretty good outcome there in terms of full-year performance. On a combined basis in aggregate, those businesses improved $85 million in terms of year-over-year comparison. And that's $85 million of loss reductions. We did get some help from the marketplace. Obviously both of these segments are impacted by new home construction. But we also had good execution.

Our Installation business was profitable in the fourth quarter. You might remember we just missed break-even in the third quarter. We were profitable in the fourth quarter. As it relates to Cabs -- and if you would please flip to slide number 7 -- we've still got some work to do as it relates to our Cabinet-related segment. Our focus, first and foremost, is to get back to profitability. As it relates to the Cabinet segment in total, we announced the planned disposition of our Danish subsidiary in our press release. As it relates to our North American business, on slide 7, we're very pleased with the new team.

We've made some good progress over the course of the second half of the year, as we've discussed previously. That team has been in place now for about six months, seven months. We gave them a clean sheet of paper in terms of assessing the situation. They've taken a very systematic approach, starting with our customers by channel, really listening to the voice of the customer. And we've gotten a lot of very constructive feedback. To that point we have set up dealer councils to insure that we can get the continued dialogue and input from our customers. And we use a lot of that information to really energize our sales force in a all-hands meeting earlier this year. We came out of that sales meeting with a lot of enthusiasm and a lot of energy.

Input from our customers and channel partners will help form our channel strategies as we move forward. Those strategy mace include pricing actions, promotions and product introductions, all of which will be focused on leading us to profitable growth. We also continue to look at our cost structure. And we've already taken several recent actions that will drive improved performance. That includes a couple of plant closures, as well as a headcount reduction.

If you please flip to slide number 8, we'll turn the presentation over to John Sznewajs, our CFO. John's going to walk us through our operating performance by segment.

Thank you, Tim. And good morning, everyone.

If you could please flip to slide 9. As Tim mentioned, we exited 2012 with a lot of momentum. Sales in the fourth quarter increased 9% as we experienced strong double-digit sales growth in our Installation, Plumbing and Decorative Architectural segments, and our North American Cabinet business. One item to note. The information included in the slides includes the results from our Danish RTA business. We expect to restate our financing's to exclude this business at the end of the first quarter.

The overall sales in North America were up 12%. Revenue increased in all channels of distribution, with the strongest gains driven by our businesses selling into the new home construction market, which were up more than 25%. As Tim mentioned, sales to key retailers were up low double digits in the quarter. And we realized selling price increases. International sales increased 2% in local currency in the quarter. And that's a great outcome considering a challenging European market. Excluding our Danish RTA business, international sales increased 8% in local currency in the quarter. Adjusted gross margins expanded nicely by approximately 310 basis points, compared to the fourth quarter of last year to 25%, due to improvement in every segment. We are also pleased with our bottom-line performance, as adjusted operating income increased nearly 250% in the quarter to $94 million, with an adjusted operating margin of 5%. The strongest fourth quarter we have reported in several years. Our adjusted EPPS was $0.04, an improvement of $0.13 versus a loss of $0.09 in the fourth quarter of last year.

If you turn to slide 10, you can see the components of our operating income improvement in the fourth quarter. Net price commodity improved approximately $37 million in the quarter, largely driven by our Cabinet, Plumbing, and Decorative Architectural segments. This $37 million reflects the year-over-year impact of our metals hedge, which was approximately $5 million negative in the quarter. The $32 million increase in net volume mix was principally driven by the strong volume increases we experienced across all of our segments. This was partially offset by an expected negative mix impact of approximately $10 million in our Plumbing segment.

As we have mentioned in the past, this is largely related to Hansgrohe and their successful penetration into new international markets. And we captured $52 million of profit improvements gross in the quarter, exceeding our expectations. And these were realized in all our businesses. These improvements were offset by higher employee-related expenses, including equity-based compensation, given the increase in our share price, and incremental program costs related to new product introductions, as we continue to invest to grow our Company. We are pleased with our full-year profit improvement initiatives gross, totaling $195 million, exceeding our prior estimate for the full year by $20 million.

