馬斯科 (MAS) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to Masco Corporation's second-quarter 2013 conference call. My name is Regina and I will be your operator for today's call. As a reminder, today's conference call 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, Regina, and good morning to everyone. Welcome to Masco Corporation's second-quarter 2013 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 second-quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion on our website. Following our prepared remarks, the call will be open for analysts' 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 feel 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-Q that we've filed with the Securities and Exchange Commission.

Today's presentation also includes non-GAAP financial measures. We've provided a reconciliation of these adjusted 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 second-quarter 2013 earnings call. If you would please move to slide number 4.

We're very pleased with our second-quarter 2013 results. Certainly one of our strongest quarters since the downturn and a continuation of the momentum which started for us in the fourth quarter of 2012. We continued our trend of delivering growth in the second quarter with all five of our operating segments, increasing top-line sales and expanding operating margins.

Our leadership position in the building products industry and our focused execution against rising new home construction activity particularly benefited our Cabinet, Installation and Window-related businesses. Notably, our Installation and Cabinetry segments were both profitable in the quarter, reflecting our strong leverage to a housing recovery and our continued commitment to cost containment. As we previously indicated, returning these segments to profitability has been one of our top priorities. Demonstrating the strength of our brands was the strong sales contribution from new product introductions, particularly in our Paint and Plumbing businesses. Despite challenging macro-economic environments in the Euro zone, our international sales increased in the quarter, reflecting strong performance by international Plumbing and Window businesses.

If you would please turn to slide number 5. As we've communicated in the past, our strategy is focused on four key elements to drive performance. We expanded our market leadership by continuing our legacy of introducing new products and programs which mattered to both our customers and the end consumer. Our Decorative Architectural businesses introduced new products at retail, which have exceeded expectation. We continue to reap the benefits from previously introduced products and programs with our North American Faucet and Toilet businesses, which delivered mid teens growth in the quarter.

Our emphasis on cost control is evident in our continued SG&A improvement. As I mentioned, we continue to see improvement in our Installation and Cabinet segments. Our Installation segment is capitalizing on improved market dynamics and drove increased sales in all channels of their business. By remaining focused on profitability, they continued their trend of improving operating profit.

The new Management team that's been in place at our North American cabinet business for the past year has had a positive impact on that business. The segment reached profitability in the quarter and continues to execute on their plan of stabilizing the business and positioning it for future profitable growth.

Combined, these two segments, our Cabinet and Installation business improved by $26 million of operating profit versus the second quarter of 2012 and we're obviously very pleased with that performance. In addition, we remain committed to strengthening our balance sheet and continue to improve our working capital during the quarter. These execution highlights produced a very strong second quarter and we're very pleased with the trajectory of our performance. If you please move to slide number 6.

At this time I would like to turn the presentation over to John Sznewajs, our Chief Financial Officer. John will walk us through our segment operating performance.

Thank you, Tim, and good morning, everyone. If you could please flip to slide 7.

As Tim just mentioned, our momentum accelerated coming out of first quarter and we delivered a strong second quarter. Sales increased 10% with North American sales up 11%. International sales up 6% in local currency for the quarter. Currency, I should say, had a minimal impact in the quarter. Volume increases were strongest in our direct builder channel.

We did a great job of leveraging our fixed costs in the quarter, as our adjusted gross margins have expanded 200 basis points to 28.9%. We are also pleased with the strength of our bottom line performance, as our commitment to cost control helped to leverage our SG&A and increased our adjusted operating income 57% to $206 million, with adjusted operating margins expanding nearly 300 basis points to 9.6%. We realized strong operating leverage as we delivered 37% incremental margins in the quarter. Our adjusted EPS more than doubled in the quarter to $0.23 per share from $0.11 per share one year ago.

Turning to slide 8, we see the components of our operating income improvement in the second quarter. The $43 million increase in net volume mix distributed by solid volume increases in our Installation, Plumbing and Decorative Architectural businesses, and to a lesser degree in Cabinets and Other Specialty segments. This growth was partially offset by negative mix in our Cabinet business as we experienced solid -- sales growth to production builders. And in our Plumbing segment with our successful new programs in expansion into international markets.

Net priced commodity improved by approximately $22 million, largely driven by our Cabinets, European Plumbing and US Window businesses. This also reflects the year-over-year impact of our metals hedge, which was $1 million favorable in this current quarter. We captured $45 million of profit improvement gross in the quarter and we believe we're on track to realize our full-year profit improvement initiatives gross of approximately $150 million.

Turning to slide 9 you can see that Plumbing segment sales increased 9% in the quarter. The strong sales momentum we've been experiencing in our North American Faucet and Toilet businesses, which include our leading brands Delta, Peerless and Brizo, continued in the second quarter. Our sales of these products grew mid-teens %, aided by last year's program wins in the retails channel and strong balance performance in the trade channel, reflecting our continued investment in the showroom, commercial and multi-family segments of this channel.