If you turn to slide 11, you see that our Plumbing segment sales increased 10% in the quarter. North American Plumbing sales were up 12%. The strong momentum that we've been experiencing in North America continued in Q4, as several of our most important brands, including Delta, Peerless and Brizo, saw sales in the quarter increase nearly 20%, aided by faucet and toilet program load-ins in the retail channel, as they continue to gain share through new product introductions. As we mentioned last quarter, the recent launch of our Delta-branded toilet program is exceeding all preliminary estimates, as these terrific new products gain traction in the market. European sales in the segment increased 6%. But more impressively, increased 9% in local currency for the quarter, despite a very difficult economic environment. I should point out that our Hansgrohe unit enjoyed record sales in 2012. Operating profit increased 29%, driven by increased volume in a favorable price commodity relationship. And was negatively impacted by the mix of $10 million, the commodity hedge of $5 million, and foreign currency of $2 million in the quarter.

Turning to slide 12, you can see that revenue in our Decorative Architectural segment grew $38 million, or 11% in the quarter, driven by strong sales of Behr's Premium Plus Ultra products, our paint and primer in one products; significantly improved sales performance at Liberty Hardware; sales gains at Home Depot with Behr's propane business; and Behr's product placement in Home Depot's Mexico stores; along with selling price increases. The new formulations Behr introduced earlier this year are performing well, exceeding all expectations. Operating margin expansion in the quarter is aided by a relatively easy comparison to the fourth quarter of 2011. You may recall, last year's fourth quarter was negatively impacted by, at that time, record high input costs for paint, Behr's additional advertising spend to drive foot traffic at Home Depot, and program costs at Liberty Hardware, as they won several new programs with major retailers. Without these headwind's, Q4 operating margins reflect the benefits of significantly improved operating performance at Liberty Hardware, where they went from a loss in the fourth quarter last year to a profit in 2012; Behr's new program win in Mexico; and at present a stabilizing commodity basket for paint with TiO2 prices coming down; and propylene prices up by about 30% in the quarter. Looking at this segment's full-year adjusted operating profit of $46 million, our Liberty Hardware unit represents approximately 40% of that $46 million improvement as they return to profitability in 2012.

Turning to slide 13, you can see that the environment for cabinetry remains challenging. This said, we saw improved performance, with segment sales increasing 1%. Our European sales decreased 21% in local currencies, and 23% in US dollars. Excluding our Danish RTA business, segment sales were up 11%. North American cabinet sales increased an impressive 13% in the quarter, reflecting strong direct-to-builder sales growth in the high 20% range, home center sales growth in the low teens percentages, and low single digit sales growth in the dealer channel. This was supplemented with solid countertop sales.

Recently we have seen a decline in promotional activity in both the big box and dealer channels. We are experiencing favorable results from these actions, which we attribute to increased demand and discipline within the industry. We improved our operating loss in the quarter by $12 million, and in the full year 2012 by $32 million, in line with our full-year profit improvement estimate for this segment. We realized $14 million of profit improvement gross in the quarter, driven principally in North America through our current year initiatives, as well as benefits realized from prior-year restructuring activities. These benefits were partially offset by other inflation and loss of leverage as a result of declining volumes in our European businesses.

And, as Tim mentioned, we are very pleased with the new North American cabinet management team. The strength of their turnaround plan is apparent in the segment's fourth quarter results. And we expect continued progress in 2013. Since the management change in July, the new team has taken actions to address capacity and improve profitability. These changes aggregate $25 million of annual profit improvement. And, coupled with the disposition of our Danish RTA business, should improve the segment's 2013 operating profit by approximately $55 million.

Turning to slide 14, you can see our Installation segment. We are very pleased with the continued improvement in both the top- and bottom-line performance of this segment. As Tim mentioned, we turned a profit in this segment in the quarter, something we have not done since the fourth quarter of 2008 when segment sales were more than $40 million higher, and the annual housing starts exceeded 900,000 units. We expanded our market leadership position as segment sales grew 13%.And were fueled by higher sales volume in our residential new construction and commercial channels. We continue to focus on increasing our Installation sales across all lines of business. And we are well positioned to grow with the big builders, particular D.R. Horton, Lennar, Pulte and KB. We also recently entered into a strategic alliance agreement with Toll Brothers. Residential new construction contracting sales increased nearly 30% in the quarter.

In addition to solid top-line performance, management's strong execution delivered significantly improved bottom-line results, with adjusted operating profit improving by $12 million and operating margins expanding by 400 basis points. This segment exhibited strong operating leverage in the quarter, delivering nearly 32% incremental margins, resulting from increased fixed-cost leverage cost control, and the benefits from our prior profit improvement actions. Turning to slide 15, you can see that our Other Specialty product segment sales increased 6% in the quarter. Excluding the exit of select US window markets, North American window sales increased high teens percentages in the fourth quarter, due to increased sales in both the new home construction and replacement window markets, and new product introductions. We are particularly pleased that our replacement window sales increased mid teens percentages, reflecting share gains driven by new products, despite what we believe is a replacement window market in the western US that was essentially flat in the quarter.

Sales of our UK windows increased low single digits in local currency in the quarter, aided by strength in both the new construction and retail channels. Segment-adjusted operating profit improved by $7 million. And adjusted operating margins expanded 460 basis points, benefiting primarily from the rationalization activities undertaken in our US window business in the third quarter and fourth quarter of last year, and reduced promotional spend. Turning to slide 16, you can see that we continue to work on strengthening our balance sheet. During the course of 2012, we ended with a net debt reduction of $400 million in the year, continued strong working capital execution by delivering working capital as a percent of sales at approximately 12.1%. And you can see that we ended the year with approximately $1.4 billion of cash on the balance sheet.

With that, I'll turn the call back over to Tim Wadhams.

Thanks, John. I had a couple of comments before we go to the question and answer session. If you would please flip to slide number 18. As I mentioned, we're pleased with our 2012 results in a variety of areas. And we certainly want to thank and recognize our employees worldwide for their continued dedication and contribution. Made a big difference last year.

While we expect general economic conditions in North America to continue to improve modestly, we are concerned that declines in disposable income may slow consumer spending. Having said that, we expect big ticket remodel activity to remain relatively slow in North America. In addition, we expect general economic conditions in Europe to continue to be somewhat uncertain. However, we're very pleased with the fact that in both 2012 and 2011, our international businesses in terms of top line were up in local currencies, having three businesses in the United Kingdom. And Hansgrohe's global expansion has been a major plus for us in that regard. And I'd like to join John in recognizing Hansgrohe. They had a record year in 2012, a great accomplishment in a very tough environment. And we're certainly very proud of the Hansgrohe team.

We expect to continue to benefit from increased activity in new home construction. Starts are projected to be up 20% to 25% in 2013. We also expect to continue to benefit from new product introductions that have recently been launched. We closed 2012 on a strong note, with fourth-quarter sales up 9%, sales in North America up 12%. And as I mentioned at the start of the call, we're off to a good start in 2013. January sales are up low double digits.

Our priorities for 2013, on slide 19, support our strategic initiatives. And again those strategic initiatives include expanding our market leadership positions, continuing to improve our cost structure, driving our Cabinet and Installation segments to profitability, and enhancing our balance sheet and liquidity. Our priorities for 2013 are very similar to the areas we emphasized for 2012. And that's by design. We'll continue to focus on the things that we can control to proactively drive our performance. And we'll hold ourselves accountable to deliver on those priorities in 2013.

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

(Operator Instructions)

George Staphos with Merrill Lynch.

Congratulations on the progress in the year. I had two questions. First of all, would you be able to either qualitatively, or perhaps more precisely, discuss the level of program costs and growth [initiative] spending you expect in '13 relative to 2012, and how might that vary within the segments? And then I had a follow on.

George, we expect that the program costs to be about flat for the year. There will be some puts and takes, depending on the segment, in 2013. I think we'll be down a little bit in our Paint segment. We launched some new products last year and had some program costs associated with it. And also Liberty Hardware had some program costs. We also incurred some program costs in Plumbing in 2013, as we launched a significant number of new products. So those were probably the areas we were at a high watermark last year, probably come off that a little bit in 2013 in those two segments.

Okay. The related question, there was some progress on SG&A to sales in the quarter on a year-on-year basis. I know you're pleased with the cost reduction progress you had during the year. Having said that, the ratio is still relatively high as compared to other companies that we look at. Can you give us some discrete goals or steps you expect to see in 2013 whereby you might be able to reduce that SG&A to sales ratio? Thanks.

Yes, George thanks. You're right. We did make some progress in the year and in the quarter on this. I think generally the way that we would look at this, as we increase our revenues over the course of 2013 and beyond, we would expect to get some operating leverage as a result of those increased sales. A couple years ago before the downturn, we were running at the 16%, 17% sales SG&A as a percent of sales. We definitely think we can get back in that direction as our sales volume increase over the course of the next several years.