As a reminder, our revenue in the second half of 2012 benefited from about $25 million of load-ins related to our retail program wins in the third and fourth quarters of last year. So I have some difficult comps in the next two quarters. We also experienced mid to high single-digit growth from several of our North American businesses, such as Rough Plumbing and Spas.

Our European sales rebounded nicely with sales increasing 6% in local currencies, following a Q1 that was hampered by difficult weather conditions. This increase was led by Hansgrohe, as our other European plumbing businesses were relatively flat if the quarter.

Offsetting this growth were weaker sales from our Bathing Unit business. As we previously mentioned, we lost a retail shower surround and tub line review in actuated our product line. These negatively impact sales by approximately $13 million in the quarter and we estimate will total approximately $50 million for the full year 2013.

Year-over-year operating profit increased $37 million, driven by increased volume, a favorable-priced commodity relationship, particularly in Europe, and favorable productivity and cost control. This was partially offset by negative mix.

Turning to slide 10 you see that revenue our Decorative Architectural segment increased 9% in the quarter, driven by strong core DIY paint sales and new product introductions. The two products we launched in Q2 at the Home Depot, Behr Marquee and Behr Deckover are off to a terrific start. We also experience growth in both our Pro and Mexico Paint initiatives. As a result we had mid single-digit gallon growth in the quarter.

Finally, Liberty Hardware contributed to the segment's top line growth as they rolled out several new programs and promotions at retail in the quarter. Operating margins expanded slightly as the benefits from additional volume were partially offset by increased advertising and other cost for the new products and programs in an unfavorable price-commodity relationship. These costs aggregated approximately $10 million in the quarter.

Turning to slide 11, you can see our continued focus on profitable growth in the Cabinet segment resulted in the improved bottom line performance, as we posted a profit in the quarter. We also saw improved top-line performance with segment sales increasing 5%. North American Cabinet sales, excluding counter tops increased high single-digit%s in the quarter, reflecting strong direct-to-builder growth.

We are profitable in our North American business and improved our operating results in the quarter by $9 million as a result of cost control, productivity improvements, which include the benefits from prior-year restructuring activities, and the favorable price-commodity relationship that reflects lower promotional spending. This favorability was partially offset by negative mix due to increased sales to production builders. The turn around plan in North America is on track and we are profitable in this segment sooner than we anticipated as a result of our focus on cost containment, improving demand and restructuring actions taken in late 2012.

As we turn to slide 12, you see our sales growth of 21% was primarily fueled by higher sales volume in our Residential New Construction, Commercial, Retrofit and Distribution businesses. Residential New Construction Installation sales increased more than 30% in the quarter and we'll continue to focus on increasing our Installation across all lines of business. We are growing with all builders, but particularly the big builders, including Toll Brothers, D.R.Horton, Lennar, Pulte and KV. And in the second quarter, we signed a national contract with Dezer.

In addition to solid top-line performance, management's strong execution delivered significantly improved bottom-line results with adjusted operating profit improving by $17 million and adjusted operating margin expanding 520 basis points. This segment exhibited strong operating leverage in the quarter, delivering 28% incremental margins despite the impact of rising material and labor costs. This business is focused on cost control coupled with a benefit they are realizing from prior profit improvement actions have positioned them to grow profitably with the housing recovery.

Turning to slide 13, our Other Specialty Products segment increased a strong 13% in the quarter, driven by North American Window sales increasing more than 20%. This growth was due to higher sales in both the new home construction and replacement window markets as well as new product introductions. We are particularly pleased that our replacement sales increased high-teen%s, reflecting growth driven by new products. And despite difficult economic conditions, our UK window business grew a low-teen%s due to higher volume and was aided by a small composite door acquisition that we made in first quarter.

Segment adjusted operating profit approved by $8 million and adjusted operating margins expanded 450 basis points, resulting from incremental volume and improved price-commodity relationship and lean and sourcing savings.

Finally, looking at our balance sheet, on slide 14, you can see that we continue to have strong working capital execution as we improved working cap as percent of sales to 13.1% from 14.6% one year ago. Also, here in the third quarter, we'll be retiring our $200 million debt maturity on August 15, its maturity date. Finally, we finished the quarter with just over $1.2 billion of cash on the balance sheet.

If you flip to slide 15, with that I'll turn the call back over to Tim for his comments on our outlook.

Thank you, John. And if you would please move to slide number 16. Our success in the second quarter reflects our commitment to executing on the priorities we identified at the beginning of the year. Our Installation and Cabinet businesses are steadily delivering results against improving market dynamics. We expect that the previous actions they have taken to improve their business will continue to deliver benefits going forward.