George, I would add one element there. As we've mentioned a couple times in the past, we have in the Behr sales force, for example, 450 people who helped service the Home Depot stores from a paint perspective. We also have a retail sales service support group that works with Lowe's. Those are our fixed costs for us that don't really vary very much based on top-line volume. So I think John's point about leverage as things continue to pick up is certainly accurate.

Okay, thanks, I'll turn it over.

Michael Rehaut with JPMorgan.

First question on new products. Really been a focus for you guys. And I was hoping if you could give any granularity in terms of 2013 in terms of your views on incremental contribution, either by segment or overall. And perhaps able to give us a sense of what the new products contributed to sales in 2012.

In terms of new products going forward, Mike, in 2013, we really did just launch the, an example in the plumbing segment, we launched the toilet program and the foundations program in late third quarter, early fourth quarter of last year. And so we expect to see the waterfall effect of that hit the financial statements in 2013. In addition to that, we won a number of other programs in some other segments, as well. We've got some product launches taking place in our Cabinet area in the first quarter of this year. And potentially some later in the year in Cabinetry. Clearly those will take a little bit longer to digest. When we launch new cabinet products, for instance, they don't necessarily have an immediate impact on the top line. It takes several quarters before those -- we really begin to feel the effects of those. So I would say that, to your point, we've been investing heavily in new products over the course of the last several years and throughout the downturn. And we expect that we would continue to do that. So I would think that our vitality index, as Tim referenced on the call, just north of 30% will be consistent in 2013.

Okay. Also I had a question about some of the movement around the restructuring in the Danish Cabinets unit. You also highlighted the solid profit improvement in Liberty Hardware. So when you think about maybe some of the lagging units that you have in the portfolio, you've taken a couple of actions, one fixing, one disposing. But if you look across the different segments that you operate, the five major segments, if you've identified any other areas where either you feel that maybe it's non-core or that there's a fix that you're putting your arms around. Where perhaps you can, if you don't want to necessarily identify by actual segment, for competitive purposes, or market purposes, give us a sense of the amount of dollars that represents and over what time period perhaps some of those either lagging units or non-core units might be addressed.

Yes, Mike. Thanks for the question, Mike. This is Tim. Yes, I would say that as we look at the portfolio today, the only business that we have that is in what we would describe as an under-performance kind of situation would be in the Cabinet segment. We've got two businesses there. Obviously, North America, we've talked a little bit about our plans to improve that. We also have a business in the United Kingdom in Cabinets, which is Moores. A relatively small business, roughly $70 million, $80 million on the top line. They continue to be in a loss position. But we have seen some signs of progress there in terms of market share gains, particularly as it relates to public building. So those would be the two areas that would be problematic at this point in time. The rest of our businesses obviously would range in terms of returns and profitability. But those would be the two that are getting the most attention from a turnaround standpoint.

Great, thank you.

Dan Oppenheim with Credit Suisse.

I was wondering if you can talk a little bit more in terms of just the overall Cabinet strategy where you talked about promotions, but also the expectation that big ticket remains slow. So, as you've thought about the strategy overall, think that, how would you describe the promotion activity, the strategy with that? Is it more targeted, more focused? And, as you think about that in terms of leading to more profitability in Cabinets, can you just talk a little bit more about how you're viewing that?

Thanks, Dan. Yes, in Cabinets, we have seen a bit more discipline as it relates to promotional activity. And I think there's a couple of drivers there. We and others have taken some actions. For example, what we've done is really moved to an allowance for the ultimate end consumer. Which gives them a little more flexibility as to how they might apply that in terms of their experience and their process. And the other thing that I think has added a little bit of discipline to the process is that demand has seemed to be increased a little bit. So there's a little bit more traffic at this point in time. We have always contended that the promotional activity would probably abate a bit as demand started to pick up. And so I think there's a couple of factors at play there.

In terms of our view of bigger ticket remodel, our sense is that that's going to continue to be slow for a period of time. And don't really see a catalyst for the bigger ticket remodel side at this point. We think there's a lot of pent-up demand there. A lot of the survey work that we've done suggest that people are willing and desirous to take on a bigger project. Credit is still somewhat challenging. Obviously, with some of the changes that took place earlier this year, disposable income is down. So our sense is it's probably going to take a little while longer for us to get major traction with some of the bigger ticket remodel activity. But as I say, we think there's pent-up demand there, and that should be a plus for the industry going forward.