Our commitment to innovation, new programs and strategic growth initiatives is producing results, as evidenced by our second-quarter performance. As John mentioned, debt reduction is slated for a couple weeks from now with cash that we have on hand. We're encouraged by our second quarter performance and the continued progress against our priorities. We certainly want to thank our employees worldwide for their ongoing efforts to drive Masco's performance.

If you would please move to slide No. 17 and a couple of comments before we go to the Q&A session. While we're pleased with our first-half performance, we recognize that we still face macro-economic challenges that we'll have to manage. The recovery in the US is less than robust and the Euro zone continues in recession.

While new home construction in North America continues to increase, the composition of starts at least at this point, continues with more multi-family homes which has an impact on our mix. And commodities have, for the most part, temporarily eased. However, the potential for unforeseen volatility continues to exist.

Despite these macro-economic factors, we're committed to delivering strong performance and we've demonstrated our ability to capitalize on the improving market dynamics that we're all experiencing. Our market-leading position supported by our strong liquidity enable us to respond to increased demand in hew home construction with greater agility. Our brands and our commitment to innovation represent strengths we can leverage in the Repair-Remodel channels to gain share and increase our strategic relationships with our key customers.

And fundamental to delivering that strong performance as we realize additional growth opportunities, we are confident that our operating leverage driven by our scale and our emphasis on cost containment will deliver meaningful incremental profits. We're encouraged by our first-half 2013 results and particularly pleased with the strength of our second quarter. We have solid momentum going in the second half of 2013 and we're off to a good start in the third quarter with July sales up, low double-digits.

And with that I would like to open up the call for questions.

In order to ensure that everyone has a chance to participate, we would like to request that you limit yourself to asking one question and one follow-up question during the Q&A session.

(Operator Instructions)

Dan Oppenheim, Credit Suisse.

It's actually Mike Dahl on for Dan. Good quarter, guys. Congrats on getting back to profitability in both Install and Cabinets. First question actually on the paint side, wanted to see if you could go down into that $10 million that you mentioned, as far as the unfavorable headwinds on the margins side. How much of that was commodity? How much of it was the initiatives at Depot? And how should we think about that for the balance of 2013?

Mike, it's John. I'd tell you that the majority of that $10 million was program-related cost and that the price-commodity relationship was just a minor piece of that $10 million. To the second piece of your question about how do we think about that going forward, hopefully we'll have some additional program costs going forward. Because that reflects the fact that we're getting additional business with our home center customers or other customers. As you know, those things are tough to predict. So it's tough to say how those will play out in the segment going forward. We'll continue to keep the investment community apprised as we win new programs in retail.

Okay. Thanks. And shifting gears to the Install side, the national contract win with Beazer, could you talk about the scope of that? Is it just Installation? How many products are getting in the door there?

Again, that's an Installation national contract as well. I don't believe we have 100% of their business, but I think it's a vast majority of their business because they may have some developments or communities where we don't have resources. Again, the team down at MCS has done a fantastic job on dealing with the big builders and winning these national contracts.

Okay. Thank you.

Bob Wetenhall, RBC Capital Markets.

Hey, guys, fantastic quarter and great job on cost control. Had a quick question about Cabinets. New res construction is -- housing starts are up 20% year over year and I think you got pricing in the quarter. I was wondering, I thought Cabinets would be a little bit more robust top line, and I was curious if that was due to Europe or some volume growth that's offset by somewhere else.

Europe hit us a little bit on the negative side on that, Bob. Thanks for your comment in terms of the quarter. Europe hit us a little bit on the top line and we had a little bit of a mix issue, as John mentioned, relative to top line. We were up 8% in North America in terms of Cabinets over all. I had a little bit of mix impact, felt like we had pretty decent quarter, did a good job on the dealer channel, good job with big builders, obviously.

Got it. And one follow up too. Paint was really good top line, growing 9%. I was hoping I could get a little bit more color on incremental margins, given the good volume and the trade off between higher advertising cost for a potentially weaker mix and how you anticipate that playing out. You got great incrementals across the rest of the portfolio. Was wondering if Paint starts to deliver equally attractive incrementals in the second part of the year. Thanks again, good quarter.

Thanks. The issue there, Bob, is traditionally we have almost all of our advertising spend takes place in the second quarter. And so when you compare second quarter to first quarter, you've got that delta. In this particular quarter, as John mentioned, we had some additional costs related to new programs, as well as some incremental advertising cost above last year. As we mentioned before, our primary objective in the Paint category is to drive gallons. As John mentioned, we had a nice lift in terms of a mid single-digit increase in terms of gallon growth versus last year.

Dennis McGill, Zelman and Associates.

Good morning. First question had to do with the Remodeling side of the business. You noted in the press release seeing some pick up there. I was wondering if you'd just elaborate on the products that you guys look at internally, whether that's components of Cabinets or components of Windows, Faucets, et cetera, where you're starting to see momentum there and thoughts around the category.