Great, thank you. And in terms of the Installation, you talked about the mix shift, how that hurt in terms of little bit less activity on the multi-family side. On the single-family side, as that's continued to rebound here, and regaining share here, do you think about doing more in terms of, you talked about, do you think there's an opportunity now where you'll do slightly more but strategically focused to get a few more products in, as you have historically, as we see more of the rebound in that single family?

Yes, Dan, it's John. I'll take this one. As it relates to your question about will we do more products in single family, I think we're going to be fairly disciplined in our approach. We are now focusing on five core products that we install. Installation obviously being the lead, but with gutters, after paint, garage doors, fireplaces being the others. So I don't think you should anticipate us to expand that product offering in the near future.

And one of the things I should probably point out, you mentioned multi-family as part of your question. We are continuing to see an extended lag, particularly on the multi-family side of things. In speaking with the folks in the field recently, it looks as though we are today insulating -- and this is not anecdotal but actually more consistent than anecdotal -- we are insulating today multi-family starts that were counted as starts in the second quarter of last year. So you can see now the effect of the lag on us in our business in that segment.

Great, thank you.

Bob Wetenhall with RBC.

Great quarter. I just wanted to understand, could you talk about your incremental margin performance. It was 51% before general corporate expenses, and 44%. Given the increased velocity in the housing market, are you expecting incrementals to sustain at current levels, or expand as we move through the year?

Bob, we've always said that the incremental margins for the business generally run around 30%. A little bit more than that for our manufacturing businesses and a little bit less than that for our Installation business. And we have experienced, for the first couple quarters coming off the bottom, incremental margins higher than that. And that's partly due to the fact that we've taken so much fixed cost out of the system. And we still estimate it's in the neighborhood of about $580 million or so of fixed costs that we've taken out. And so we can see the operating leverage on the business. That said, as the economy matures, and we get into a more mid cycle environment, I would expect we would migrate back to those 30% incremental margins.

Yes, the other thing, Bob, that I think is probably important to note is that we have had some positive impact the last couple of quarters with price commodity. And generally, over time, as we've indicated, that would tend to balance out. As you know, last couple of years we've been negative in that regard. We're still behind as we look at the last couple of years. But that does contribute a little bit to that incremental margin in 2012.

Got it. That's helpful. And obviously in your slide deck you note that $37 million price commodity is finally favorable, for a change. How much of that went into the Paint business? And I'm a little confused. If you could give some guidance in terms of how to think about the Paint business in terms of margin performance. Is it going to be consistent with what we saw in the fourth quarter where you got a 670 basis point pick up? Or am I missing something there?

Bob, in terms of the break down of the net price commodity in the quarter, it was split among three segments. Really, Cabinetry, Plumbing -- and really in Plumbing that was largely driven by our European plumbing business. And then in our Paint segment, as well. And so the way that breaks down -- I don't know if I have those numbers in my fingertips -- but I'd say that Cabinets was probably the least amount. And then Plumbing would be the next amount. And Paint would probably be the highest amount, but only slightly higher than the Plumbing business. So that's the first answer to your question.

The second part of your question is what do we expect going forward. And as I mentioned as we walked through the segment slides, we had a relatively easy comp compared to the fourth quarter of last year. We had a lot of headwinds. Commodity prices were extremely high. We did get some pricing in the first quarter of 2012. So I'd say I would not anticipate the same kind of margin expansion that you saw in the fourth quarter to continue going forward. So we expect -- pricing is always something that we talk about on a regular basis with our customers. So, margin, don't know where that's going to go in 2013 at this point. We've got conflicting signals as it relates to commodities in that segment, with TiO2 coming down and propylene going up pretty significantly. So we'll see how that plays out as 2013 rolls out.

Yes, I'd add, Bob, that, as we've indicated in the past, we expect to always have very strong margins in the Decorative Architectural segment. We have indicated that, as we continue to grow the pro side of the business, and as I think you're very much aware we've been investing for international opportunities in Paint, as well, as we make progress in those areas, we would anticipate that margins would probably come down over time. But having said that, we would expect to grow the absolute profit dollars in that segment at a very good return. So we think that's a reasonably good trade. But we would always expect to have relatively strong margins in that segment.

Got it. Thanks very much.

Ken Zener with KeyBanc Capital Markets.

Given the very strong growth we're seeing in new construction, can you update us on your thoughts in Installation if we were to be at 1.5 million starts? And how much of that is the volume lift and how much might be pricing, specifically in Installation? And if you could update us on any comments you have there.