Lower price points, Dennis, obviously with Paint and Faucets have done well for us over the course of the last couple of years. What we've seen, we talked a little bit about that in the first quarter, is a little bit of pick up in terms of Windows for replacement or remodel, as well as Cabinets. As we mentioned, dealer sales in Cabinets were relatively strong in the quarter related to last year. So we've seen a little bit more activity there. I think it's still a little bit early to declare victory on the bigger ticket side. Trends seem to be indicating more foot traffic, more interest and certainly a little bit of pick up in terms of execution.

Okay. And then separately, we've seen a lot of press releases related to installation branches starting to come back online. Can you quantify where that number stands today? And then how you guys are thinking about growth in that business through branch as opposed to organic through existing branches over the next couple of years?

Yes, sure, Dennis. I think our goal for the year is that at about 15 branches at MCS by the end of the year. I think to date right about 9, so far. And not all of those are full branches. I should remind you and the rest of the folks on the line, that we're taking a very thoughtful look about how we expand the business as it relates to our branches. In a number of areas we're having unmanned strategic stocking centers, where we just drop inventory and our crews can go there and pick up inventory to expand the geographic presence that we can cover. Those we believe will ultimately turn into full branches, once they've got enough volume in that area where it warrants a full branch. We're trying to keep our cost in control as we slowly grow that business.

Does that change the incremental cost of the business at all?

I think it improves slightly. I don't think we're going to materially deviate from that 25% incremental margin that we've been guiding you to over the course of the last year or two.

Okay, thanks, guys.

Keith Hughes, SunTrust.

Thank you. Question is on Europe, the international sales were, I think, surprisingly good due to the trend there. I know you talked about some individual wins, but what's your view for Europe for the second half of the year? Are we seeing a bottoming there or what kind of trend do you see going into July?

I think that what I've seen more recently is it looks like things have stabilized to a certain extent in Europe. At least that's what some of the economists seem to be indicating. We are, as we've said before, Keith, we're positioned in the United Kingdom, which is one of the two economies that I think are expected to have positive GDP this year, along with Germany. Our position there has been pretty stable over the course of the last several quarters. We did have a nice lift in that quarter with our Window business in the second quarter, with our window business which is in the UK.

And then, of course Hansgrohe, with their international reach, if you will, continues to do a nice job with some of the project work, some of the new markets that they've entered. So that tends to give us a little bit more balance. So I would expect that we'll continue to do well with Hansgrohe going forward, there's no question about that. I don't particularly anticipate a big lift from an economic standpoint, but I think our businesses will continue to perform pretty well. You might remember that we've been up in local currencies in Europe over the last two years, as I recall. Fairly modest, but still up. I think that as things get better, we would expect to do a little bit better than we've done in terms of the last couple of years.

And final question on the Paint business. You talked about some extra ads and product roll-out costs in the second quarter. Does that abate as we go into the third?

Yes, Keith, that would abate. That was a one-time cost to get those products into the store shelves and in front of the consumers.

Okay. Thank you.

Nishu Sood, Deutsch Bank.

Thanks. Wanted to ask the first question. John, you mentioned the nice performance on Installation Services and that was in spite of labor issues. I wanted to get a little bit more color on that. Also, in any of your other businesses that are more labor-intensive, as you're ramping up in terms of adding staff back for the housing recovery, whether any issues have cropped up and how that's been managed and how that's been looking.

Yes, Nichu. We have experienced some labor tightness around in various markets around the United States. But it's not in a uniform tightness. Certain markets like Texas, Northern California, the Denver area, we've experienced some tightness in our labor. But we've hired more than 500 people across the organization since the beginning of the year to support the growth. That's not just in our Installation business but that's Company-wide. We've not had significant issue in terms of finding people. We offer benefits where many of the competitors that we're up against are smaller competitors and may not have a benefit package they can offer to their employees. Getting people in the door has not been an issue for us at this point.

And what about across the other divisions? Has that been an issue, let's say in Windows or Cabinets, or any of the other operations?

No, at this point, Nishu, it's not been an issue across any of the manufacturing operations. We do actively recruit all the time to ensure that we've got an adequate pipeline of labor and we feel pretty confident about where we stand today.

Okay. Thanks.

George Staphos, Bank of America Merrill Lynch.

Thanks, everyone, good morning. Congratulations on the progress. My two questions were really around Behr. On the one hand I was hoping you could discuss with a little bit more detail, what kind of pick up or benefit you're seeing from the Pro initiatives. And then, switching gears to the retail side, if you will, what benefit are you seeing from Marquee thus far in the market? And what benefit is it having on your other brands through Home Depot? Thanks.

On the Pro side, George, we continue to show a nice increases year over year. We haven't quantified that, but we continue to get some nice penetration there. We've done some things to repackage our Kilz brand, done some formulation work there. That activity seems to be paying off fairly well. We're encouraged by that.