The way I would think about that, Bob, is that when we look at incremental starts, we estimate that 50,000 starts for us in that particular segment would equate to about $45 million of incremental volume. So that would give you a reasonable idea as to where we might end up in terms of the area of around 1.5 million starts. Having said that, I would say that we also have other growth opportunities in that segment when we think about retrofit and light commercial. So, as we think about growth going forward, those additional adjacencies that we've been able to enter and successfully execute against should give us growth opportunities, as well.

Okay. And then, obviously, just following up on that, on Installation, given that it's the majority of that business, could you comment on how pricing, if and when it occurs in that category, if that does fall straight to the bottom line? And then, John, I think you mentioned a $55 million profit number for Cabinets. I was a little confused there. If you were referring to actions that have already been taken in 2012, the benefits. And/or the benefit you'll get in '13 when you guys give us the restated numbers for the European divestiture. So what was the European divestiture drag on EBIT please? Thank you.

Yes, Ken, I'll take the second half of that question. As it relates to our Cabinet segment, really two buckets here, one, two [components] of that $55 million. One is the $30 million improvement that would be driven by the elimination of our Danish RTA business from our financial statement. So that implies a $30 million loss in that business in 2012.

On the $250 million of sales?

On $250 million of sales, correct. And then the other part of your question related to the profit improvements. Those are prior year, 2012, initiatives that we started that we expect to generate $225 million of profit improvement in 2013. So that aggregates that $55 million number.

Yes. And, Bob, your other question related to pricing on Installation -- excuse me, Ken, I'm sorry, I said Bob again. I meant Ken, I apologize. Yes, Ken, in terms of your other question around pricing as it relates to Installation, generally speaking, as we've indicated in the past, when we do get a price increase, we've been able to either work with our suppliers, work on productivity, or ultimately pass that along in the marketplace. And I think we've been pretty successful over time making that happen.

Thank you.

David MacGregor with Longbow Research.

Congratulations on all the progress. With respect to the $37 million of net price commodity benefit, have you talked at all, if you did I missed it, on the price commodity benefit you anticipate for '13?

No. We do expect a little bit of tail wind for price commodity in 2013, David. That basically stems from the fact that in a couple different segments we implemented price in the first quarter of last year, so we'll have the waterfall benefit of that. Beyond that, the balance of our commodities had been relatively stable over the course of the last several quarters. A little bit of headwind on some of the inputs into Cabinetry. But beyond that, pretty stable pricing on commodity input costs across all five segments at this point in time.

I think Tim had mentioned earlier that over time there had still been some unrecovered inflation over prior years. What segments are you seeing most of that in?

That would principally be in our Decorative Architectural segment, David. I would say, if you look over the last three or four -- three years, principally -- we would still be about $15 million, $20 million behind in the price commodity relationship on an aggregate basis.

Okay. Last question, just on the Behr expansion into Mexico and the builders hardware business at retail. What did that contribute to growth in that segment?

Boy, I don't know. I don't have either of those off the top of my head. Just to give you a sense, David, there's about 90 Home Depot stores in Mexico. We said about 50% of those in the fourth quarter, the balance of them will be sent here in the first quarter. And then as it relates to our Decorative Architectural, I just don't have those numbers off the top of my head.

Yes, I think we were up 9% in the quarter. And there's probably 1% or 2% that would have been driven by the two items John mentioned, I would guess.

Great, thanks, good luck.

Adam Rudiger with Wells Fargo Securities.

I wanted to just talk about the Cabinets a little bit more and consolidate a bunch of the questions that have already been asked. But if I think about the exit of the European business, that should impact revenues by about 20%. And with your thoughts on repair and remodel big ticket items being somewhat delayed, and that's the bulk of your business in that segment, and then layering some strong growth maybe in the new builder business, it suggests that overall revenues in the segment still going to be down next year, And with a $55 million improvement it looks like it would still be reporting losses. I just wanted to see if you think that made sense, without specific guidance thematically on how to think about 2013.

Revenues will certainly be down by the $250 million of the Cabinet business that we exit. I wouldn't necessarily suggest that we expect revenues to be down, after you back that number out. Obviously, we had a very good fourth quarter in North America. I think, as John mentioned, I think we were up 13% in North America in the fourth quarter. And that is with a relatively slow bigger ticket remodel activity. We don't see a lot of change in that as things go forward. So, from that standpoint, that would be the way we would see the top line.