As it relates to Marquee, Marquee is doing well. We launched both Marquee and a new product that we call Deckover, and both of those are doing well in the marketplace. Deckover, given the time of year and the nature of that product, has really been a grand slam for us. It's performed exceedingly well. In fact, we've had a little bit of problem, quite frankly, from a supply perspective, in a couple of situations, so we're ramping that up. Both those products are performing well for us at retail.

On the Pro initiative, you say you're doing well. I know you're not quantifying it, but would it be fair to say you're doing better than your overall gallonage growth? Even though I realize that's kind of an apple and oranges comparison.

A little tough for us to respond to that. We didn't really break it down between Pro and DIY. As we indicated, we were up mid single-digits in terms of gallons. But that would really apply to both retail and Pro. I can't tell you it's six and six. But it certainly would represent increased gallons in both those areas.

Okay. Thank you, Tim. Good luck in the quarter.

Thanks, George.

Mike Wood with Macquarie Capital.

Thank you. You had an impressive Cabinets margins but if I do look at the roughly $25 million annualized that you saved from the two plant closures, and I attribute 25% of that to the quarter, looks like it leaves about 25% incremental margins on the remaining sales growth. I'm curious if that's what you would expect going forward, if there was a drag on that from the product roll outs, like the Merillat next quarter that you're planning.

Yes, it's more of a mixed issue, Mike. In terms of the large increase that we've had on the new home side, particularly with some of the larger builders. That's more of a mix-related issue in terms of the analysis that you just did.

Great. And also in the press release you mentioned you were encouraged by R&R trends. Can you give us an update in terms of what that growth rate looked like? In the past you've given update in terms of post-quarter trends, so if you have any comments on July. Thanks.

Well, July was pretty much across the board. Came in strong. As we mentioned, low double-digits and there really isn't anything unusual going segment by segment. All segments had some strong results there. We talked a little bit earlier about the R&R side of things. As we indicated in the press release, seeing some improving trends there. As I mentioned previously, lower ticket items like Faucets and Paint have continued to do well. We are seeing a little bit more activity around Windows for replacement or remodel as well as a little bit more activity from a Cabinet standpoint.

I wouldn't necessarily want to predict what the second half would look like there. Our sense is that that ought to continue. I think some of the fundamentals, when you think about housing turn over, you think about the fact that home price appreciation has continued, which is certainly a plus in that regard, consumer confidence is ticking up a little bit, job growth is there. It would feel to me like assuming that that continues in the second half, we ought to continue to see positive trends in those two bigger-ticket items for our business.

Great job. Thanks.

Ken Zener, KeyBanc Capital Markets.

Good morning. I would like to follow up on the Windows where your success continues. Not only, I think, is the category turning, but you're obviously gaining share. Could you discuss how that plays out, given your more western focus? You talked about home prices. Is there something really distinct that you are seeing since your growth rates are so strong, given your recent exposure, A? And B, is it getting more rational on the extrusion side? Is that actual industry finally getting its capacity in line?

Yes, I would think from a capacity standpoint, Ken, that things are fairly balanced. You might remember that about 1.5 years ago or so, we took a couple, three plants out in the West. And certainly feel like our capacity's in a very good spot at this time. What I would say is that we are a regional business, and when we talk about increases, we're talking about in terms of share, talking about the regional market that we play in. Milgard is continuing to do a very good job. It's a great brand. We've had some new product introductions that have helped. A lot of focus on dealer relations and the pipeline in the dealer channel. Obviously in the West, we've seen some improved repair-remodel activity. So I think it's more a market dynamic and the fact that we're executing at a very high level and we've got some new product in the channel.

Ken, just to add to Tim's comment, just to refresh your memory, we do our own extrusions within Milgard. We don't really take a look at the extrusion industry and what's happening out there. We feel pretty comfortable about our internal capacity.

Okay. Great. And then if you could, in Installation, where you did obviously go to a positive. Can you give us a little more granularity around what's enabling you to go into these markets? Is it that there's a certain volume that you're targeting? And could you perhaps comment on the volume leverage that you're getting as opposed to price in the business, enabling you to lift margins as well? Thank you.

Yes, Ken, to address your last question first, we've typically experienced about 25% incremental margins in this segment on volume. That's about where we're at right now. We've been very consistent on that over the course of the last several quarters, so the volume has been pretty good. In terms of how we grow this business, we are being very thoughtful about where we see demand increasing, and then placing these strategic stocking centers that we talked about a little bit earlier, in those locations that are seeing that growth and demand. And then going after it with our large builder and then also our more traditional local and regional builders as well. We cut across all the customers in that segment or in that business, so we feel very good about the execution that the team is delivering there.

Right. I guess to the extent you're running below, if you say 25% on volume and if you're below that. Are you insinuating that price was not positive? Thank you.

No, if you're asking about the fact that there was some Installation pricing that was put out in the marketplace in the second quarter, I'll tell you that we worked hard to offset those increases by working with our suppliers, focusing on our own internal productivity. But then also in certain instances passing through prices is required.

Yes, Ken, that's been a dynamic for the last couple of years. We have not had significant price-commodity impact in that segment over the course of the last couple of years. I think to John's point, we've been successful managing price increases that have been placed in the market.

Thank you.

Sam Darkatsh, Raymond James.

Terrific quarter, absolutely wonderful to see, especially Plumbing, which was considerably better than I think many people were looking for. Most of my questions have been answered. Specifically, Cabinets, regarding to the home center level. You mentioned the dealer and the builder demand being real strong. What are you seeing there? What do you expect over the next 6 to 12 months at that specific vertical?

Yes, Sam, it's John. I think it's fair to say that we had some modest share increases year over year in Cabinets in home centers. I'll also tell you that sequentially as we talked about in our first-quarter call, that we get stronger share gains from Q1 into Q2 as some of our competitors rolled off some of the aggressive promotional activity that they were undertaking. We have been very consistent with our promotional activity. As I referenced on the first quarter call, you're going to re-balance after the end of those promotional periods. I feel pretty good about where we're at. As always, continue to focus on that aspect of our business and try to grow.

And key retailer sales, Tim, did you mention that yet? I didn't hear it if you did. I apologize.

No, I did not mention it, Sam. And we have made a decision not to provide that going forward. Basically that doesn't say a heck of a lot about our business. It does give some read-through, if you will, to a couple of our customers. And from their perspective they would appreciate it if we didn't disclose that particular metric. So we've decided not to do it. Obviously as you look at our segments and think about paint, think about plumbing, think about the commentary that we do by channel, you can get a pretty good perspective of how we're doing in that particular area of the business. But from our standpoint, that doesn't really lend a whole lot to understanding Masco's performance.

Understood. Thank you very much.

Nick Coppola, Thompson research.

Looking at Cabinets, particularly at retail and dealers, are you starting to see customers trading up to some of the higher price points that would be accretive to margins?

Yes, Nick, we are seeing some evidence of that as people shift up from some of our more basic-grade products to things like all plywood construction, some of the premium door styles and finishes. We are seeing some of those trends in the marketplace.

The other thing, Nick, that I think is kind of important there is that folks who are interested in a higher-end cabinet, our semi-custom for example, if they're not going to buy it now, they tend to wait. So we're not seeing people necessarily trade down in that channel. I think that's another nugget, if you will, in terms of the way people are starting to think about things. At least that's what we're feeling in the market place.

Okay. That's helpful. And then a cross-segment, if I heard correctly, of sales to big builders has improved, even incrementally relative to prior quarters. Thinking about that, what is that a function of? Is it really a function of new contracts like we talked about with Beazer? Or is it really getting additional penetration with existing customers?

I think it's a combination of really getting new opportunities with builders. Again, as John indicated, we've always been strong with the local or regional guy. I think what's really happening there is that the bigger builders are taking share. That when you think about the new home activity, a lot of that is being picked up by the larger builders.

Okay. That makes sense, thank you.

Adam Rudiger, Wells Fargo Securities.

Can you talk about what happened what the sales did in June? If I recall, intra-quarter, you had talked about some double-digit mid-teens growth in April and May, which suggests June might have slowed a little bit. Can you talk about the puts and takes and last year's comparisons in June?

Yes, June was up mid single-digit in terms of sales. You're correct, April was up mid-teens. May was up low double-digits. So there was a little bit of a drop vis-a-vis those two months. But as I mentioned, July came in, or it looks like it's going to come in, we don't have the final numbers yet, obviously. But looks like it's going to come in at least at the low double-digit range.

So, I'm not sure I'd read too much into that, Adam. I think that given the strength of April and May, coming off a relatively slower first quarter, we talked about that from a weather perspective. I think there was a little pit of lift there, weather related. June came in about what we anticipated, quite frankly, in terms of our planning. There wasn't necessarily anything unusual relative to June. As I indicated, July has picked up again, to a at least what appears to be a low double-digit area.

Okay. And then on that note, was there, for May with the new programs, the Deck payment and the Marquee. Did that, do you think, add, or did you quantify the incremental sales at Depot that might have been one time in nature as you get those products in the stores?

We did not quantify that. Partly, if you recall Tim's comments couple of minutes ago, about the strength of some of the activity surrounding those new products. We don't think that there was much of a loaded impact in the second quarter, given the strength of the sales we saw in those products.

Okay. Thanks very much.

Michael Rehaut, JPMorgan.