On the bottom line, as John mentioned, we are anticipating about $55 million of improvement from the actions that have been taken. And obviously that leaves a little bit of work to do. But our sense is that we have a chance to show significant improvement in that segment from a bottom-line standpoint. And I think particularly in North America. I don't think that we get to profitability in 2013 in the segment, primarily because of our UK operation. That environment continues to be pretty tough. But I think we've got a chance to show significant improvement in profitability in 2013.

Okay. And then just going back to your opening remarks about all the discussions you've been having, what's been the biggest take-away that you've gotten from your partners in terms of dealer strategy that you'll attack and try to fix in order to improve your status there?

I think the biggest take-away is that we have huge opportunity. That the communication that we've gotten back in terms of opportunity that exists in terms of our ability to improve in a variety of different areas, some dissatisfaction potentially with other suppliers. The fact that we've traditionally had five days of delivery, for example, on the Merillat side. We've had three- to four-week delivery on the KraftMaid side. Those are industry-leading delivery statistics. And we certainly feel like we ought to be able to leverage those going forward. So, I would say that, I think the thing that was probably most important there is just a lot of opportunity to, in areas where we may not have executed previously as well as we would have liked, to win back business, as well as continue to gain some business in the dealer channel.

Okay, thank you.

Keith Hughes with SunTrust.

Just going back to Cabinets one more time. If we look at just North American Cabinets, taking the business you're selling and others out, can you give us any kind of feel on where profitability level is there?

Yes, we improved, Keith, by about $32 million in the segment for the year. And basically all of that was virtually in North America. And I believe, if I'm remembering correctly from last year, I think that would probably put us at about $40 million of loss in North America. And as we've discussed, we've talked about the two plant closures that took place, the headcount reduction. John gave the estimate of about $25 million of savings related to those. And so I think, as I indicated earlier, when you take those actions, and then think about some other things that are possible down the road, whether it's on the cost side and/or the revenue side, as I said earlier, I think we've got a pretty good shot to show some dramatic improvement in that segment and in North America in 2013.

And final question, switching over to Plumbing, you talked on numerous calls on how well Hansgrohe has done despite what's going on in Europe. Can you give the audience any kind of feel on the size and margin, or just something, some kind of details on how well they're doing?

Yes. Clearly, they're a significant piece of the segment. We don't obviously break down individual components of the segment, Keith. They've got a broad international footprint. They serve in more than 125 markets. I think that's a key component of their growth. While they're headquartered in Germany, they're not necessarily beholden to the economic conditions in Germany. They experience solid growth in the Far East, in some of the emerging markets in South America, the Middle East, even into Africa, where they're selling their products. So they've really got a global perspective on the market. And have done a great job of penetrating, particularly at the mid- to high-end price points, all over the globe. So just fantastic operation over there.

Yes, Keith, in our appendix, we indicate that North America represents about 60% of the segment. And the segment's about $3 billion. That obviously leaves 40% for Europe. We've got two other relatively small businesses, Bristan and Huppe. So you could probably assume that Hansgrohe is a pretty good piece of that. And to John's point, continues to just do a fabulous job in terms of execution.

Okay, thank you.

Nishu Sood with Deutsche Bank.

I wanted to actually follow-up on Hansgrohe there. Just generally, internationally, if I look over the last four or five years, a significant number of the divestitures you folks have had have come in Europe. And if I think about the expansions and dispositions of standalone businesses, and if I think about the expansion you've had, Hansgrohe has obviously been a super star in terms of international expansion. Behr, I know you've had some of the Delta efforts in the Far East. So how should we think about your international efforts and footprint in the coming years? Is that organic growth and maybe even some continued retrenchment of some of the standalone units? Is that how you also would think about the next few years in terms of your international footprint?

I think that as we think about the international footprint, it's certainly an area that we have put some emphasis on as we think about our Delta organization and our Behr organization in the United States. We've talked about that over the course of the last several quarters. I think that Hansgrohe, obviously, has done a fabulous job of expansion. And a big piece of that has been more international. You are correct that we have divested some businesses in Europe. And, generally speaking, the view there, Nishu, has been that some of those have been relatively small businesses participating in local markets, with limited growth opportunities. And so, as we assess the portfolio, we continue to look at the composition of it. And continue to look at it from a return standpoint. I can't tell you there's anything imminent at this point in time, other than the Danish subsidiary that we talked about. The rest of the businesses in the portfolio, with the exception of our Cabinet business in the United Kingdom, made a relatively nice contribution last year in terms of outcome from a profitability standpoint. Obviously in Europe, the top line is a bit challenged at this point in time. But we have seen some pretty good bottom-line improvement as it relates to our window and plumbing-related businesses.