Thanks for taking my question. First, on installation if you could, in the past, in the last cycle, when you were growing both sides of the business, the Installation side and the non-Installation side, as you were ramping up the non-Installation product through a negative mix there, since then in the downturn you've shut down a lot of those non-Installation products. I was hoping if you could give us a sense of where you are in terms of the dollar mix of the business between Installation, non-Installation and Retrofit, and the relative profitability of those three segments and how you think about that coming out into this upcoming cycle.

Yes, Mike, you had a couple of questions embedded in there. Let me try to make certain I get to all of them. I think your first question was around the mix of business Installation versus non-Installation. Right now if you look at our Contracting business, that looks like about two-thirds, one-third mix, two-thirds being Installation, one-third being diversified products, that we call them. Things like fireplaces, gutters, garage doors and after paint.

Also I think you asked about the profitability of installation versus the diversified products. I'll tell you, you might expect, we've always been a large buyer of Installation. Those products do absolutely better margins than our diversified products. But I would tell you that our diversified products, the ones that we're still in, are much better than the diversified products that we had several years ago, given the breadth that we had. And was there a third question embedded in there, Mike, that I may have --

Yes, thanks, John. Just about how you think about growing each of the two businesses going forward. If, coming up into this upcoming cycle, are you going to maybe lean more on the Installation side? Or would you try and grow that non-- or that diversified products business back to where it was?

Clearly, Mike, because we've narrowed the scope of the number of diversified products, it won't nearly get to be the size that it was in the last cycle. That said, I think what we're trying to do is better balance the business for long run. That includes looking at focusing on the Retrofit business, where we do have dedicated sales people going after that business. And then continue to focus on both Installation and diversified products with all of our customers. I think there's -- the foot is on the gas across all three product categories.

Okay. And just one additional question, if I could. On the new products, I believe you mentioned right at the beginning of the call that some of them were exceeding your expectations, which is great to hear. I was hoping maybe, are there any metrics you could share about how you track those new products, perhaps as in terms of a vitality index across all of your sales? Or contribution to growth and how we should think about that going forward?

We don't necessarily break out the contribution or haven't tried to aggregate that, Mike. But basically, you might remember from some of our presentations, that our vitality index currently is running above 30%. In our vitality index, our new products, manufactured products, that excludes our Installation business, but basically those are products that we've introduced within the last three years as a percent of our total sales. That's been above 30. My guess would be, given the strength of what's taken place this year, we should certainly be, in 2013, above that 30% level going forward. That really reflects the emphasis we put on innovation, some of the new programs we've come out with, the Toilet programs, some of the Faucet programs. We certainly see that as a very fundamental part of our strategy going forward, and a continued area that we'll certainly be emphasizing.

Can I squeeze one last one in?

No, we need to move to the next person. We'll catch up with you on the phone.

Stephen East, ISI Group.

Thank you. Congratulations, guys, nice improvement.

Thanks, Steve.

Tim, when you look at your incremental op margins, they've improved awfully nicely in the first half of the year. I actually look for some acceleration in the second half of the year. Where do you think your normalized incremental op margin should be? And how long do you think it takes you to get back as you climb down during the re-acceleration period of the cycle?

I think the way to answer that, Steve, is really talk about our contribution margin. Obviously the incremental profits have been a little bit higher than 30%, which is basically the contribution margin across the enterprise. We've talked a little bit about that by segment. I think, from modeling perspective if you were to use the 30%, that will get you into the right ballpark.

We've had a little bit of benefit, as John mentioned, from price-commodity relationships that tend to help that. I think if you use the 30% contribution margin, I think that is a very good proxy for what ought to drop to the bottom line on incremental volume. As we've said a couple of times, when we have a new program that's a little bit different. Those incremental margins can be a little bit less than that because you've got additional advertising or merchandising-related costs, which would be true with, for example, with our new Toilet program.

Okay. And would the Remodeling incremental margin be any different than what you would see in your normal course of business?

I wouldn't necessarily say so, Stephen. Again, when we when think about contribution margin on volume, that's pretty constant. Typically on the Repair-Remodel side, you might have a little bit of additional advertising-related cost or merchandising-related cost. But, again, that blended 30% is a pretty good way to look at it.

Okay. And then just one last question. Someone asked you about June. The last few quarters you've seemed to -- your trend seems to be strongest in the first month of the quarter and ease back a bit. Is that how we should think about your business? Or have there been some unusual things that have transpired as you go through the quarters recently?

I don't know that I would necessarily read too much into the fact that the first month of the quarter for the last couple, three quarters has been strong. We're not complaining about that at all. We certainly have enjoyed some pretty good starts to the quarter. If you go back to January as well as April and July, there's no question. And again, I think that any time you're in a recovery, it's going to be a little lumpy at times. You're going to see order patterns change a little bit, buying patterns by consumers change a little bit. They can move around. I think that's more indicative of the fact that we're still coming off a bottom here that's been pretty protracted.

The recovery in housing has been pretty strong and pretty solid over the course of the last 1.5 years or so. But when you look at GDP and the overall general economic environment, it's still relatively weak. I think we're going to probably see some movements like that. But I think that from a trend standpoint, we're not experiencing anything that is concerning to us about the order patterns per month or the monthly results. We have been able to -- we forecasts things, obviously, like everybody else. Generally speaking our forecasts have been pretty good from a monthly perspective. I don't know that there's anything necessarily unusual there.

Okay, thanks a lot.

Susan Maklari, UBS.

Quick question for you. You mentioned that you're still making progress in terms of the $150 million goal for profit improvements. Given what we've seen this year, and this general expectation for trends going forward, is there any thought of maybe updating that goal? Can you give us any sense of what you would need to see change out there in order to get some kind of change in -- or an update in that?

Susan, as we took a look at it and what we've come in with year to date, I think we're comfortable with the goal. As you might recall, we undertook pretty significant activity in the back half of last year, which impacts obviously, the first half of the year. So maybe that's some of the progress we've made year to date. The strength of it won't be as great in the back half of this year. That's why we're sticking with $150 million at this point. But we'll update you again at the end of the third quarter.

Yes, and that certainly doesn't suggest, Susan, that we're not always looking for incremental opportunities, whether it's process improvement or other efficiencies. We continue to drive for that and certainly we'll continue to push hard. But, to John's point, we'll update that as we go along.

Okay. And then in terms of the M&A environment, can you give us a quick update there? Are you seeing anything changing or anything that's come up of interest?

Clearly, compared to the last four or five years, when there was virtually no M&A activity in our industry, the increase in the number of businesses that seem to be coming to market has increased nicely. As you would expect, being one of the leaders in the building materials industry, we do take a look at a lot of the folks that do come to market and we are being very selective about how we think about M&A, just to give you a sense. You should not anticipate that we would hit a sixth or seventh product line at this point. We may consider a small tuck-in like we did for our UK Window business earlier this year. So those are the types of thing that is we're looking at this point, Susan.

Okay.

Operator, I think we've got time for one more question.

David McGregor, Longbow Research.

Thanks very much and congratulations on all the progress, Tim.

Thank you.

I wanted to ask you about the Cabinet business. A few years ago, you combined your Retail and your Builder Cabinet businesses. Part of that was the pursuit of cost reductions, but also trying to develop a good-better-best product lineup that would allow you to better penetrate the retail and the dealer channel and win market share. You obviously accomplished a lot in terms of getting your fixed costs down and getting your breakeven point down in that segment. Maybe you could talk a little bit and update us on the extent to which you feel you've made progress in terms of developing a good, or a strong good-better-best product lineup, and your strength at opening price points and your ability to win share as a consequence.

Sure, I think your focus is right, David. We did put a lot of emphasis on the cost side and have made very good progress there. We also think we've made some improvements in terms of the three brands. You might remember that in February we launched some new product for the KraftMaid brand. As I think John indicated in the last call, we've got a major, in fact the largest in the history of Merillat's existence, a new product launch coming up this fall. So we think we've made some good progress there.

We are working to do a good job to clarify what all of those brands represent. And to the extend that we think about good-better-best in terms of our quality brand, our Merillat brand, and our KraftMaid brand, we think we've got good distinction there. And certainly feel like we're starting to see a little bit of a lift in terms of the marketplace and a good response to some of the things that we've done to position those brands. So I think we're in a good spot. Obviously we think we've got some good upside on that segment and we've got to continue to demonstrate that going forward.

Good. Second question on working capital. You made a lot of progress there. I think you got your working capital percentage of revenues down about 150 basis points year over year. Is this about as good as it gets, given you've got new product roll-outs, you've got new listings, you've got cyclical recovery in front of us? Does working capital consume cash going forward?

David, we've been pleasantly surprised with how the entire team across the enterprise has driven our working capital improvement over the course of time. Every time I think we hit a new low, we next quarter do another new low. I feel pretty good about it. Incrementally, I don't think it's going to get significantly better. Do we still have opportunities? Yes, I'd say we do. I think our receivables of tables are probably about as good a shape as we're going to get them. I think there's still some opportunity to take a look at inventory across the spectrum. I'm hopeful that there's some opportunity for further working capital improvement and we're going to go after it, without a doubt. But, it's been a great team effort so far in getting where we're at.

Yes, I think, David, we'll continue to push there. John and the finance team, Dave Brown and our supply chain guys, and our business unit folks have done a very, very good job over the course of the last couple of years. There's no question about it. We'll keep pushing. We can always do a little bit better and our folks are committed to make that happen.

And with that, I want to thank everybody for participating today. We'll turn it back to you, Regina.

Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining and you may now disconnect.