Great, thanks. And the second question I wanted to ask was, now that the housing starts recovery is well established, how does your capacity sit for 2013? Are there any facilities that you're looking at and thinking they might need to be mothballed with the 25% growth? I notice your CapEx is rising in 2013, according to guidance. It's pretty modest so I wouldn't expect that includes any mothballing. But how are you thinking about that generally?

Generally, Nishu, I'd take a look at, one, the CapEx, your second question first, I'm taking a look at it more as 2012 was a low watermark in terms of CapEx, as opposed to it being the norm. So the $165 million feels about right. You may recall that we generally spend about 2% of sales in capital every year. So that $165 million fits into that general range.

And then also, as it relates to you asked a question about capacity or expansion. At this point, don't see any further mothballing. Could there be some minor pruning that we do here or there in the portfolio? Absolutely. But if you think about our Installation business, for instance, we added about 6 what we call stocking points in 2012. Probably looked at another 12 to 15 of those in 2013. And those are small, not even full branches, in markets that we're not currently serving. So, as you may recall, we pulled back about 50% of our branch locations during the course of the downturn. Now we don't have complete national coverage and we're starting to add back these stocking units or stocking locations in areas where we see growth taking place. So I'd say more on the expansion side than the contraction side in 2013.

Okay, thanks.

Dennis McGill with Zelman & Associates.

First one just on the -- whether you want to talk about this at the Company-wide level or key retailer sales -- can you maybe differentiate the revenue performance versus point of sale, I guess that would be more on the key retailer side, what you're seeing actually go out the door?

Yes, not aware, Dennis, of any disconnect there at all in terms of inventory build, if you will. Obviously, GDP was very soft in the fourth quarter. I think one of the contributing factors was declines in inventory, as I recall, from some of the economic information that we saw. But I wouldn't necessarily say that there's any big disconnect that I'm aware of. John?

Yes, I would add, Dennis, to Tim's comments that there was a little bit of a favorable load-in in the fourth quarter, because of the Plumbing wins that we had in both toilets and faucets. But beyond that, to Tim's point, if you think about our Cabinet business, that's all made-to-order. So there's really no surprises there. To Tim's point, no inventory balancing that we've seen.

So the load-ins would still, if you took out the load-ins you'd still be double digits at key retail?

If we took out the load-ins--.

Dennis, there is an offset to that. We did mention earlier this year that we lost some utility tub business. And we also lost another bath product. And, actually, those numbers basically offset each other, if you will. And they're all retail-related sales.

Okay. Second question would just be around the balance sheet. I think you mentioned $200 million of deleverage this year. And still pretty elevated relative to historical leverage metrics. So how do you think about the leverage situation and the course of deleverage over the next handful of years?

Dennis, I think we have been taking a pretty concerted effort in deleveraging over the course of the next several years. So we've got the $200 million maturity coming due this year in August, which we intend to pay off. And then we've got nothing in '13. And then $1.5 billion coming due -- $500 million in '15 and $1 billion in '16. And so, as we look at those two maturities, those are where we've got a lot of focus on right now. And I would think that, as we tackle those two, that we would like to probably take those down in aggregate, refinance less than $1.5 billion, somewhere $300 million, $500 million of net debt reduction out of those two maturities probably. Don't know for certain just yet. Longer term benefit, I'd have you focus on the fact that we want to get back to investment grade rating with both agencies. And we want to do that by getting our debt-to-cap in a better position, and getting that into a more traditional 45%, 55% range that we've seen from us pre-downturn.

And I would guess, Dennis, that a big portion of that would come from additional growth in retained earnings going forward. John's mentioned some debt reduction, but our sense is that most of that improvement will come over time through growth and retained earnings.

And I guess, Dennis, I should add to Tim's comment there, don't forget we've got a valuation allowance on a deferred tax asset. So when that flips, that's $600 million, $700 million of equity that pops back on the balance sheet.

And the rating agencies treat that 1 for 1 coming back?

Yes, they would. They would treat that 1 for 1.

Okay, thank you guys.

Okay, thank you. We appreciate your participation. And thank you, Brent.

Thank you. This concludes today's conference call. You may now disconnect.